SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
BIOKEYS PHARMACEUTICALS, INC.
(Name of Small Business Issuer in its charter)
DELAWARE 84-1318182
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
9948 HIBERT ST., SUITE 100
SAN DIEGO, CALIFORNIA 92131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (858) 271-9671
--------------
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.001
(Title of Class)
TABLE OF CONTENTS
PART I
PAGE
Item 1. Description of Business................................................................................3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations...........................................................................................19
Item 3. Description of Property...............................................................................32
Item 4. Security Ownership of Certain Beneficial Owners and Management........................................32
Item 5. Directors, Executive Officers, Promoters and Control Persons..........................................34
Item 6. Executive Compensation................................................................................36
Item 7. Certain Relationships and Related Transactions........................................................37
Item 8. Description of Securities.............................................................................38
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and Related
Stockholder Matters..................................................................................41
Item 2. Legal Proceedings.....................................................................................42
Item 3. Changes in and Disagreements With Accountants.........................................................42
Item 4. Recent Sales of Unregistered Securities...............................................................42
Item 5. Indemnification of Directors and Officers.............................................................43
PART F/S
Financial Statements.............................................................................................45
PART III
Item 1. Index to Exhibits.....................................................................................46
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ITEM 1. DESCRIPTION OF BUSINESS
COMPANY BACKGROUND
Biokeys Pharmaceuticals, Inc. and its wholly owned subsidiary, Biokeys,
Inc. (which we refer to collectively as the "Company" or "we") are a biomedical
research and development business focused on treatments for cancer and viral
infections. Our business is in the development stage, meaning that we have not
generated any significant revenues and we have not yet marketed any product.
Through our license agreements with the University of Texas M.D. Anderson Cancer
Center (referred to as "M.D. Anderson") and the University of Southern
California (referred to as "USC"), we have development, commercialization,
manufacturing and marketing rights to a number of drug candidates in the fields
of antiviral and anti cancer therapy, which are in varying stages of
development. Our goal is to become a leading developer of drug therapies for
HIV/AIDS, HPV (human papillomavirus) and cancer.
Until our merger with Biokeys, Inc., a privately-held biomedical
research and development company based in San Diego, California, our parent
company was known as BioQuest, Inc. When our merger was completed on October 10,
2000, Biokeys, Inc. became a wholly-owned subsidiary of BioQuest, Inc., and
BioQuest, Inc. changed its name to Biokeys Pharmaceuticals, Inc.
Prior to the merger, BioQuest, Inc. had devoted its limited resources
solely to its research and development activities conducted at M.D. Anderson in
connection with HIV/ AIDS therapy. By early 2000, BioQuest, Inc. had determined
that its future growth would require the broadening of its product base and the
addition of one or more strategic partners. With the assistance of an investment
banking firm, Biokeys, Inc. was introduced to BioQuest, Inc. Early discussions
indicated that there were a compatibility of management goals and significant
potential benefits for BioQuest, Inc. to be gained from the addition of an
established research and development connection between Biokeys, Inc. and USC.
Arms-length negotiations were conducted between the two companies and their
managements in early 2000, which resulted in the execution of a Agreement and
Plan of Merger (referred to as the "Merger Agreement") on May 19, 2000. The
stockholders of BioQuest, Inc. approved the transaction at a stockholder's
meeting held on June 23, 2000 and the stockholders of Biokeys, Inc. also aproved
the combination.
Under the Merger Agreement, the former stockholders of Biokeys, Inc.
were entitled to receive 6,999,990 shares of Common Stock of BioQuest, Inc.,
which was approximately equal to the 7,000,000 shares of BioQuest, Inc.
outstanding immediately prior to the merger. In addition, the Merger Agreement
required the two companies to adjust their respective options and warrants
outstanding at the time, so that the options and warrants which had been issued
by Biokeys, Inc. prior to the effective date of the merger were approximately
equal to those which had been previously granted by BioQuest, Inc.
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Among the reasons for, and the significant potential benefits resulting
from, the merger are the following:
o BioQuest, Inc. and Biokeys, Inc. have combined their personnel
resources, resulting in a more diversified management than
either company had prior to the merger.
o The combination of BioQuest, Inc. and Biokeys, Inc.
significantly expanded the potential biomedical product lines
and technologies available to BioQuest, Inc.
o Biokeys, Inc. brought with it a promising anti-cancer
pharmaceutical, Co-Factor, which had undergone initial human
trials in Sweden and was therefore significantly closer to
potential commercialization than any technology sponsored and
developed by BioQuest, Inc.
o Biokeys, Inc. added a new and significant source of biomedical
research and technology through its license arrangements with
USC.
o Biokeys, Inc. made available the services of additional
research consultants, particularly Dr. Colin Paul Spears and
Dr. Bengt Gustavsson.
o The creation of a larger entity through the merger made
possible better access to research institutions, other
potential strategic partners and future sources of financing.
Since the merger, we have maintained two offices. Our principal
executive office is located at 9948 Hibert Street, Suite 100, San Diego,
California 92131, (telephone number 858/271-9671). We also have an office at 333
N. Sam Houston Parkway, Suite 1035, Houston, TX 77060 (telephone number
281/272-0000) where a number of administrative and financial functions are
carried out. We maintain a website located at WWW.BIOKEYS.COM, but the
information on our website is not part of this registration statement.
Our Common Stock has been traded in the over-the-counter market and
quoted in the "pink sheets" under the ticker symbol "BKYS." (See Part II, Item 1
below.)
COMPANY TECHNOLOGIES UNDER DEVELOPMENT
We have six potential drug products in development:
PRODUCT LINE FOCUS APPLICATION
CoFactor(TM) Anticancer 5-FU biomodulator
Selone(TM) Anticancer alkylating agent for drug-resistant cancers
EradicAide(TM) Antiviral HIV/AIDS prophylactic and therapeutic agent
BlockAide/CR(TM) Antiviral HIV/AIDS therapeutic agent
BlockAide/VP(TM) Antiviral HIV/AIDS therapeutic agent
Thiovir(TM) Antiviral broad-spectrum agent for human papillomaviruses and
other viral infections
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COFACTOR
CoFactor (5,10-methylenetetrahydrofolate) is a patented new drug which
greatly improves the performance of 5-FU (5-Fluorouracil) and other
fluoropyrimidines commonly used in cancer chemotherapy. It was developed by
researchers at USC in Los Angeles and at the Sahlgrenska University Hospital,
University of Goteborg, Sweden, who discovered its ability to greatly enhance
5-FU's inhibition of a key enzyme, thymidylate synthase (TS), necessary for
cancer cell growth. Since 5-FU is probably the most extensively used cancer
chemotherapy drug in the world, this enhanced performance makes CoFactor a
promising new combination therapy drug for the treatment of cancer.
Between November 1989 and March 1993, a Phase I/II clinical study of
the use of CoFactor in combination with 5-FU was performed at Sahlgrenska
University Hospital, under the direction of Dr. Bengt Gustavsson, in close
collaboration with Dr. Colin Paul Spears at USC. Results of Drs. Gustavsson's
and Spear's work with humans were published in THE CANCER JOURNAL, vol. 10, no.
5 September-October 1997.
Dr. Gustavsson and Dr. Spears, who are the co-inventors of CoFactor
technology, are currently medical/clinical consultants to the Company. Dr. Bengt
Gustavsson has an annual consulting contract under which he has been paid
$70,000 per year in equal monthly installments. Dr. Colin Paul Spears is
compensated for his services as needed, at a rate of approximately $1,000 per
day, but also provides basic consultation from time to time without per diem
remuneration. Both Dr. Gustavsson and Dr. Spears are reimbursed for some of
their expenses, including Company-related travel.
In the human clinical trials at Sahlgrenska University Hospital,
CoFactor was administered to 62 cancer patients receiving 5-FU therapy. Partial
responses in the range of 21%-55% were noted in colorectal, pancreas, stomach,
gallbladder and breast cancer patients. The average duration of remissions was
9-15 months, which is at least a two-fold increase over 5-FU/leucovorin therapy.
Toxicity was milder than expected for 5-FU or 5-FU/leucovorin, and no toxicities
of CoFactor have been observed. We consider that these results represent a
significant improvement over 5-FU/leucvorin standard traditional therapy for
cancer patients.
Several publications appeared during late 1997 and early 1998 in
leading medical journals, including CANCER INVESTIGATIONS, CANCER TREATMENT,
ANTICANCER RESEARCH, and THE CANCER JOURNAL, concerning the use of CoFactor.
Such publications discussed:
o curative results with 5-FU therapy in combination with CoFactor for
liver cancer in animal studies compared to 5-FU alone or to
5-FU/leucovorin therapy;
o significant response to 5-FU/CoFactor in animal colon cancer studies;
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o human pharmacokinetic (drug action/metabolism) data documenting high
blood levels of CoFactor for several hours after administration; and
o the achievement of stabilizing the CoFactor compound for routine
administration to patients.
Since the time when the clinical trials were conducted and reported,
technology for analyzing human enzyme levels has progressed. As a result, in
January 2001, the Company undertook a study on tissue samples from the 62
patients who were treated in the earlier trials, by retrieving paraffin-embedded
tissues of those patients from the Sahlgrenska University Hospital's medical
archives. Analyses were based upon a RT-PCR (Reverse Transcriptase - Polymerase
Chain Reaction), a technique first described in Goteborg, Sweden in 1977 for
detection of TS gene expression, but now dramatically improved by technology
developed at USC. This advancement permitted retrospective analyses from
paraffin-fixed tissues, using micro-disection technology, which enabled the
Company to better understand why patients responded to 5- FU/CoFactor therapy.
An IND (Investigational New Drug) application has been submitted to the
U.S. Food and Drug Administration, or FDA, for approval of Phase II / III trials
for second-line metastatic colorectal cancer therapy, in order to test CoFactor
in conjunction with 5-FU. We also intend to file an IND with the Swedish FDA or
in 2002. For further discussion of intended clinical trials for CoFactor, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
SELONE
Selone is the Company's leading compound in a new class of compounds
which are potential new cancer drugs for drug resistant cancer, discovered
through USC research focused on the use of the element selenium, an
anti-oxidant. We are the exclusive licensee of a patent from USC, which
encompasses the use of Selone and other oxygen-carbon-selenium compounds as
anticancer agents, as well as the method for their synthesis.
Selone acts, in part, as a highly nitrogen-specific alkylating agent (a
drug that kills cancer cells by directly attacking their DNA) found to be
effective against cancer cell lines that exhibit drug resistance to currently
available alkylating and platinating (akylating compounds which contain
platinum) agents. Alkylating agents, as a class, are the most broadly used
anticancer agents in the world, collectively surpassing the use of 5-FU. In
recent years, alkylating agents have been increasingly used, in dose
intensification strategies such as bone marrow transplant, and have exhibited
further promise when used with compounds known as thiophosphate protection
agents. However, a majority of cancers develop resistance to currently available
alkylating and platinating agents, usually through a thiol (sulfur metabolism)
mechanism. Selone was developed to address this problem, through increased
targeting to guanine nitrogen contained in DNA, without increased susceptibility
to the thiol mechanisms connected with drug resistance.
Based upon current IN VITRO screening methods, Selone shows promise of
being broadly effective, at even very low concentrations, against human ovarian,
breast, lung and head/neck
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cancers, and against leukemias and lymphomas. Its potency is remarkably high for
its rate of alkylating activity, suggesting an increased specificity of action.
Demonstrated effectiveness in central nervous system cell lines, in addition to
the extraordinarily high solubility of Selone in watery and fatty tissues,
suggests potential activity in brain tumors. Selone shows full activity in human
cell lines resistant to other cancer drugs, including antitumor antibiotics, and
in nitrosourea-resistant colon cancer. It has also demonstrated significant
activity against leukemia in mice at doses predicted to readily achieve
effective blood concentrations.
Now that chemical, kinetic and tissue toxicity relationships have been
established for Selone, we are planning further IN VIVO testing and pre-clinical
optimization and toxicity studies to determine recommended dose/schedules for
later Phase I-II human clinical trials.
ERADICAIDE
We have licensed the exclusive right to commercialize a patented
immunotherapeutic and vaccine strategy, developed by M.D. Anderson, that relies
on eliciting a cell-mediated immunity response to treat individuals already
infected with HIV and to protect against new HIV infections. A unique feature of
this technology is that it is designed to not elicit an antibody response.
The survival of the HIV virus in the human body is dependant on its
ability to penetrate special target cells, take over genetic material in those
cells, and use that genetic material to make millions and billions of copies
which then propagate from the surface of the cell, killing the cell in the
process. In cell-mediated immunity, after a virus has penetrated the cell and
released its genetic material, its viral proteins are broken into fragments by
the infected cell. The resulting viral protein fragments are then transported
within the infected cell through a mechanism called the MHC (Major
Histocompatibility Complex) Class I pathway to special sites on the surface of
the infected cell. Here the viral protein fragments are displayed to the body's
immune system as evidence that the cell is infected and should be destroyed
before it can produce new virus particles. Cruising Killer T-cells, circulating
in the body, recognize the presence of these displayed viral proteins as a
signal to kill the infected cells and also as a signal to the immune system to
produce more Killer T-cells preprogrammed to seek out and specifically kill off
the HIV infected cells.
A research model system incorporating a special version of HIV has
recently been developed. A form of SHIV or Simian (monkey)/human
Immunodeficiency Virus, a chimeric virus, which contains the inner core proteins
and genetic material from SHIV and the outer envelope proteins and viral binding
proteins of HIV, has proven to be an invaluable research tool in the quest for
effective approaches to HIV control. Monkeys to whom SHIV was administered
showed rapidly induced immunodeficiency (profound reduction in CD-4 positive
cell counts within three to four weeks after infection), progressing to an AIDS
state nearly identical to that seen in humans infected with HIV.
Preliminary trials were conducted at the University of Texas animal
research facility in Bastrop, Texas under the supervision of Dr. Jagan Sastry.
Rhesus monkeys were used along with SHIV developed by a group of research labs,
including M.D. Anderson. M.D. Anderson's SHIV
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development work was supported in part by the Company. In the trial, test
animals were vaccinated with the Company's cell-mediated immunity agent known as
EradicAide, and subsequently challenged with live SHIV. Compared to control
animals, viral levels in plasma in treated animals were reduced more than
1,000-fold three weeks after challenge with virus. In non-treated control
animals, the CD-4 positive T-cell counts dropped at least 90% while in treated
animals the change in CD-4 positive T-cell counts ranged from 0 to 10% with one
animal showing a maximum 30% reduction.
These data demonstrate scientific proof of principle for the
cell-mediated immunity strategy. Subsequent confirmatory trials and safety
testing are now being performed by the Company. We expect that the Company may
be able to qualify for the FDA's Fast Track Program for human trials, which
provides for an accelerated FDA review process of HIV therapeutic drugs.
BLOCKAIDE/CR
Scientists at M.D. Anderson have developed another approach to
combating HIV, based on the BlockAide/CR compound, a synthetic peptide (a
sequence of amino acids that is part of a protein) which appears to be able to
block the ability of HIV to infect human immune cells. During IN VITRO
experiments in human cell cultures, and in preliminary animal tests conducted at
M.D. Anderson and sponsored by the Company, BlockAide/CR was able to
significantly depress the level of HIV infection indicated in blood samples.
Studies from several laboratories, including M.D. Anderson and the U.S.
National Institutes of Health, indicate that at least two cell surface receptors
are involved in the mechanism for HIV binding and immune cell penetration. One
is the CD4 receptor, largely found on T helper cells which are part of the human
immune system. The second receptor, which has only recently been described, is
represented by members of a family of chemokine receptors, a type of target cell
molecule. HIV researchers have found that a molecular component called the V3
Loop, which is part of the GP-120 surface protein on the outer coat of the HIV
virus, plays a critical role in interacting with these CD4 receptors and
chemokine receptors, thus initiating the infection process.
M.D. Anderson researchers believe that the BlockAide/CR compound, which
is structurally similar to a portion of the V3 Loop, mimics the V3 Loop and, by
occupying CD4 receptor sites on immune system cells, prevents the virus from
binding to immune cell receptors and subsequently penetrating the cell. Dr.
Jagan K. Sastry of M.D. Anderson is credited with discovering the inhibitory
effects of BlockAide/CR. He likens the V3 Loop to a key: when HIV, using the V3
Loop as a key tries to enter a human cell via a CD4 receptor site (the keyhole),
the virus is unsuccessful because the entrance key hole is already blocked by
BlockAide/CR.
In addition, based on their work to date, Dr. Sastry and his research
colleagues believe that BlockAide/CR can effectively block syncytium formation
and prevent or limit the T-cell loss that invariably occurs with a progressive
HIV infection. Syncytium formation is a very important step in the spread of HIV
infection and the destruction of T-cells. In this process, an HIV infected cell
combines with a number of healthy T-cells to form a large multinuclear mass or
syncytium. The syncytia die quickly, killing the incorporated T-cells and
releasing massive numbers of
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newly formed HIV particles.
Published studies suggest that, at the time of its initial
transmission, and for a variable period afterwards, HIV exists largely in
nonsyncytial form and is relatively harmless to the body's natural immune
system. It is believed that, during this phase, T-cells generated by the immune
system keep the virus in check. As the virus evolves, however, it acquires the
ability to infect T- cells and the immune system becomes less able to combat the
virus. The result is the emergence of the syncytial form of HIV and the onset of
the illness phase, the point at which the patient begins to develop AIDS.
The Company intends to conduct large animal toxicology testing for
BlockAide/CR which, if successful, is expected to enable the Company to proceed
with preparations for human testing under the FDA's Fast Track Program.
BLOCKAIDE/VP
The BlockAide/VP compound was also created and patented by M.D.
Anderson and is licensed to the Company. It works to prevent HIV infection in
human cells in a different way from BlockAide/CR.
HIV depends on its ability to enter and infect host cells in order to
multiply and survive. In the case of HIV, the binding protein GP-120 on the
surface of the HIV particle interacts with a receptor site known as CD4, which
is present on the surface of certain human cells. Interaction of the HIV virus
with CD4 causes a change in the shape of GP-120, uncovering the actual binding
region of GP-120, which then fuses with a second, chemokine receptor.
The BlockAide/VP compound mimics a section of the CD4 receptor. When
BlockAide/VP comes into contact with the GP-120 protein present on the surface
of HIV, it appears to cause a change in the protein-folding configuration of
GP-120, rendering the GP-120 unable to initiate the infection process.
Early tests indicate that HIV virus treated with BlockAide/VP and
exposed to human cells is unable to bind to and infect such cells. The Company
does not know of any other available antiviral agent which can render HIV unable
to infect cells in this manner.
BlockAide/VP has progressed through IN VITRO testing, and though a
preliminary primate trial, with encouraging results. Further preclinical and
animal toxicity testing must be conducted before progressing to human trials, in
the same manner as described above for BlockAide/CR. If proven safe and
effective in preclinical testing, and if approved by the FDA through its Fast
Track Program, BlockAide/VP could be used for HIV infected individuals as an
adjunct to Triple Combination Therapy, a multiple drug regimen widely used to
suppress HIV in HIV infected humans to prevent the onset of AIDS, or as a
primary therapy for newly infected individuals.
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THIOVIR
Thiovir is a sulfur-containing compound synthesized using technology
developed at USC and exclusively licensed to the Company by USC.
Thiovir and Thiovir-analogues under development are part of a new class
of compounds known as thiophosphonoformates (sulfur/phosphorous compounds),
which have demonstrated powerful antiviral properties. Thiovir was designed to
be a replacement for the broad-spectrum antiviral drug, foscarnet. Foscarnet is
administered by intravenous catheter (IV drip) and is FDA-approved for treatment
of HIV, herpes and CMV (cytomegalovirus) infections. Although foscarnet is a
highly effective, broad-spectrum antiviral, it has limitations from a commercial
perspective because it must be administered by IV catheter with medical
supervision. Also, foscarnet is a small molecule whose parent chemical structure
restricts modifications that could lead to the future development of an oral
form of the drug.
In contrast to foscarnet, the creation of thiophosphonates (such as
Thiovir) makes possible an entirely new class of compounds, of which there can
be many proprietary derivatives. These derivatives can lead to additional
improvements in antiviral effectiveness, oral drug forms and reduced toxicity.
The thiophosphonate is delivered as an active prodrug (an initial form of a drug
which converts in the body through normal metabolic processes), and may also
metabolize to additional active compounds. In the case of Thiovir, a dual action
antiviral effect is achieved through delivery of an active prodrug and an active
metabolite, which happens to be foscarnet.
An IN VITRO test of a group of Thiovir analogues was conducted at the
National Cancer Institute. Results reported to USC in early 2000 revealed
several compounds with better therapeutic values than foscarnet for HHV-8, a
herpes virus linked to Kaposi's sarcoma, the cancer that causes lesions on the
skin of AIDS patients. In addition, preliminary studies conducted by the Company
on Thiovir efficacy against papillomaviruses (a viral infection directly related
to genital warts and cervical cancer) between 1999 and 2001, with collaborators
at the Gittlen Cancer Research Institute and Hershey Medical Center, Penn State
University, showed that Thiovir had potential as an antiviral treatment for
papillomavirus infection. Current research and development efforts for Thiovir
are supported by the Company and by U.S. government funding. Assuming continued
positive research results, the Company would intend to file an IND for a form of
Thiovir for testing in humans infected with genital warts caused by HPV.
MEDICAL MARKETS
ANTI-CANCER AGENTS
On a worldwide basis, cancer killed over 6 million people in 1998,
according to statistics published by the World Health Organization. After
cardiovascular disease, cancer is the second most frequent cause of death in
developing countries, accounting for 21% of all deaths. In the U.S., cancer is
responsible for approximately 23% of all deaths according to recent statistics.
The American Cancer Society reported in 1998 that there were more than 1.4
million new cases of cancer diagnosed in the U.S. and over 560,000 deaths due to
cancer in the previous year.
Treatment choices for the cancer patient depend on the stage of the
cancerous tumor, and whether and/or how far the cancer has spread. Treatment
options include surgery, radiation,
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chemotherapy, hormone therapy and immunotherapy. Treatment of cancer with
chemicals is referred to as chemotherapy, which represents a current market in
the U.S. of approximately $9 billion, according to Frost & Sullivan Market
Research and IMS Market Research.
Traditional cancer chemotherapy poisons all body cells to some extent,
but particularly targets rapidly dividing cells such as cancer cells. Its effect
on other rapidly dividing cells, such as hair follicles, cells lining the
stomach and red blood cells, accounts for some of the more common negative side
effects of cancer chemotherapy. Current approaches often use several drugs in
combination, aimed at minimizing side effects while attacking the rapidly
proliferating cells at vulnerable times.
Chemotherapy is highly individualized, depending on the type of disease
and its progression, the action of the agents used, and the side effects in the
patient, and may be used alone or in combination with other cancer therapies,
such as surgery or radiation. Chemotherapy drugs such as 5-FU, Ancobon,
Methotrexate, Alkeran and Cyloxan, are commonly used to treat patients.
We believe that the total annual market potential for CoFactor is
related to new cases of cancer, which are often treated by 5-FU therapy, the
single most widely used cancer drug in the world, according to industry experts.
Doses of 5-FU vary widely based upon the cancer being treated. As an example, in
U.S. therapy regimens, approximately 36 doses of 5-FU are administered to
approximately two-thirds of colorectal cancer patients annually, compared with
12 doses of 5-FU to about one-third of breast cancer patients.
Based upon statistics for cancer incidence and cancer treatment
reported by the American Cancer Society, we estimate that the annual potential
for CoFactor use can be based on an assumed annual use of over 4 million doses
of 5-FU, with initial emphasis focused on combination therapy with 5-FU for
colorectal cancer. There are approximately 131,000 new cases of colorectal
cancer per year in the U.S. alone. It should be noted that these estimates do
not take into account additional market opportunities to enhance other drugs
similar to 5-FU, such as floxuridine (FUDR), florafur (tegafur),
Doxifluridine(R) (5'deoxyfluorouridine) and Xeloda(R) (campecctabine).
Selone, which functions in part as an alkylating agent against cancer
cell lines that exhibit drug resistance to currently available alkylating and
platinating agents, may serve as a useful new anticancer drug. Alkylating agents
as a class are the most broadly used anticancer agents in the world,
collectively surpassing the use of 5-FU as single agent . In recent years, they
have been used increasingly in dose intensification strategies, such as bone
marrow transplant, and have exhibited further promise when used with the
thiophosphate protection agents. Approximately one-half of all cancers can
become resistant to treatment with current chemotherapy products. Accordingly,
we believe there is great potential for new products which address drug
resistance in cancer therapy.
HIV/AIDS THERAPY
Significant advancements have been made in the treatment of
asymptomatic HIV positive patients. It is now understood that early combination
therapy with a three or four drug "cocktail" can push HIV viral load to below
"detectable levels." This therapy is often referred to as
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HAART (highly aggressive antiretroviral therapy). It is widely reported that the
average annual drug cost for such combination therapy in the U.S. is $11,000 per
patient.
However, recent studies have shown that, whether or not patients adhere
to the strict therapy regimens required for HAART treatment, antiretroviral
therapy will continue to lead to problems of viral resistance, rendering many
drugs ineffective over time. There is no conclusive evidence that current drugs
can eradicate HIV from the body over the long term. As long as HIV is present in
the body, the opportunity exists for the evolution of HIV escape mutants
resistant to HAART. These mutant strains can reproduce unchecked by HAART,
subsequently becoming the predominant strain and re-establishing high viral
loads in patients. This can lead to permanently damaged immune systems,
opportunistic infections, and the advance to AIDS even if combination therapy
continues. Currently, no one combination of drugs is effective for all patients,
and therapies are continually modified based upon patient progress. Therefore,
new drugs and new drug approaches continue to be needed for HIV therapy.
In a recent study reported by the University of California-San
Francisco, based upon treatment of HIV positive patients at San Francisco
General Hospital, 53% of patients had evidence of treatment failure after at
least six months of therapy. Based on these facts, we believe that the demand
for new types of HIV drugs, designed to block infection or to clear HIV-
infected cells, will therefore increase.
The World Health Organization and the U.S. Centers for Disease Control
report that there are 1.5 million HIV positive individuals in the U.S. and
Europe, where the vast majority of anti- HIV drugs are used. However, according
to a November 1999 report by the United Nations Program on HIV/AIDS, more than
33 million adults and children in the world are living with HIV and 16,000 new
infections are occurring each day. As current transmission rates hold steady,
the number of people with HIV/AIDS will soar to 40 million in 2001. HIV
infections are not being treated in the third world, to even the smallest
extent, since cost is prohibitive and the ability to administer complex therapy
is nearly impossible. Thus, simple, inexpensive new therapies are required.
THIOVIR AND HPV
According to the Center for Disease Control and the American Cancer
Society, the most prevalent sexually transmitted disease in the U.S. is human
papillomavirus (HPV) infection, which is extremely contagious, with
approximately two-thirds of all people exposed to the virus becoming infected
within a three-month period. The virus exists in over 80 different subtypes, 40
of which affect the urogenital region.
Transmission of HPV usually occurs through direct skin contact during
vaginal, anal or oral sex with an infected individual, and warts (called genital
warts or condylomas) may or may not begin to appear on the skin surrounding the
entrance to infection, depending on the length of the latency period. Because
one of the consequences of HPV infection is the introduction of abnormal cells,
the infection may lead to cancerous growths, particularly on the cervix.
Although HPV and genital warts are treatable, there is currently no known cure
for the infection.
HPV is highly prevalent in women under 30 years of age, and studies
indicate that the
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majority of college age women are HPV positive without clinical or cytological
evidence. According to American Cancer Society, the lifetime risk of invasive
cancer is 5-10% for untreated HPV infection, and, if infected with a
high-oncogenic form of HPV, there is a 70% risk of having an abnormal papsmear.
Approximately 5.5 million new cases of sexually transmitted HPV occur in the
U.S. each year, with at least 20 million people currently infected according to
pharmaceutical industry estimates. Of special importance is the link between HPV
and cancer, particularly cervical cancer. The role of HPV as a principal agent
in the etiology of cervical cancer has been clearly established by the American
Cancer Society and the American Association of Obstetrics and Gynecology.
Preliminary studies sponsored by the Company on Thiovir efficacy
against HPV, with collaborators at the Gittlen Cancer Research Institute and
Hershey Medical Center, Penn State University, showed that Thiovir had potential
as an antiviral treatment for papillomavirus infection. These studies along with
animal toxicology data, could provide the basis for an IND to test a topical
form of Thiovir for genital warts in humans.
MARKETING AND SALES
We do not presently have a marketing and sales staff, although the
experience and background of Nicholas Jon Virca, President of Biokeys, Inc.,
includes pharmaceutical marketing and sales functions. As one or more Company
products approach commercialization, we intend to seek arrangements with third
parties, such as pharmaceutical companies, for the marketing and distribution of
our products. At that point, we would also seek to add marketing personnel for
liaison, support and administrative purposes. While we have held preliminary
discussions on a number of occasions with potential commercialization and
marketing partners, we have not yet entered into any binding agreements with a
commercialization or marketing partner.
For further information on the requirements for clinical trials and
future commercialization, see the discussion below under "Government Regulation
and Clinical Testing for New Drugs." See also the discussion under "Risk
Factors" in Item 2 below.
MANUFACTURING
We do not have our own manufacturing facilities, and do not intend to
establish them. Instead, the Company has entered into a clinical supply
agreement with Eprova AG, of Schaffhausen, Switzerland, and Clinalfa AG of
Laufelfingen, Switzerland, under which Eprova and Clinalfa will produce CoFactor
in limited quantities for clinical testing requirements. At present, this
contract is terminable at will, and, assuming eventual approval of CoFactor for
sale in the U.S. and other parts of the world, we intend to negotiate a
long-term manufacturing contract for the commercial supply of CoFactor with
Eprova. Eprova is a leading manufacturer of compounds with chemical structures
comparable to CoFactor, and we therefore believe it has the aptitude and
capability for large-scale production of CoFactor. In addition, the Company
anticipates developing additional manufacturing sources for CoFactor so that
there will not be a single source. There are a number of contract manufacturers
available for such work in the U.S. and abroad. The Company has also begun to
explore manufacturing capabilities with several different contract manufacturers
for other potential products now under development.
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As new drug candidates progress through development, testing and
commercialization stages, we intend to establish one or more relationships with
additional manufacturers. Consequently, the Company will be dependent upon
various manufacturers for a reliable supply of its drug products. (See "Risk
Factors" in Item 2 below.)
LICENSING AND RESEARCH AGREEMENTS
M.D. ANDERSON AGREEMENTS
In June 1996, the Company entered into an exclusive worldwide Patent
and Technology License Agreement with M.D. Anderson (the "M.D. Anderson
Agreement") granting development, manufacturing and marketing rights, relating
to the commercialization of technologies described in seven patents and patent
applications developed by scientists at M.D. Anderson in the field of HIV
therapy and preventions. The M.D. Anderson Agreement continues in effect for the
life of the subject patents (including any extensions or renewals), and requires
payment of royalties based on percentages of sales and a share of sub-licensing
revenues from products developed under the Agreement. Our exclusive license
rights are subject to any non- exclusive rights that the U.S. government may
have as a result of any agreement between it and M.D. Anderson by which
government-funded research was provided in connection with the licensed
technology. The M.D. Anderson Agreement requires the Company to reimburse M.D.
Anderson for the cost of preparing, filing, prosecuting and maintaining the
licensed patents.
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. In accordance with the Amendment, we issued 414,829 shares of our
Common Stock to M.D. Anderson, valued at $1,000,000 based on the then market
price of the shares. 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 due to M.D. Anderson upon the
enrollment of the first patient in the first Phase I trial of any product that
utilizes licensed subject matter.
No royalties have been paid under the M.D. Anderson Agreement and
Amendment.
USC AGREEMENTS
Under an Option and License Agreement with USC dated January 23, 1998,
amended August 16, 2000, we hold exclusive 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, we
acquired exclusive rights under the four patents related to Thiovir antiviral
technologies. These agreements with USC (the USC License Agreements) grant us
exclusive worldwide licenses to study, use, manufacture and market drug products
covered by the subject patents. Under the USC License Agreements, we are
obligated to pay USC for out-of-pocket expenses incurred in filing, prosecuting,
enforcing and maintaining the
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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 a running royalty 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 these agreements.
SPONSORED RESEARCH AGREEMENTS
We entered into a sponsored research agreement with M.D. Anderson on
September 7, 2000, which 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 HIV infection and if the preparation can be administered
after HIV infection as a therapeutic. This 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.
We also have sponsored research arrangements with USC, under which USC
will continue studies in the therapeutic potential of Thiovir and its analogues
as antiviral agents. The Company has entered into a grant agreement with USC
effective November 1, 2000, under which USC will perform research into Thiovir
and its analogues as inhibitors for HPV and other pathogenic viruses. The
budgeted research costs for this study are approximately $217,000, which amount
has been paid by the Company.
LICENSED PATENT RIGHTS
As summarized above, the Company has license rights under 13 issued
patents as of September 2001. Our license rights under these patents remain
valid for the life of the various patents. The following chart summarizes those
patients and indicates the currently estimated expiration dates of such patents.
PATENT # PATENT DESCRIPTION APPLICATION APPLICATION ISSUE DATE EXPIRATION
/FOCUS DATE DATE
5,072,032 Preparation and use of thiophos- Antiviral 6/21/1989 12/10/1991 6/21/2009
phonates and thio-analogues of /Anticancer
phosphonoformic acid
5,128,319 Prophylaxis and therapy of Antiviral 9/20/1989 7/7/1992 9/20/2009
acquired immunodeficiency
syndrome
5,183,812 Preparation and use of thiophos- Antiviral 09/30/1991 2/2/1993 9/30/2011
phonates and thio-analogues /Anticancer
of phosphonoformic acid
5,376,658 5,10-methylene-tetrahydrofolate Anticancer 12/23/1993 12/27/1994 12/23/2013
as a modulator of a chemothera-
peutic agent
5,534,519 5,10-methylene-tetrahydrofolate Anticancer 10/20/1994 7/9/1996 10/20/2014
as a modulator of a chemothera-
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peutic agent
5,603,933 CD4 peptides for binding to viral Antiviral 8/31/1993 2/18/1997 2/18/2014
envelope proteins
5,614,562 Method of treating drug resistant Anticancer 12/16/1992 3/25/1997 3/25/2014
tumor cells using organoselenones
EP 0 671 947 Compositions for eliciting cytotoxic Antiviral 2/12/1992 8/3/2000 2/12/2012
T-lymphocyte responses against
viruses
6,147,244 Preparations of thiophosphites and Antiviral 5/3/1999 11/14/2000 5/3/2019
Thiophosphonates /Anticancer
6,147,245 Preparation and use of Alpha-Keto Antiviral 7/13/1999 11/14/2000 7/13/2019
Bisphosphonates
6,210,873 Methods and compositions for the Antiviral 12/2/1991 4/3/2001 4/3/2018
priming of specific cytotoxic
T-lymphocyte response
6,265,539 Prophylaxis and therapy of Antiviral 2/13/1992 7/24/2001 7/24/2018
acquired immunodeficiency
syndrome
6,284,909 Preparations of thiophosphites and Antiviral 11/1/2000 9/4/2001 11/1/2020
thiophosphonates
Other than those listed above, the Company does not have any patent
license or royalty agreements. However, as a biomedical research and development
company, we expect that the Company will continue to seek new patent and license
opportunities related to its business.
GOVERNMENT REGULATION AND CLINICAL TESTING FOR NEW DRUGS
The manufacture and sale of therapeutic drugs are subject to government
regulation in the U.S. and in certain foreign countries. In the U.S., we must
follow rules and regulations established by the FDA requiring the presentation
of data indicating that our products are safe and efficacious and are
manufactured in accordance with the FDA's current Good Manufacturing Practices
(cGMP) regulations.
Safety and effectiveness standards are required in certain other
countries as well. The Company believes that only a limited number of foreign
countries have extensive regulatory requirements for new drugs, especially Japan
and the countries comprising the European Union.
The steps required to be taken before a new prescription drug may be
marketed in the U.S. include (i) preclinical laboratory and animal tests, (ii)
the submission to the FDA of an IND, which must be evaluated and found
acceptable by the FDA before human clinical trials may commence, (iii) adequate
and well-controlled human clinical trials to establish the safety and
effectiveness of the drug, (iv) the submission of a New Drug Application (NDA)
to the FDA and (v) FDA approval of the NDA. Prior to obtaining FDA approval of
an NDA, the facilities that
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will be used to manufacture the drug must undergo a preapproval inspection to
ensure compliance with the FDA's cGMP regulations.
Preclinical tests include laboratory evaluation of product chemistry
and animal studies to assess the safety and effectiveness of the product and its
formulation. The results of the preclinical tests are submitted to the FDA as
part of an IND, and unless the FDA objects, the IND will become effective 30
days following its receipt by the FDA, after which clinical trials can begin. If
the FDA has concerns about the proposed clinical trial, it may delay the trial
and require modifications to the trial protocol prior to permitting the trial to
begin.
Clinical trials involve the administration of the pharmaceutical
product to healthy volunteers or to patients identified as having the condition
for which the product is being tested. The pharmaceutical product is
administered under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with protocols previously submitted
to the FDA as part of the IND that detail the objectives of the trial, the
parameters used to monitor safety and the efficacy criteria that are being
evaluated. Each clinical trial is conducted under the auspices of an
Institutional Review Board ("IRB") at the institution at which the trial is
conducted. The IRB considers, among other things, ethical factors, the safety of
the human subjects and the possible liability risk for the institution.
Clinical trials are typically conducted in three sequential phases that
may overlap. In Phase I, the initial introduction of the pharmaceutical into
healthy human volunteers, the emphasis is on testing for safety (adverse
effects), dosage tolerance, metabolism, distribution, excretion and clinical
pharmacology. Phase II involves trials in a limited patient population to
determine the effectiveness of the pharmaceutical for specific targeted
indications, to determine dosage tolerance and optimal dosage and to identify
possible adverse side effects and safety risks.
In serious diseases such as HIV/AIDS, patients suffering from the
disease rather than healthy volunteers are used in Phase I trials. In addition,
Phase I trials may be divided between Phase Ia, in which single doses of the
drug are given, and Phase Ib, in which multiple doses are given. In the latter
instance, some efficacy data may be obtained if the subjects are patients
suffering from the disease rather than healthy volunteers, and these trials are
referred to as "Phase Ib/IIa."
After a compound has been shown in Phase II trials to have an
acceptable safety profile and probable effectiveness, Phase III trials are
undertaken to evaluate clinical effectiveness further and to further test for
safety within an expanded patient population at multiple clinical study sites.
The FDA reviews both the clinical trial plans and the results of the trials at
each phase, and may discontinue the trials at any time if there are significant
safety issues.
The results of the preclinical tests and clinical trials are submitted
to the FDA in the form of an NDA for marketing approval. The testing and
approval process requires substantial time and effort, and FDA approval may not
be granted on a timely basis or at all. The approval process is affected by a
number of factors, including the severity of the disease, the availability of
alternative treatments and the risks and benefits demonstrated in clinical
trials. Additional animal studies or clinical trials may be requested during the
FDA review process and may delay marketing approval.
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Upon approval, a drug may be marketed only for the FDA approved
indications in the approved dosage forms. Further clinical trials are necessary
to gain approval for the use of the product for any additional indications or
dosage forms. The FDA may also require post-market reporting and may require
surveillance programs to monitor the side effects of the drug, which may result
in withdrawal of approval after marketing begins.
The FDA has developed several regulatory procedures to accelerate the
clinical testing and approval of drugs intended to treat serious or
life-threatening illnesses under certain circumstances. For example, in l988,
the FDA issued regulations to expedite the development, evaluation and marketing
of drugs for life-threatening and severely debilitating illnesses, especially
where no alternative therapy exists (the "l988 Regulations"). These procedures
encourage early consultation between the IND sponsors and the FDA in the
preclinical testing and clinical trial phases to determine what evidence will be
necessary for marketing approval and to assist the sponsors in designing
clinical trials. Under this program, the FDA works closely with the IND sponsors
to accelerate and condense Phase II clinical trials, which may, in some cases,
eliminate the need to conduct Phase III trials or limit the scope of Phase III
trials. Under the l988 Regulations, the FDA may require post-marketing clinical
trials (Phase IV trials) to obtain additional information on the drug's risks,
benefits and optimal use.
In l992, the FDA issued regulations establishing an accelerated NDA
approval procedure for certain drugs under Subpart H of the agency's NDA
approval regulations ("Subpart H Regulations"). The Subpart H Regulations
provide for accelerated NDA approval for new drugs intended to treat serious or
life-threatening diseases where the drugs provide a meaningful therapeutic
advantage over existing treatment. Under this accelerated approval procedure,
the FDA may approve a drug based on evidence from adequate and well-controlled
studies of the drug's effects. This approval is conditional on the favorable
completion of trials to establish and define the degree of clinical benefits to
the patient. In this case, post-marketing clinical trials would usually be
underway when the product obtains accelerated approval. If, after approval, a
post-marketing clinical study establishes that the drug does not perform as
expected, or if post- marketing restrictions are not adhered to or are not
adequate to ensure the safe use of the drug, or other evidence demonstrates that
the product is not safe and/or effective under its conditions of use, the FDA
may withdraw approval. The Subpart H Regulations can complement the l988
Regulations for expediting the development, evaluation and marketing of drugs.
These two procedures for expediting the clinical evaluation and approval of
certain drugs may shorten the drug development process by as much as two to
three years.
We believe that several of our drugs may be candidates for accelerated
development and/or approval under the l988 Regulations and/or the Subpart H
Regulations. This would include our HIV/AIDS drugs as well as the Company's
anticancer agents.
Once the sale of a product is approved, the FDA regulates the
manufacturing and marketing of the product. The FDA periodically inspects both
domestic and foreign drug manufacturing facilities to ensure compliance with
applicable cGMP regulations and other requirements. In addition, manufacturers
in the U.S. must register with the FDA and submit a list of every drug in
commercial distribution. Foreign manufacturers are subject only to the drug
listing requirement. Post-marketing reports are also required to monitor the
product's usage and
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effects. Product approvals may be withdrawn, or sanctions imposed, if compliance
with regulatory requirements is not maintained.
Many foreign countries also regulate the clinical testing,
manufacturing, marketing and use of pharmaceutical products. The requirements
relating to the conduct of clinical trials, product approval, manufacturing,
marketing, pricing and reimbursement vary widely from country to country. In
addition to the import requirements of foreign countries, a company must also
comply with U.S. laws governing the export of FDA regulated products.
HEALTH CARE REFORM MEASURES AND THIRD PARTY REIMBURSEMENT
Pharmaceutical companies are affected by the efforts of governments and
third party payors to contain or reduce the cost of health care through various
means. A number of legislative and regulatory proposals aimed at changing the
health care system have been proposed in recent years. In addition, an
increasing emphasis on managed care in the U.S. has and will continue to
increase pressures on pharmaceutical pricing. While the Company cannot predict
whether legislative or regulatory proposals will be adopted or the effect such
proposals or managed care efforts may have on its business, the announcement
and/or adoption of such proposals or efforts could have a material adverse
effect on the Company. In the U.S. and elsewhere, sales of prescription
pharmaceuticals are dependent in part on the availability of reimbursement to
the consumer from third party payors, such as government and private insurance
plans that mandate predetermined discounts from list prices.
RESEARCH AND DEVELOPMENT OUTLAYS
During l999 and 2000, the Company expended $351,446 and $983,198,
respectively, on research and development activities. In addition, the Company
has expended $591,394 for research and development during the nine months ending
September 30, 2001.
EMPLOYEES
The Company presently has three full-time employees and one part-time
employee. No significant increase in the number of employees is anticipated in
the next 12 months.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
As a development-stage biomedical research company, we have not yet
generated any revenues from our anti-cancer and anti-viral products. We have had
no earnings since inception, and have an accumulated deficit of $15,527,553 as
of September 30, 2001. Our expenses from inception have related to costs
incurred in research activities for the development of our drug
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candidates, to administrative expenses required to support these efforts and,
more recently, to substantial charges for amortization of goodwill resulting
from the October 2000 merger with Biokeys, Inc. We expect losses to continue for
the near future, and such losses will likely increase as human clinical trials
in the U.S. are undertaken for our CoFactor drug. 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, future profitability will require that the Company establish
agreements with other parties for the clinical testing, manufacturing,
commercialization and sale of its products.
Since inception, the Company has generally funded itself through
short-term loans and the sale of equity securities. We will need to obtain
additional financing in order to sustain our efforts, as discussed below under
"Liquidity and Capital Resources."
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30,2000
The Company had no revenues from operations for the nine months ended
September 30, 2001, as research and development activities continued. Interest
income for the nine month period totaled $30,693, compared with $8,014 for the
prior period, reflected interest earned on the balance of the proceeds from the
Company's overseas private placement offering completed in the fall of 2000.
Funding from the overseas private placement enabled the Company to
increase research and development expenditures by 80% for the nine months ended
September 30, 2001, to $591,384 from $328,706 for the prior period.
General and administrative costs rose from $567,625 for the prior
period to $1,555,539 for the current nine months, an increase of $987,914 or
174%. The increase was due primarily to the issuance of shares of common stock
and warrants in payment for medical and other consulting services, the addition
of salaried personnel as a result of the merger, and higher professional fees
and other costs reflecting greater corporate activity after the merger.
Depreciation and amortization amounted to $5,707,101 compared to $4,974
for the prior nine months, due entirely to the merger between BioQuest, Inc. and
Biokeys, Inc., which resulted in a total of $15,205,675 of goodwill being
recorded on the Company's balance sheet based on allocation of the purchase
price to net assets acquired. Such amount is being amortized over a two-year
period beginning in the last quarter of 2000, resulting in goodwill amortization
charges of $1,902,367 per fiscal quarter.
There was no interest expense in the nine months ended September 30,
2001, compared with $19,696 for the prior nine-month period, because the earlier
indebtedness had been paid or converted into shares of Common Stock.
As a result of the factors described, the Company's net loss
increased from $(917,542) for the prior nine months to $(7,823,331) for the
current period, and from a loss of $(0.07) per share for the prior period to
a loss of $(0.55) per share for the current period.
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YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
The Company continued its research and development efforts in both 1999
and 2000, and no revenues were received during the period. However, the Company
earned interest income which increased to $40,922 in 2000 from $14,234 in 1999,
as a result of interest earned on funds received from the Company's overseas
private placement offering.
Using the proceeds of our overseas private placement offering, we
were able to significantly expand our research and development efforts in
connection with our EradicAide and BlockAide products for HIV/AIDS. Results
in preliminary, small-scale non-human primate trials warranted an expansion
of the Company's research program into larger scale non-human primate trials
conducted through researchers at M.D. Anderson. In addition, after the
consummation of the merger with Biokeys, Inc., we began to fund research and
development efforts in connection with CoFactor and Thiovir. Accordingly, our
research and development expenses increased 180% from $351,446 in 1999 to
$983,198 in 2000.
General and Administrative expenses increased by approximately 17% from
$708,562 in 1999 to $827,970 in 2000, primarily as a result of additional costs
and expenses related to the merger.
Depreciation and amortization increased from $5,385 in 1999 to
$1,907,341 in 2000. Such increases are due entirely to the merger, which
resulted in $15,205,675 of goodwill being recorded on the Company's balance
sheet based on allocation of the purchase price to net assets acquired. Such
amount is being amortized over a two-year period, beginning in the last quarter
of 2000, at which time a goodwill amortization charge of $1,900,709 for the
quarter was recorded.
Interest expense increased from $4,326 in 1999 to $23,497 in 2000, due
to the accrual of interest on the Company's subordinated convertible notes
issued in a private offering in the spring of 2000.
As a result of the factors described above, the Company's net loss
increased from $(1,055,485) in 1999 to $(3,701,084) in 2000, and the loss per
share increased from $(0.20) per share in 1999 to $(0.44) per share in 2000.
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 December 31, 2000, the Company had cash and equivalents and a
certificate of deposit totaling $1,484,208, compared with only $58,463 at the
end of the prior year. As of September 30, 2001, cash and cash equivalents
totaled $165,535, compared with $467,878 plus a $1,016,320 certificate of
deposit at September 30, 2000.
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The Company does not have any bank or any other commercial financing
arrangements. The Company's operations since the merger have been funded
primarily from the proceeds of its overseas private placement offering
consummated in August and September 2000, by which the Company raised a total of
$3.2 million through the issuance of its Series A 8% Convertible Preferred
Stock.
We intend to move our CoFactor product into human clinical trials in
the U.S. during 2002, if the FDA approves our pending application. If granted
approval, the Company will need adequate funding to conduct the trials, either
through a commercial partnership, additional financing, or a combination of
both. The clinical trials for 2002 are expected to cost between $2.5 and $3.5
million, based upon estimates obtained from three different contract research
organizations capable of running clinical trials for CoFactor.
The Company also plans further development of its HIV products,
EradicAide and BlockAide in 2002 if funding is available through a marketing
partnership, government grant (for which the Company has applied during 2001)
or additional financing. Expenditures on research and development for
EradicAide are expected to range between $250,000 and $1,000,000, depending
on whether animal testing or initial human trials are scheduled.
We have raised approximately $450,000 through private interim
financing and the issuance of short-term notes and warrants in November and
December of 2001. We believe our current resources are sufficient to fund our
general and administrative overhead until the end of April 2002, at which
time we will need to obtain additional financing of approximately $1,000,000
to cover corporate overhead and working capital needs until early 2003. In
addition, we are seeking additional resources to fund the research projects
described above. If funding is available, we may add up to two additional
management-level employees in 2002.
We are currently formulating plans for the additional financing
which will be required for 2002 and beyond, but we have not yet obtained
commitments for such financing. The Company's dependence on raising
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, the cost and timing of production arrangements, the
development of effective sales and marketing activities, government grants,
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.
The Company will be required to obtain such funding through equity or
debt financing, strategic alliances with corporate partners and others, or
through other sources not yet identified. The Company does not presently have
any committed sources of additional financing, and cannot guarantee that
additional funding will be available on acceptable terms, if 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.
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QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
We do not engage in trading market-risk sensitive instruments and do
not purchase hedging instruments or "other than trading" instruments that are
likely to expose us to market risk, whether interest rate, foreign currency
exchange, commodity price or equity price risk. We have no outstanding debt
instruments, have not entered into any forward or future contracts, and have
purchased no options and entered into no swaps. We have no credit lines or other
borrowing facilities, and do not view ourselves as subject to interest rate
fluctuation risk at the present time.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS (SFAS 141). SFAS
141 eliminates the pooling of interests method of accounting and requires that
all business combinations initiated after June 30, 2001 be accounted for under
the purchase method. The Company does not expect the adoption of SFAS 141 to
have a material impact on its business because it currently has no planned or
pending acquisitions.
The FASB has also issued Statement of Financial Accounting Standards
No. 142 GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS 142) which will be effective
for the Company as of January 1, 2002. SFAS 142 requires that goodwill and other
intangible assets with indefinite lives no longer be amortized. SFAS 142 further
requires that the fair value of goodwill and other intangible assets with
indefinite lives be tested for impairment upon adoption of this statement,
annually and upon the occurrence of certain events and be written down to fair
value if considered impaired. Adoption of SFAS 142 will result in the
elimination of annual amortization expense related to goodwill; however, because
of the extensive effort needed to comply with this statement, the impact of
related impairment, if any, on our financial position or results of operations
has not been determined.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We believe this registration statement contains "forward-looking
statements." These statements are subject to risks and uncertainties and are
based on the beliefs and assumptions of our management based on information
currently available on it. When we use words such as "believes", "expects",
"anticipates", "intends", "plans", "estimates", "should", "likely", or similar
expressions, we are making forward-looking statements. Forward-looking
statements are not guarantees of performance. They involve risks, uncertainties,
and assumptions. Our future results and stockholder values may differ materially
from those expressed in the forward-looking statements. Many of the factors that
will determine these results and values are beyond our ability of control or
predict.
Assumptions relating to budgeting, marketing, and other management
decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based
-23-
on actual experience and business developments, the impact of which may cause us
to alter our marketing, capital expenditure, or other budgets, which may in turn
affect our business, financial position, results of operations, and cash flows.
RISK FACTORS
THERE IS A SUBSTANTIAL ACCUMULATED DEFICIT AND LIMITED WORKING CAPITAL.
The Company had an accumulated deficit of $(15,527,553) as of September
30, 2001. 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 REVENUES OR PROFITS.
The Company has devoted its resources in recent years 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 be
available until, and unless the new products are clinically tested, approved by
the FDA and successfully marketed, an outcome which the Company is not able to
guarantee.
IT IS UNCERTAIN THAT THE COMPANY WILL HAVE ACCESS TO FUTURE CAPITAL.
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 may be required to fund our activities. We
cannot assure you that we will be able to consummate any such financing on
favorable terms, if at all, or that such financing will be adequate to meet
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
severely limit the Company's ability to continue its research and development
projects.
-24-
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.
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 you 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.
Potential competition for CoFactor is difficult to quantify at this
time. CoFactor is designed to enhance the performance of the Cancer Chemotherapy
drug 5-FU (as described under Item 1 above). For colorectal cancer applications,
which is our intended target market for CoFactor at this time, there are
products which could be considered indirect competition, and we know of no
direct competition to CoFactor as of the present time. Such indirect competition
would come from leucovorin manufacturers, such as Astra Pharmaceuticals, Inc.
and GlaxoSmithKline, which are large pharmaceutical companies, Immunex
Corporation, which is a biotech company and generic manufacturers such as Roxane
Laboratories and Elkins-Sin, Inc. Since CoFactor will work synergistically with
other key drugs such as CPT-ll, manufactured by Pharmacia & Upjohn, and because
CoFactor has a different mode of action than CPT-11, we believe CoFactor will be
useful with 5-FU drugs that are now manufactured by approximately 40 different
branded or generic pharmaceutical manufacturers. However, we cannot rule out the
possibility that there may be other directly competitive drugs available by the
time CoFactor is able to obtain market approval.
-25-
Competition for Selone, the Company's other anticancer agent, could
arise from anticancer agents that are manufactured by pharmaceutical companies
such as Bristol Myers Squibb, with its Cisplatin and carboplatin drugs, which
are platinating agents, other anti-cancer drugs, such as Vinblastine, and
Vincristine from Eli Lilly or Methotrexate from Lederle.
Competition in the HIV/AIDS area is focused on drugs that are used in
combination regimens to fight HIV progression to AIDS by suppressing the viral
load. These drugs, such as Abacavir, Acyclovir, Amprenavir, 3TC, AZT and
Valcyclovir, marketed by GlaxoSmithKline, or d4T and ddI marketed by Bristol
Myers Squibb, are only a few of the approximately 20 different drugs approved by
the FDA for HIV therapy. They are all sold by large pharmaceutical companies.
Competition for Thiovir for treatment of HPV infection consists of
topical creams, made from plant extracts, or surgical methods for removal of
genital warts caused by HPV.
Many of our competitors have significantly greater financial, technical
and human resources and will likely be better equipped to develop, manufacture
and market products. In addition than the Company, 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 could drastically reduce the
extent of the market for our products.
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
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.
THERE IS UNCERTAINTY AS TO THE AVAILABILITY AND AMOUNTS OF HEALTH CARE
REIMBURSEMENT.
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
-26-
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 which any future health care
reforms may have on its business, and such reforms could limit coverage or
reimbursement for claims of patients receiving therapies based on the Company's
products.
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
-27-
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
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 and from USC.
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 you 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 hinder future financing efforts and delay clinical
development efforts by the Company pending resolution of the disputed matters.
-28-
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 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 a significant
license agreement would require the Company to adjust and/or change its business
plan.
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,
respectively. 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.
In addition, to develop and commercialize future drug products, the
Company may need to hire and retain a number of additional highly qualified and
experienced management, scientific personnel, consultants and advisors. The
ability to attract and retain qualified personnel will be critical to the
success of the Company. Competition for qualified individuals is intense, and
the Company will face competition 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 acceptable terms or at all, and the failure to do so would have a material
adverse effect on the Company.
If the Company were to lose the services of its current biomedical
researchers, we believe such services could be replaced by other independent
researchers available in the San Diego and Houston areas, which have substantial
biomedical research facilities and personnel. In addition, much of the research
already conducted on CoFactor has been published in peer-review scientific
journals and is therefore available to successor research personnel. However,
the replacement process, if necessary, could cause delays in development and
clinical trial work.
-29-
THERE IS NO SALES AND MARKETING CAPABILITY AT THE PRESENT TIME.
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.
THERE ARE NO MANUFACTURING CAPABILITIES.
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 Eprova, AG and Clinalfa AG. 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
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
-30-
assurance that such third parties will perform all of their obligations under
arrangements with the Company or will perform those obligations satisfactorily.
THERE IS NO PRODUCT LIABILITY INSURANCE AND IT IS UNCERTAIN THAT SUCH INSURANCE
CAN BE OBTAINED.
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 limited
product liability insurance for its clinical trials 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 impact
both the reputation and the financial resources of the Company.
THE MARKET PRICE OF OUR SHARES IS VOLATILE.
Market prices for the Company's Common Stock and the securities of
other medical and biomedical technology companies have been volatile. 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 THE SHARES OF PREFERRED STOCK IN THE FUTURE MAY AFFECT COMMON
STOCK.
The Company has previously issued shares of Series A Convertible
Preferred Stock to overseas investors. In addition, the Board of Directors is
authorized, without action by the stockholders, to issue other shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof. Although no such issuance is currently
planned, the effect of such issuance in the future may (i) restrict dividends on
Common Stock, (ii) dilute the voting power of Common Stock, (iii) impair the
liquidation rights of the Common Stock, and (iv) delay or prevent a change in
control without further action by the stockholders.
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
-31-
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.
THE EFFECT OF ADDITIONAL OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES COULD
DEPRESS THE PRICE OF OUR STOCK.
As of September 30, 2001, there were outstanding options and warrants
for the purchase of an aggregate of 3,072,078 shares of Common Stock at various
exercise prices. In addition, the Company's Series A Convertible Preferred Stock
is convertible into a total of 800,000 shares of Common Stock at the election of
the holder. Assuming that all options and warrants were exercised and that all
of the Series A Preferred Stock was converted, a total of 3,872,078 additional
shares of Common Stock would be issued, for which the Company would receive
aggregate cash proceeds of approximately $3,309,318. After various holding
period requirements under Rule 144 of the Securities and Exchange Commission
were satisfied, the holders of such shares would be entitled to sell such shares
in the public market, assuming a public market for the Company's shares were
then available. The public sale of such significant amounts of shares could
adversely affect the prevailing price of Common Stock in the market and could
seriously impair the Company's ability to raise capital through subsequent
securities offerings.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's principal office is located at 9948 Hibert St., Suite 100
in San Diego, California, and consists of 1,553 square feet. The office is
occupied under a three-year lease expiring on January 14, 2004, at a rental of
$33,600 per year.
The Company also has an office handling administration and finance, at
333 N. Sam Houston Parkway, Suite 1035, Houston, Texas, which consists of
approximately 800 square feet.
-32-
The lease on this office expired as of October 31, 2001, and the Company has
entered into a month-to-month lease arrangement at $19.00 per square foot. We
believe the Company could easily find comparable space should the Company need
to or want to vacate this office.
Our research and development activities are conducted mainly on the
premises of M.D. Anderson, USC and Sahlgrenska University Hospital, pursuant to
the terms of sponsored research arrangements.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to the Company
regarding beneficial ownership of the Common Stock of the Company as of
September 30, 2001, of (i) each person who is known to the Company to own of
record or beneficially more than five percent (5%) of such Common Stock, (ii)
each director and executive officer of the Company (including Biokeys, Inc.) and
(iii) all directors and executive officers of the Company (including Biokeys,
Inc.) as a group. All share amounts shown here and elsewhere in this
registration have been adjusted to reflect a reverse stock split of
approximately one for 1.9899 in July 2000.
Name and Address of Beneficial Owners Number of Shares Percent of Class
- ------------------------------------- ---------------- ----------------
Louis R. Reif 201,010(1) 1.38%
c/o Biokeys Pharmaceuticals, Inc.
333 N. Sam Houston Pkwy, Suite 1035
Houston, Texas 77060
Warren C. Lau 885,797(2) 6.07%
c/o Biokeys Pharmaceuticals, Inc.
333 N. Sam Houston Pkwy, Suite 1035
Houston, Texas 77060
Nicholas Jon Virca 476,693(3) 3.27%
c/o Biokeys Pharmaceuticals, Inc.
9948 Hibert Street, Suite 100
San Diego, CA 92131
Robert D. Whitworth 50,205 0.52%
c/o Biokeys Pharmaceuticals, Inc.
333 N. Sam Houston Pkwy, Suite 1035
Houston, Texas 77060
Francis E. O'Donnell, Jr., M.D. 1,323,646(4) 9.07%
709 The Hamptons Lane
- ----------
(1) Does not include a total of 703,536 shares held by the adult children
of Mr. Reif, as trustees of family trusts, as to which Mr.Reif disclaims any
voting power or beneficial ownership.
(2) Includes 6,000 shares held by Mr. Lau as custodian for his minor
children, as to which he has voting power but disclaims any beneficial
ownership.
(3) Includes currently exercisable warrants for the purchase of 144,435
shares.
-33-
Name and Address of Beneficial Owners Number of Shares Percent of Class
- ------------------------------------- ---------------- ----------------
Town & Country, Missouri 63017
Thomas DePetrillo 957,922(5) 6.57%
988 Centerville Road
Warwick, Rhode Island 02886
Matthew Balk 976,275(6) 6.69%
245 Park Avenue, 44th Floor
New York, NY 10167
M. Ross Johnson, Ph.D. 502,538(7) 3.45%
53524 Bickett Street
Chapel Hill, North Carolina 27514
Jonnie R. Williams 1,072,085 7.35%
1 Starwood Lane
Manakin Sabot, VA 23103
All directors and executive officers of the 3,465,064 23.75%
Company (including the directors and
executive officers of Biokeys, Inc.) as a
group (6 persons)
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The Board of Directors of Biokeys Pharmaceuticals, Inc. is presently
composed of Louis R. Reif, Warren C. Lau, and Robert D. Whitworth. Directors
generally serve for one-year terms and until successors are duly elected and
qualified.
The Board of Directors of our subsidiary, Biokeys, Inc., is comprised
of M. Ross Johnson, Ph.D., Nicholas Jon Virca, Francis E. O'Donnell, Jr., M.D.,
and Louis R. Reif.
The directors and executive officers of each of Biokeys
Pharmaceuticals, Inc. and Biokeys, Inc., and their respective positions and ages
as of June 30, 2001, are as follows:
- ----------
(4) Includes shares held by family trust and children, as to which Dr.
O'Donnell has voting power but disclaims any beneficial interest.
(5) Includes warrants held by Mr. DePetrillo to purchase 366,430 shares,
currently exercisable, and shares held by family members. Mr. DePetrillo has
voting power but disclaims any beneficial interest as to such family-owned
shares.
(6) Does not include other shares held by certain adult relatives of Mr.
Balk, as to which he disclaims any voting power or beneficial ownership.
(7) Represents currently exercisable warrants.
-34-
NAME AGE POSITION
- -----------------------------------------------------------------------------------------------------------------
Louis R. Reif 78 Chairman, Chief Executive Officer and
Director of Biokeys Pharmaceuticals, Inc.;
Director and Secretary of Biokeys, Inc.
Nicholas Jon Virca 54 President, Chief Executive Officer and
Director of Biokeys, Inc.
Warren C. Lau 48 President, Chief Financial Officer and
Director of Biokeys Pharmaceuticals, Inc.;
Chief Financial Officer of Biokeys, Inc.
M. Ross Johnson, Ph.D. 56 Chairman and Director of Biokeys, Inc.
Francis E. O'Donnell, Jr. M.D. 52 Director of Biokeys, Inc.
Robert D. Whitworth 48 Director and Secretary of Biokeys
Pharmaceuticals, Inc.
LOUIS R. REIF is a co-founder of Biokeys Pharmaceuticals, Inc. and has served as
its Chief Executive Officer and Chairman and as a member of its Board of
Directors since 1996. From 1952 to 1993, Mr. Reif was associated with National
Fuel Gas Company, a U.S. natural gas company listed on the New York Stock
Exchange. He served as Vice President from 1958 to 1974, President and Chief
Executive Officer from 1974 to 1988, a Director from 1966 to 1993, and Chairman
of the Board from 1980 to 1993. In 1989, Mr. Reif served as Chief Operating
Officer and a Director of Delaware North Companies, a large privately-held
company operating food concession businesses at major sports arenas in the U.S.
He has served as past Chairman of the American Gas Association and Chairman of
the 17th World Gas Conference of the International Gas Union. He is a
Trustee-emeritus of the State University of New York. Mr. Reif received a B.A.
degree from the University of Buffalo and a J.D. degree from the University of
Michigan.
NICHOLAS JON VIRCA has served as President, and a Director of Biokeys, Inc., the
Company's wholly-owned subsidiary, since March 1997, becoming Chief Executive
Officer in March 2000. From 1991 to 1997, he served as Vice President of
Operations, and as a director from 1997 to 1998, of Diametrix Detectors, Inc., a
privately-held immunosensor company which he co- founded and which focused on
detection of narcotics using monoclonal antibodies. From 1991 to 1994, Mr. Virca
also served as Vice President, Business Operations, of IRT Corporation, a
publicly-traded company that specialized in x-ray inspection and imaging systems
for industrial and security applications. In addition, from 1994 to 1997, Mr.
Virca served as Business Unit Manager, Security Products, for Nicolet Imaging
Systems, a company that purchased substantially all of IRT's assets in 1994. His
earlier employment includes key marketing and general management positions with
Fisher Scientific, Damon Biotech, Promega Corporation, the Ortho Division of
Johnson & Johnson and the Ross Division of Abbott Laboratories, during which he
participated in the commercialization of numerous prescription and OTC
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pharmaceuticals and biotherapeutic and diagnostic reagents. Mr. Virca received a
B.A. degree in biology from Youngstown State University.
WARREN C. LAU is the co-founder of Biokeys Pharmaceuticals, Inc. and has served
as its President and as a member of its Board of Directors from June 1996, and
Chief Financial Officer of Biokeys, Inc., the Company's wholly-owned subsidiary,
since the merger. From November 1997 to September 1998, Mr. Lau served as a
director of Immune Complex Corporation and Synthetic Genetics, Inc.,
privately-held biotechnology companies with which the Company was affiliated
during such period. From 1986 to 1996, Mr. Lau was a registered representative
of Josephthal, Lyons and Ross, an investment banking and brokerage firm, where
he was involved with the underwriting of biotechnology issues.
M. ROSS JOHNSON, PH.D. serves as Chairman and a Director of Biokeys, Inc. From
1996 to 1999, he was President, Chief Executive Officer and member of the Board
of Directors of Trimeris, Inc., and, from 1995 to 1996, served as its Chief
Scientific Officer and Vice President of Research and Development. Trimeris is
engaged in the development of fusion inhibitor technology for antivirals to
treat HIV infection. Prior to his service with Trimeris, Dr. Johnson was
President and CEO of Parnassus Pharmaceuticals and Vice President of Chemistry
at the Glaxo, Inc. Research Institute in North Carolina, where he was part of
the original scientific founding team. Earlier, he served in key scientific and
research management positions with Pfizer Central Research. He is Adjunct
Professor of Chemistry and Adjunct Professor of Medicinal Chemistry at the
University of North Carolina at Chapel Hill. He has authorized or participated
in numerous patents, scientific publications and scientific and medical
presentations. Dr. Johnson received his B.S. degree in chemistry from the
University of California at Berkeley and a Ph.D. degree in organic chemistry
from the University of California at Santa Barbara.
FRANCIS E. O'DONNELL, JR., M.D. has served as a director of Biokeys, Inc.
(including its predecessor) since1996. He is founder and Managing Partner of
Hopkins Capital Group, LLC, a biotech business development company. In his role
as Managing Partner for the Hopkins Capital Group, he is actively involved in
the management of the portfolio companies: APP Specialty Pharmacy, Photo Vision
Pharmaceuticals, BioDelivery Sciences International, Inc., RetinaPharma, Inc.,
Pen2Net, Inc. and Sublase, Inc. Dr. O'Donnell is the Founder and Managing
Partner of Hopkins Biotech Development Corporate (HBDC) which provides biotech
company advertising. Dr. O'Donnell has published over 30 peer-reviewed
scientific articles and he has been awarded 22 U.S. patents. He is a 1975
graduate of the Johns Hopkins School of Medicine and former a Professor and
Chairman, Department of Opthamology at the St. Louis University School of
Medicine in St. Louis, Missouri.
ROBERT D. WHITWORTH has served as a director of Biokeys Pharmaceuticals, Inc.
since August, 1998. Mr. Whitworth began his business career in 1976 with Charles
Martin, Inc., a petroleum inspection company, and ultimately served as Chief
Chemist for Europe, Africa, and the Middle East. In 1979, Mr. Whitworth became
Vice President, Logistics and Quality Control, at Hydrocarbon Trading and
Transport, Inc., a Houston, Texas, company, which at the time was the largest
private supplier of jet fuel in the U.S. From 1989 to 1994, Mr. Whitworth was a
Vice President of Croydon Resources, Inc., a provider of crude oil and refined
petroleum products for refinery processing. From 1994 to the present, Mr.
Whitworth has served as Manager of International Fuel Sales and Operations for
Mercury Group, Inc., a jet fuel supplier for the airline industry. Mr. Whitworth
is the holder of 22 U.S. and international patents in chemical and petroleum
engineering, and is a member of the American Chemical Society, the American
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Society for Testing and Materials and the International Standards Association.
Mr. Whitworth holds a B.S. degree in Chemistry from Southern Methodist
University.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to each executive
officer of Biokeys Pharmaceuticals, Inc. and Biokeys, Inc., for each of the
three fiscal years ended December 31, 2000:
Annual Compensation Awards Payouts
(i)
(a) (b) (c) (d) (e) (f) (g) (h)
Name Year Salary Bonus Other Restricted Securities LTIP All
and ($) ($) Annual Stock Underlying Payouts Other
Principal Compe Award(s) Options/ ($) Compen-
Position nsation ($) SARs (#) sation
($) ($)
Nicholas Jon Virca 2000 30,000(1)
President & CEO 1999
Biokeys, Inc. 1998
Warren C. Lau 2000 114,000
President 1999 114,000 5,000
Biokeys 1998 94,000 5,000
Pharmaceuticals,
Inc.
Louis R. Reif (2)
Notes: (1) Includes salary only for the last quarter of 2000, during which
Biokeys, Inc. was a subsidiary.
(2) Mr. Reif has not been paid compensation, but is reimbursed for
actual expenses.
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Warren C. Lau, President
of Biokeys Pharmaceuticals, Inc., expiring November 30, 2002. The agreement
provides for an annual salary of $114,000, plus cost-of-living increases based
on percentage changes in the Consumer Price Index. In the event of a change of
control of the Company and a related termination of the employment agreement,
Mr. Lau will be entitled to a severance payment equal to one year's salary.
Nicholas Jon Virca, the President and Chief Executive Officer of
Biokeys, Inc., does not presently have an employment agreement. He receives a
salary of $120,000 per year.
The Company provides health and life insurance coverage for Messrs.
Virca and Lau.
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ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Warren C. Lau, a founder, stockholder, officer and director of Biokeys
Pharmaceuticals Inc., is party to an executive employment agreement providing
for a salary of $114,000 per year. Nicholas Jon Virca, an officer and director
of Biokeys, Inc. and a stockholder of the Company, is paid a salary of $120,000.
(See Item 6 above).
Louis R. Reif, a founder, stockholder, officer and director of Biokeys
Pharmaceuticals, Inc., is not compensated for his service for the Company, but
receives reimbursement of actual expenses incurred in performing services for
the Company, including attending meetings and undertaking business trips for the
Company. Directors who are not executive officers of the Company are similarly
reimbursed, but are not paid a salary.
M. Ross Johnson, a Director and Chairman of Biokeys, Inc., has provided
consulting services to the Company from time to time. In consideration of such
services, the Company issued warrants to Dr. Johnson in 1999 for the purchase of
up to 502,528 shares of Common Stock. From time to time, the Company has also
paid Dr. Johnson cash consulting fees which amounted to $15,000 in the aggregate
as of December 31, 2000.
Matthew Balk, a principal stockholder of the Company, is affiliated
with H.C. Wainwright & Co., Inc., a brokerage and investment banking firm. H.C.
Wainwright & Co., Inc. represented the Company in its merger arrangements with
Biokeys, Inc., for which the Company agreed to issue 150,000 shares of Common
Stock in payment of such services.
In connection with the Merger Agreement, the directors of BioQuest,
Inc. and Biokeys, Inc. authorized the issuance of warrants (referred to as
the "Incentive Warrants") for the purchase of an aggregate of 229,482 shares
of Common Stock at an exercise price of $0.49 per share. These Incentive
Warrants constituted a portion of the total number of warrants which were
permitted to be outstanding for the combined companies under the terms of the
Merger Agreement. The Incentive Warrants were not initially assigned to
specific individuals, but were issued to the Company's directors and its
counsel, to be held under the terms of an Escrow Agreement which provided for
the directors to designate, from time to time, employees, officers,
consultants, directors and others whose present or future services were
deemed to be of substantial benefit to the Company and who would become
recipients of the Incentive Warrants. As of September 30, 2001, none of such
Incentive Warrants had been assigned to any individuals. Because the
Incentive Warrants had not been so assigned by the directors, they were not
recorded in the Company's financial statements through September 30, 2001,
but will be recorded in the future when an award is made to a specific
recipient.
ITEM 8. DESCRIPTION OF SECURITIES
The authorized capital stock of Biokeys Pharmaceuticals, Inc. consists
of 1,000,000 shares of Preferred Stock, $0.01 par value, and 50,000,000 shares
of Common Stock, $0.001 par value.
PREFERRED STOCK
Our Board of Directors is authorized, without action by the
stockholders, to issue preferred stock in one or more series. In the year 2000,
we issued 3,200 shares of Series A 8% Convertible Preferred Stock, which are
currently outstanding, to three investors in an overseas
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private placement offering under Regulation S promulgated by the Securities and
Exchange Commission.
SERIES A 8% CONVERTIBLE PREFERRED STOCK (referred to as the "Preferred Stock")
DIVIDEND RIGHTS. Holders of shares of Preferred Stock are
entitled to receive, when, as and if declared by the Company's Board of
Directors out of earnings at the time legally available therefor,
dividends at the annual rate of 8% per share, payable semi- annually on
June 30 and December 31, pro-rated to the date of original issuance of
the shares. Dividends are cumulative and will be payable to holders of
record as they appear on our stock books on such record dates as are
fixed by the Board of Directors. At the election of the holder, such
dividends will be payable in shares and fractional shares of Preferred
Stock, valued for this purpose at the rate of $1,000 per share.
LIQUIDATION PREFERENCE. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary, the
Preferred Stock will have preference and priority over the Common Stock
of the Company for payment, out of the assets of the Company or
proceeds thereof available for distribution to shareholders, of the sum
of $1,000 per share plus all cumulative dividends payable and unpaid
thereon to the date of such distribution.
CONVERSION: The shares of Preferred Stock have the following
conversion rights:
(i) The Preferred Stock is convertible into Common Stock at
the election of the holder. Each share of Preferred Stock is
convertible into 250 shares of the Company's Common Stock, which is
equal to a conversion price of $4.00 per share.
(ii) The conversion price and ratio will be subject to
adjustment for subsequent events such as stock splits,
recapitalization, and certain financing. In addition, if within two
years after issuance the Company sells Common Stock in a private
placement or in a underwritten public offering at a price per share
which is less than the conversion price, the Company will issue a
sufficient number of additional shares of Common Stock to each holder
of Preferred Stock so as to reduce the effective conversion price to
the level established in such private placement or public offering;
PROVIDED, HOWEVER, that (i) such provisions shall not apply to a
specified transaction previously pending between the Company and an
institutional investor, (ii) such reduced conversion price shall not be
less than $2.50 per share, and (iii) such price adjustment provisions
shall not apply to an interim financing of $1,000,000 or less.
REDEMPTION: The Company may call the Preferred Stock for
redemption at any time the closing price of Common Stock remains at a
level of at least $8.00 per share for a period of at least 20
consecutive trading days. The redemption price will be equal to the
liquidation preference plus accrued and unpaid dividends. Also, at any
time beginning after July 1, 2003, the Company may call all or any
portion of the outstanding Preferred Stock for redemption on at least
30 days notice, at a redemption price equal to 105% of the liquidation
preference of such shares, plus all accrued and unpaid dividends. On
the effective date fixed for redemption in the redemption notice, the
Preferred Stock will cease to be outstanding but conversion rights will
be exercisable up until the effective redemption date.
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VOTING RIGHTS. The Preferred Stock will have no voting rights,
except that the written consent or affirmative vote of the holders of a
majority of the outstanding Preferred Stock is required to approve (i)
any proposed amendment to the Company's Certificate of Incorporation
that would materially alter or change the powers, preferences, or
special rights of the Preferred Stock so as to affect the holders
adversely, and (ii) any plan of merger or consolidation that contains
provisions which, if contained in a proposed amendment to the Company's
Certificate of Incorporation, would have entitled the holders of the
Preferred Stock to vote, as a class, on the issue.
OTHER SERIES OF PREFERRED SHARES
Of the remaining authorized but unissued shares of preferred stock, our
Board of Directors is authorized, without action by the stockholders, to issue
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof. These rights, preferences and
privileges may include dividend rights, conversion rights, voting rights, terms
of redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of any series, all or any of
which may be greater than the rights of the Common Stock. We have no present
plans to issue any new shares of preferred stock.
COMMON STOCK
The Company's Common Stock consists of 50,000,000 authorized shares of
$0.001 par value. As of September 30, 2001 there were 14,906,387 shares of
Common Stock outstanding. In addition, the Company had reserved and set aside a
total of 3,072,078 shares for issuance upon future exercise of outstanding
warrants, and 800,000 shares for issuance upon future conversion of the
Company's Series A Convertible Preferred Stock.
The holders of our Common Stock are entitled to one vote per share held
of record on all matters submitted to a vote of the stockholders. Our
certificate of incorporation does not provide for cumulative voting in the
election of directors. Subject to preferences that may be applicable to any
outstanding preferred stock, the holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by our
Board of Directors out of funds legally available for that purpose. In the event
of our liquidation, dissolution or winding up, holders of our Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock, if any, then
outstanding. Holders of our Common Stock have no preemptive or other
subscription or conversion rights. There are no redemption or sinking fund
provisions applicable to our Common Stock.
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PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Until December 7, 1999, the Common Stock of Biokeys Pharmaceuticals,
Inc. (then known as BioQuest, Inc.) was quoted on the National Association of
Securities Dealers (NASD) OTC Bulletin Board under the symbol "HIVX". Since that
time, our Common Stock has been quoted in the "Pink Sheets". Trading in the
"Pink Sheets" takes place on an irregular basis, and liquidity in this trading
market may be variable or non-existent. All prices shown have been adjusted to
reflect 1 for 1.989949857 reverse stock split in July 2000. When this
registration statement becomes effective, the Company intends to reapply for
quotation privileges on the OTC Bulletin Board.
The following represents high and low prices on the OTC Bulletin Board
until December 7, 1999 and thereafter in the Pink Sheets, during the last 24
months:
Quarter Ending High Low
-------------- ---- ---
December 31, 1999 $0.736 $0.239
March 31, 2000 $3.48 $0.299
June 30, 2000 $3.18 $0.995
September 30, 2000 $3.90 $2.25
December 31, 2000 $3.85 $2.80
March 31, 2001 $5.25 $2.75
June 30, 2001 $2.90 $2.10
September 30, 2001 $3.10 $2.00
HOLDERS
The number of record and beneficial holders of our Common Stock as of
September 30, 2001 is approximately 600.
TRANSFER AGENT
Biokeys Pharmaceutical's transfer agent is Interwest Transfer Co.,
Inc., 1981 East 4800 South, Salt Lake City, UT 84117.
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ITEM 2. LEGAL PROCEEDINGS
The Company is a defendant in an action entitled Karo Bio USA, Inc. vs.
Biokeys Pharmaceuticals, Inc., recently commenced in the United States District
Court for the District of Delaware. The action alleges infringement of Karo
Bio's federal trademark registration for the name "Biokey," based upon their
claimed prior use in connection with a particular Karo Bio product, and the use
of "Biokeys" in our Company's name. The plaintiff seeks to prevent us from
continuing to use "Biokeys" as part of our name, as well as an unspecified
amount of damages.
The case is at an early stage and no discovery proceedings have yet
taken place. Although the Company intends to defend the action vigorously, we
have been conducting settlement discussions with the plaintiff and believe that
the proceeding may be settled in the near future without monetary liability by
either party. We believe that the lawsuit by Karo Bio will not have a material
adverse effect on the Company.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
From January 1999 to September 30, 2001, the Company issued the
following securities which were not registered under the Securities Act of 1933,
as amended (the "Securities Act").
o In November and December 1999, the Company agreed to sell to
four accredited investors a total of 678,412 shares of Common
Stock at a price of approximately $0.20 per share for a total
of $135,000. Each share was accompanied by a warrant to
purchase additional shares of Common Stock at an exercise
price of $0.40 per share. In March 2000, these warrants were
exercised under a cashless exercise provision, resulting in
the issuance of 599,066 shares of Common Stock to the warrant
holders. This transaction was undertaken pursuant to exemption
under Section 4(2) of the Securities Act.
o From April to June 2000, the Company issued an aggregate of
$472,000 principal amount of 8.5% subordinated convertible
promissory notes in a private placement offering to
approximately 10 accredited investors under Regulation D, made
through Company officers and without the assistance of any
placement agent. In accordance with the terms of the notes,
the principal amounts of the notes and all accrued interest
were converted into shares of Common Stock at a conversion
price of $1.19 per share, effective as of the consummation of
the Company's merger with Biokeys, Inc. which resulted in the
issuance of 412,487 restricted shares to the note holders.
o As of October 2000, the Company issued, pursuant to the
exemption contained in Section 4(2) of the Securities Act, a
total of approximately 6,999,990 shares of its Common Stock to
38 former stockholders of Biokeys, Inc., in accordance with
the terms of the Merger Agreement between BioQuest, Inc. and
Biokeys, Inc.
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o In October and November 2000, the Company, agreed to issue,
pursuant to the exemption contained in Section 4(2) of the
Securities Act, 8,727 shares of Common Stock to a creditor in
settlement of certain outstanding obligations of Biokeys, Inc.
which preceded the date of consummation of the merger.
o In August and September 2000, the Company sold a total of
3,200 shares of Series A 8% Convertible Preferred Stock to
three overseas investors for a total of $3,200,000, and issued
to such investors warrants to purchase 400,000 shares of
Common Stock at $5.00 per share. Such sale and issuance were
conducted in accordance with Regulation S of the Securities
and Exchange Commission.
o In February 2001, the Company granted 100,000 shares of Common
Stock to a consulting firm for financial advisory services to
be provided in 2001. Such shares were issued pursuant to the
exemption available under Section 4(2) of the Securities Act.
o In August 2001, two warrant holders exercised warrants through
a cashless exercise provision in the warrants. Warrants to
purchase a total of 271,758 shares of Common Stock were
accordingly exchanged for the issuance of a total of 218,493
shares of Common Stock. This transaction was undertaken
pursuant to the exemption available under Section 4(2) of the
Securities Act.
All of the foregoing transactions were undertaken pursuant to written
agreements between the Company and the recipients of shares or warrants, which
agreements referred specifically or generally to restrictions on transfer under
the Securities Act, Regulation S or Regulation D. All certificates for shares
and/or warrants contained restrictive legends prohibiting the transfer of same,
in the standard form used by the Company for such transactions. The Company's
transfer agent was directed in each instance to provide for a "stop transfer"
notation in its shareholder records.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 102(b) (7) of the Delaware General Corporation
Law (the "DGCL"), Biokeys Pharmaceutical's Certificate of Incorporation and By
Laws eliminate in certain circumstances the liability of directors of Biokeys
Pharmaceuticals for monetary damages for breach of their fiduciary duty as
directors. This provision does not eliminate the liability of a director: (i)
for breach of the director's duty of loyalty to Biokeys Pharmaceuticals or its
stockholders; (ii) for acts or omissions by the director not in good faith or
which involve intentional misconduct or a knowing violation of the law; (iii)
under Section174 of the DGCL; or (iv) for transactions from which the director
derived an improper personal benefit. Such limitation of liability does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
Subsection (a) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint
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venture, trust, or other enterprise, against expenses (including attorneys'
fees), judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending, or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the fact that
such a person acted in any of the capacities set forth above, against expenses
(including attorney's fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue, or matter as to which such person shall have been
adjudged to be liable to the corporation, unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability, but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
Section 145 of the DGCL further provides that to the extent a director,
officer, employee, or agent of a corporation has been successful in the defense
of any action, suit, or proceeding referred to in subsections (a) and (b) or in
the defense of any claim, issue, or matter therein, he shall be indemnified
against expenses (including attorney's fees) actually and reasonably incurred by
him in connection therewith; that indemnification provided for by Section 145 of
the DGCL shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and empowers the corporation to purchase and
maintain insurance on behalf of any person acting in any of the capacities set
forth in the second preceding paragraph against any liability asserted against
him or incurred by him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145 of the DGCL.
The Company's Bylaws require it, under certain circumstances, to
indemnify any person who is or was a director or officer against expense
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with any threatened,
pending or completed action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in, or not opposed to, the best interests
of Biokeys Pharmaceuticals and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
Bylaws of the Company also provide that expenses incurred by a director or
officer in defending or investigating a threatened or pending action, suit or
proceeding shall be paid by the Company in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of such director or officer to repay such amount if it shall ultimately be
determined that he is not entitle to be indemnified by Biokeys Pharmaceuticals
as authorized in the Bylaws.
In addition, the Company has applied for directors' and officers'
liability insurance which, if issued, insures against liabilities that directors
and officers of Biokeys Pharmaceuticals may incur in such capacities. The risks
covered by such policies do not exclude liabilities under the Securities Act.
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PART F/S
The following financial statements are included herein:
TITLE OF DOCUMENTS
A. FINANCIAL STATEMENTS OF BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
DECEMBER 31, 2000 AND DECEMBER 31, 1999
PAGE
1 Independent Auditors' Report
2 Consolidated Balance Sheets
3 Consolidated Statements of Operations
4 Consolidated Statements of Shareholders' Equity (Deficit)
5 Consolidated Statements of Cash Flows
6 Notes to Consolidated Financial Statements
B. FINANCIAL STATEMENTS OF BIOKEYS, INC.
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
PAGE
1 Independent Auditors' Report
2 Balance Sheets
3 Statements of Operations
4 Statements of Shareholders' Equity (Deficit)
5 Statements of Cash Flows
6 Notes to Financial Statements
C. FINANCIAL STATEMENTS OF BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED)
PAGE
1 Consolidated Balance Sheets
2 Consolidated Statements of Operations
3 Consolidated Statements of Cash Flows
4 Notes to Financial Statements
-45-
PART III
ITEM 1. INDEX TO EXHIBITS
Exhibit DESCRIPTION
Number
2.1 Agreement and Plan of Merger dated May 19, 2000 among
BioQuest, Inc.; BioQuest Acquisition Corp.; and Biokeys, Inc.
3.1 Certificate of Amendment of Certificate of Incorporation of
BioQuest, Inc. - October 12, 2000
3.2 Certificate of Amendment of Certificate of Incorporation of
BioQuest, Inc. - October 12, 2000
3.3 Certificate of Merger of BioQuest Acquisition Corp. into
Biokeys, Inc. - October 12, 2000
3.4 Certificate of Incorporation of BioQuest Acquisition Corp. -
May 19, 2000
3.6 Amended and Restated Bylaws of Biokeys Pharmaceuticals, Inc.
4.1 Certificate of Designation of BioQuest, Inc. - September 11,
2000
10.1* Patent and Technology License Agreement with M.D. Anderson -
June, 1996 (Request for confidential treatment of certain
data)
10.2* Amendment to M.D. Anderson Licensing Agreement June 15, 2000
(Request for confidential treatment of certain data)
10.3* Option and License Agreement with USC - June 23, 1998 (Co
Factor and Selone) (Request for confidential treatment of
certain data)
10.4 Amendment to Option and License Agreement with USC dated
August 16, 2000 (Co Factor and Selone) (Request for
confidential treatment of certain data)
10.5* Option and License Agreement with USC dated August 17, 2000
(Thiovir) (Request for confidential treatment of certain data)
10.6 Employment Agreement with Warren C. Lau
11.1 Statement Regarding Computation of Per Share Earnings
21.1 Subsidiaries of the Registrant
24.1 Powers of Attorney (included on signature pages)
* Refiled with this amendment on Form 10-SB/A
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and
Exchange Act of 1934, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 11th day of January, 2002.
BIOKEYS PHARMACEUTICALS, INC.
By: /s/ LOUIS R. REIF
-----------------
Louis R. Reif, Chairman and Chief
Executive Officer
By: /s/ WARREN C. LAU
-----------------
Warren C. Lau, President and Chief
Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints LOUIS R. REIF and WARREN C. LAU, or
either of them, as his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities to sign the Registration Statement of Biokeys
Pharmaceuticals, Inc. on Form 10SB, and any and all amendments (including
post-effective amendments) to such Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorney-in-fact and agents or any
of them or their or his substitute or substitutes, may unlawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of
1934, this Registration Statement or thereto has been signed below by the
following persons in the capacities and on the date indicated.
Signatures Title Date
- ---------- ----- ----
/s/ LOUIS REIF Director January 11, 2002
-------------------------------
Louis R. Reif
/s/ ROBERT D. WHITWORTH Director January 11, 2002
-------------------------------
Robert D. Whitworth
/s/ WARREN C. LAU Director January 11, 2002
-------------------------------
Warren C. Lau
-47-
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Consolidated Financial Statements
December 31, 2000 and 1999
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Biokeys Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Biokeys
Pharmaceuticals, Inc. and subsidiary (formerly BioQuest, Inc.) (a development
stage enterprise) (the Company) as of December 31, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for the years then ended, and for the period from inception (June
12, 1996) through December 31, 2000. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Biokeys
Pharmaceuticals, Inc. and subsidiary (formerly BioQuest, Inc.) (a development
stage enterprise) as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended, and for the period
from inception (June 12, 1996) through December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 11 to
the consolidated financial statements, the Company has suffered recurring losses
from operations; this fact raises substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in note 11. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Houston, Texas
June 22, 2001
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Consolidated Balance Sheets
DECEMBER 31,
Assets 2000 1999
------------ ------------
Current assets:
Cash and cash equivalents $ 467,878 58,463
Certificate of deposit 1,016,330 --
Advances to employees 10,500 6,554
Prepaid expenses 71,624 --
------------ ------------
Total current assets 1,566,332 65,017
Property and equipment, net (note 4) 6,356 9,243
Goodwill, net of accumulated amortization of $1,900,709 in 2000 13,304,966 --
Other assets 1,180 1,180
------------ ------------
Total assets $ 14,878,834 75,440
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 67,537 165,082
Accrued salary and related taxes 116,034 60,605
Accrued dividends payable 85,000 --
Notes payable (note 5) -- 97,718
Sponsored research payable (note 7) -- 845,944
Obligation under license agreement (note 6) -- 139,834
------------ ------------
Total current liabilities 268,571 1,309,183
------------ ------------
Shareholders' equity (deficit) (notes 1, 6 and 8):
Cumulative convertible preferred stock, $.01 par value,
(aggregate involuntary liquidation preference $3,285,000),
1,000,000 shares authorized; issued and outstanding, 3,200
shares in 2000 32 --
Common stock, $.001 par value, 50,000,000 shares authorized;
issued and outstanding, 14,586,984 shares in 2000 and
5,859,976 shares in 1999 14,587 5,860
Additional paid-in capital 22,299,866 2,763,535
Deficit accumulated during the development stage (7,704,222) (4,003,138)
------------ ------------
Total shareholders' equity (deficit) 14,610,263 (1,233,743)
Commitments and contingencies (notes 6, 7, 11, 12 and 13)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 14,878,834 75,440
============ ============
See accompanying notes to consolidated financial statements.
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Consolidated Statements of Operations
INCEPTION
(JUNE 12, 1996)
YEAR ENDED DECEMBER 31, THROUGH
-------------------------- DECEMBER 31,
2000 1999 2000
----------- ----------- -----------
Net sales $ -- -- 174,830
Cost of goods sold -- -- 51,094
----------- ----------- -----------
Gross margin -- -- 123,736
Grant revenue -- -- 80,338
Interest income 40,922 14,234 57,005
----------- ----------- -----------
40,922 14,234 261,079
----------- ----------- -----------
Operating expenses:
Research and development 983,198 351,446 2,717,544
General and administrative 827,970 708,562 3,437,098
Depreciation and amortization 1,907,341 5,385 1,989,516
Interest expense 23,497 4,326 111,989
Equity in loss of subsidiary -- -- 178,936
----------- ----------- -----------
Total operating expenses 3,742,006 1,069,719 8,435,083
----------- ----------- -----------
Loss before cumulative effect of
change in accounting principle (3,701,084) (1,055,485) (8,174,004)
Cumulative effect of change in accounting
principle -- -- (25,821)
----------- ----------- -----------
Net loss $(3,701,084) (1,055,485) (8,199,825)
=========== =========== ===========
Loss per common share -
basic and diluted (note 10) $ (0.44) (0.20)
=========== ===========
See accompanying notes to consolidated financial statements.
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Consolidated Statements of Shareholders' Equity (Deficit)
Inception (June 12, 1996) through December 31, 2000
DEFICIT
CUMULATIVE CONVERTIBLE ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE SHAREHOLDERS'
-------------------- ----------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE (DEFICIT)
--------- --------- ----------- ---------- ----------- ------------ ------------
Balances at June 12, 1996 (date of
incorporation) - $ - - $ - - - -
Sale of common stock without par value - - 503 5 5 - 10
Change in par value of common stock - - - (4) 4 - -
Issuance of common stock and net
liabilities assumed in acquisition - - 1,716,132 1,716 3,224 (18,094) (13,154)
Issuance of common stock - - 2,010,111 2,010 456 (2,466) -
Net loss - - - - - (259,476) (259,476)
--------- --------- ----------- ---------- ----------- ------------ ------------
Balances at December 31, 1996 - - 3,726,746 3,727 3,689 (280,036) (272,620)
Sale of common stock, net
of offering costs of $9,976 - - 1,004,554 1,004 1,789,975 - 1,790,979
Issuance of common stock in acquisition - - 375,891 376 887,874 - 888,250
Minority interest deficiency at
acquisition charged to the Company - - - - - (45,003) (45,003)
Net loss - - - - - (1,979,400) (1,979,400)
--------- --------- ----------- ---------- ----------- ------------ ------------
Balances at December 31, 1997 - - 5,107,190 5,107 2,681,538 (2,304,439) 382,206
Rescission of acquisition - - (375,891) (376) (887,874) 561,166 (327,084)
Issuance of common stock at
conversion of notes payable - - 450,264 451 363,549 - 364,000
Expense related to stock warrants
issued - - - - 260,000 - 260,000
Net loss - - - - - (1,204,380) (1,204,380)
--------- --------- ----------- ---------- ----------- ------------ ------------
Balances at December 31, 1998 - - 5,181,564 5,182 2,417,213 (2,947,653) (525,258)
Sale of common stock (note 8) - - 678,412 678 134,322 - 135,000
Expense related to stock warrants
issued (note 8) - - - - 212,000 - 212,000
Net loss - - - - - (1,055,485) (1,055,485)
--------- --------- ----------- ---------- ----------- ------------ ------------
Balances at December 31, 1999 - - 5,859,976 5,860 2,763,535 (4,003,138) (1,233,743)
Sale of preferred stock, net of
offering costs of $76,500 (note 8) 3,200 32 - - 3,123,468 - 3,123,500
Issuance of common stock at conversion
of notes and interest payable
(note 8) - - 412,487 412 492,085 - 492,497
Issuance of common stock at
conversion of notes payable (note 8) - - 70,354 70 83,930 - 84,000
Issuance of common stock to settle
obligations (notes 1 and 6) - - 495,111 496 1,201,664 - 1,202,160
Issuance of common stock for acquisition
(note 1) - - 6,999,990 7,000 9,325,769 - 9,332,769
Issuance of warrants for acquisition
(note 1) - - - - 4,767,664 - 4,767,664
Stock issued for acquisition costs
(note 1) - - 150,000 150 487,350 - 487,500
Expense related to stock warrants
issued (note 8) - - - - 140,000 - 140,000
Dividends payable (note 8) - - - - (85,000) - (85,000)
Cashless exercise of warrants (note 8) - - 599,066 599 (599) - -
Net loss - - - - - (3,701,084) (3,701,084)
--------- --------- ----------- ---------- ----------- ------------ ------------
Balances at December 31, 2000 3,200 $ 32 14,586,984 $ 14,587 22,299,866 (7,704,222) 14,610,263
========= ========= =========== ========== =========== ============ ============
See accompanying notes to consolidated financial statements.
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
INCEPTION
(JUNE 12, 1996)
YEAR ENDED DECEMBER 31, THROUGH
-------------------------------- DECEMBER 31,
2000 1999 2000
-------------- -------------- ------------------
Cash flows from operating activities:
Net loss $ (3,701,084) (1,055,485) (8,199,825)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,907,341 5,385 1,989,516
Expense related to stock warrants issued 140,000 212,000 612,000
Expenses paid by issuance of common stock 211,209 - 211,209
Equity in loss of subsidiary - - 178,936
Write-off of license agreement - - 152,866
Cumulative effect of change in accounting principle - - 25,821
Changes in assets and liabilities, net of effect of
acquisitions:
(Increase) decrease in other assets (81,382) 11,518 (142,153)
Increase in inventory - - (13,490)
Increase (decrease) in accounts payable
and accrued liabilities (624,376) 67,430 (475,139)
Increase in sponsored research
payable and license obligation - 360,419 924,318
-------------- -------------- ------------------
Net cash used in operating activities (2,148,292) (398,733) (4,735,941)
-------------- -------------- ------------------
Cash flows from investing activities:
Purchase of certificate of deposit (1,016,330) - (1,016,330)
Purchases of property and equipment (3,745) - (87,630)
Payment on obligation under license agreement - - (106,250)
Cash acquired in acquisition of subsidiary - - 64,233
Payments on note receivable - 170,000 370,000
Advance to subsidiary - - (90,475)
Cash transferred in rescission of acquisition - - (19,475)
Cash received in rescission of acquisition - - 230,000
-------------- -------------- ------------------
Net cash provided by (used in) investing activities (1,020,075) 170,000 (655,927)
-------------- -------------- ------------------
Cash flows from financing activities:
Proceeds from sale of preferred stock 3,200,000 - 3,200,000
Proceeds from sale of common stock - 135,000 1,935,965
Payment of financing and offering costs (76,500) - (98,976)
Payment of notes payable and long-term debt (17,718) - (67,718)
Proceeds from issuance of notes payable 472,000 80,000 894,718
Principal payments on capital lease obligations - - (4,243)
-------------- -------------- ------------------
Net cash provided by financing activities 3,577,782 215,000 5,859,746
-------------- -------------- ------------------
Net increase in cash and cash equivalents 409,415 (13,733) 467,878
Cash and cash equivalents at beginning of period 58,463 72,196 -
-------------- -------------- ------------------
Cash and cash equivalents at end of period $ 467,878 58,463 467,878
============== ============== ==================
See accompanying notes to consolidated financial statements.
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(1) DESCRIPTION OF THE COMPANY
Biokeys Pharmaceuticals, Inc., a Delaware corporation, formerly known as
BioQuest, 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. The Company currently
does not market any product. Through its license agreements with
University of Texas M.D. Anderson Cancer Center (M.D. Anderson) and
University of Southern California (USC), the Company has rights to drug
candidates in varying early stages of development.
On October 10, 2000, a wholly-owned subsidiary of BioQuest, Inc. merged
with Biokeys, Inc. (Biokeys) of San Diego, California (see note 3).
BioQuest, Inc. (BioQuest) changed its name to Biokeys Pharmaceuticals
Inc. Pursuant to the merger, Biokeys shareholders received 6,999,990
shares of BioQuest common stock, representing 50% of the total common
stock of BioQuest outstanding upon consummation of the merger. All
previously outstanding Biokeys shares were canceled, and all outstanding
Biokeys warrants were replaced with warrants to purchase a total of
1,468,018 shares of Company common stock at $0.49 per share expiring
December 15, 2003, representing 50% of the outstanding warrants to
purchase common stock upon consummation of the merger. A Biokeys
liability was settled through the issuance of 8,727 shares of Company
common stock. The Company issued 150,000 shares of common stock in
payment of certain direct acquisition costs. The officers and directors
of BioQuest have continued as the officers and directors of the Company
after consummation of the merger. For financial reporting purposes, the
merger was accounted for as a purchase. Biokeys operating activity is
included in the Company's consolidated financial statements from the date
of the merger.
The Company's shares trade in the over-the-counter market and are quoted
in the so-called "pink sheets" 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. 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.
(Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
COMMON STOCK
On June 20, 2000, the Company effected a reverse stock split of its
common stock of approximately 1.9899 to 1. All share and per-share
information included in the accompanying consolidated financial
statements and related notes has been adjusted to reflect the stock
split.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for employee stock-based
compensation, and includes the required footnote disclosures of Statement
of Financial Accounting Standards No. 123.
The Company accounts for non-employee stock-based compensation in
accordance with Emerging Issues Task Force Issue No. 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.
CASH EQUIVALENTS
Highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.
FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, certificate of
deposit, advances to employees, 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 Company maintains cash, cash equivalents, and certificates of deposit
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.
GOODWILL
Goodwill (excess of purchase price over fair value of net assets
acquired) is being amortized using the straight-line method over two
years.
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.
(Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
DEFERRED FINANCING COSTS
Costs associated with arranging debt financing are deferred and amortized
using the straight-line method over the term of the notes payable.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed as incurred and include
Company-sponsored research and development.
LICENSE AGREEMENTS
Costs of license agreements for patent rights and technology rights that
currently have no alternative future uses are expensed as research and
development costs.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that property and
equipment and intangible or other noncurrent assets may be impaired, an
evaluation of the recoverability of currently recorded costs will be
made. If an evaluation is required, the estimated value of undiscounted
future net cash flows associated with the asset is compared to the
asset's carrying value to determine if impairment exists. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets.
INCOME TAXES
Income taxes are accounted for using the asset and liability method under
which deferred tax assets and liabilities are recognized for estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Deferred tax expense or benefit is recognized as a result of the change
in the asset or liability during the period.
SUPPLEMENTARY CASH FLOW INFORMATION
Interest of $3,000 and $4,300 was paid during 2000 and 1999,
respectively. No income taxes were paid during 2000 and 1999.
(Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
Noncash investing and financing transactions excluded from the statements
of cash flows for the years ended December 31, 2000 and 1999 are as
follows:
2000 1999
------------------ -----------------
Conversion of notes payable and accrued
interest into common stock (note 8) $ 84,000 -
Issuance of common stock to settle
obligations (note 6) 1,172,490 -
Issuance of common stock for acquisition
(note 1) 9,332,769 -
Issuance of warrants for acquisition (note 1) 4,767,664 -
Acquisition liability settled with stock
(note 1) 29,670 -
Issuance of common stock for direct costs
of acquisition (note 1) 487,500 -
Warrants issued for consulting services
(note 8) 140,000 212,000
Cashless exercise of warrants (note 8) 599 -
Dividends payable (note 8) 85,000 -
Issuance of common stock at conversion
of notes and interest payable (note 8) 492,497 -
Acquisition of Biokeys, Inc.:
Other assets 5,812 -
Current liabilities 582,260 -
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS (SFAS 141).
SFAS 141 eliminates the pooling of interests method of accounting and
requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method. The Company does not expect the
adoption of SFAS 141 to have a material impact on its business because it
currently has no planned or pending acquisitions.
(Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The FASB has also issued Statement of Financial Accounting Standards No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS 142), which will be
effective for the Company as of January 1, 2002. SFAS 142 requires that
goodwill and other intangible assets with indefinite lives no longer be
amortized. SFAS 142 further requires that the fair value of goodwill and
other intangible assets with indefinite lives be tested for impairment
upon adoption of this statement, annually and upon the occurrence of
certain events and be written down to fair value if considered impaired.
Adoption of SFAS 142 will result in the elimination of annual
amortization expense related to goodwill; however, because of the
extensive effort needed to comply with this statement, the impact of
related impairment, if any, on our financial position or results of
operations has not been determined.
(3) ACQUISITION OF BIOKEYS, INC.
On October 10, 2000, the Company merged with Biokeys, Inc. (see note 1).
The cost of the acquisition follows:
Value of 6,999,990 shares of common stock $ 9,332,769
Value of warrants to purchase 1,468,018 shares of
common stock, including warrants to purchase
103,904 shares of common stock to settle Biokeys,
Inc. obligations at closing 4,767,664
Value of common stock issued to settle Biokeys, Inc.
liability at closing 29,670
Direct costs of acquisition 580,850
----------
$14,710,953
==========
The value of the 6,999,990 shares of common stock is based on the average
closing price of BioQuest's common stock between the dates the
acquisition was agreed to and announced. The value of the warrants to
purchase 1,468,018 shares of common stock was based on the Black-Scholes
pricing model with assumptions of expected life of 3.2 years, risk-free
interest rate of 5.91%, volatility of 160%, and no dividends.
The cost of the acquisition has been allocated on the basis of the
estimated fair value of the assets acquired and liabilities assumed. This
allocation resulted in goodwill of $15,205,675 which is being amortized
using the straight-line method over two years. In connection with the
acquisition, net liabilities were assumed by the Company as follows:
Other assets $ 5,812
Current liabilities (500,534)
-------------
$ (494,722)
=============
(Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The following unaudited pro forma results of operations for the years
ended December 31, 2000 and 1999 have been prepared as though the merger
occurred January 1, 1999. The pro forma results include amortization of
goodwill arising from the merger of $1,900,709 per quarter. This pro
forma information is not necessarily indicative of any future results of
the Company.
2000 1999
------------ ------------
Interest income $ 40,922 14,234
Operating expenses (11,706,535) (9,150,656)
------------ ------------
Net loss $(11,665,613) (9,136,422)
------------ ------------
Loss per common share $ (0.83) (0.75)
============ ============
Weighted average number of common
shares outstanding 14,027,144 12,183,437
============ ============
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2000 and 1999 were as follows:
USEFUL
LIVES 2000 1999
----------------- ----------------- -----------------
Office furniture and equipment 5 years $ 13,420 13,420
Computer software and equipment 3 years 11,845 8,100
----------------- -----------------
25,265 21,520
Less accumulated depreciation
and amortization (18,909) (12,277)
----------------- -----------------
$ 6,356 9,243
================= =================
(5) NOTES PAYABLE
At December 31, 1999, the Company had overdue unsecured promissory notes
payable to investors in the principal amounts of $80,000 and $17,718,
bearing interest at 8% and 12% per annum, respectively. The notes had
original maturity dates of November 30, 1999 and July 31, 1999,
respectively, but the investors agreed to forbear any action to collect
the notes in 1999. The two notes were paid in full, including accrued
interest, during 2000. The $80,000 note and accrued interest were
converted to common stock (see note 8). The $17,718 note and accrued
interest were repaid with cash.
(Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(6) 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, including the amounts
referred to in note 7. Finally, the Amendment defined a milestone payment
due to M.D. Anderson upon the enrollment of the first patient in the
first Phase I 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
years ended December 31, 2000 and 1999. The M.D. Anderson License
Agreement continues in effect until all patent rights have expired.
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
(Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
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.
(7) 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.
Biokeys has entered into an SRA with USC under which USC will continue
studies in the therapeutic potential of Thiovir and its analogues as
anti-viral agents. The Company has entered into a grant agreement with
USC effective November 1, 2000, under which USC will perform research
into Thiovir and its analogues as inhibitors for HPV and other pathogenic
viruses. The budgeted research costs for this study are approximately
$217,000, which sum has been paid and expensed by the Company in 2000.
(8) EQUITY TRANSACTIONS
In August 1999, the Company borrowed $80,000 from two investors who had
previously purchased common stock. The notes issued to the investors were
due in November 1999 and carried interest at an annual rate of 8%. The
Company issued warrants to purchase 40,202 shares of common stock at
$0.49 per share to the investors as part of the same transaction. The
notes, which were due November 30, 1999, were repaid in March 2000
through the conversion of principal and interest into common stock at
$1.19 per share and the issuance of additional warrants to purchase
40,202 shares of common stock at $0.49 per share.
(Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
In November and December 1999, the Company agreed to sell to four
investors a total of 678,412 shares of its common stock at a price of
approximately $0.20 per share for a total of $135,000. Each share was
accompanied by a warrant to purchase shares of common stock at an
exercise price of $0.40 cents per share. The warrants were exercised in
March 2000 under a provision permitting cashless exercise, with 599,066
shares being issued to the holders as a result of such exercise.
Beginning in April 2000, the Company sold an aggregate of $472,000
principal amount of 8.5% subordinated convertible promissory notes in a
private placement offering to accredited investors. The principal amounts
of the notes, together with accrued interest of $20,497, was converted
into shares of common stock at a conversion price of $1.19 per share,
effective as of the consummation of the merger between the Company and
Biokeys.
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, 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 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. At December
31, 2000, dividends payable totaled $85,000 or $27 per share. The
preferred stock is redeemable at the option of the Company at any time
the closing price of common stock remains at a level of at least $8 per
share for 20 consecutive days if the Company is listed on the American
Stock Exchange or NASDAQ at such time, with the redemption price being
equal to the liquidation preference. In addition, at any time after July
1, 2003, the Company may call all of any portion of the outstanding
preferred stock for redemption on at least 30 days notice, at a
redemption price equal to 105% of the liquidation preference plus all
accrued and unpaid dividends. The Company 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 December 31, 2000.
In June 1999, the Company issued warrants to a key consultant to purchase
502,528 shares of common stock. The fair value of these warrants on the
date of issue, $212,000, has been recorded as a noncash general and
administrative expense. The warrants are exercisable at $0.49 per share
and expire in June 2006. No such warrants have been exercised as of
December 31, 2000.
In September 1998, the Company issued warrants to several consultants for
the purchase of an aggregate of 670,875 shares of common stock. The
warrants are exercisable at $0.49 per share and expire in September 2005.
No such warrants have been exercised as of December 31, 2000.
(Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
In conjunction with the acquisition of Biokeys as discussed in note 1,
all outstanding Biokeys warrants were replaced with warrants to purchase
a total of 1,468,018 shares of the Company's common stock at $0.49 per
share that expire December 15, 2003.
Non-employee 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 2000 and 1999: no dividend yield for either year; expected volatility
of 125% to 170%; risk-free interest rates 6.1% to 6.8%; and expected
lives of three and seven years, respectively.
At December 31, 2000, there were outstanding warrants to purchase a total
of 3,222,331 shares of common stock as follows:
EXERCISE EXPIRATION
WARRANTS PRICE DATE
- ------------------- ----------------- ---------------------------
80,404 $ 0.49 August 2002
100,506 0.49 May 2003
400,000 4.00 August 2003
1,468,018 0.49 December 2003
670,875 0.49 September 2005
502,528 0.49 June 2006
(9) INCOME TAXES
Significant components of income tax expense for the years ended December
31, 2000 and 1999 are as follows:
2000 1999
--------- ---------
Deferred tax benefit $ 487,617 284,064
Increase in valuation allowance for
deferred tax assets (487,617) (284,064)
--------- ---------
Income tax expense $ -- --
========= =========
(Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
The tax effects of temporary differences that give rise to deferred tax
assets at December 31, 2000 and 1999 are as follows:
2000 1999
----------- -----------
Net operating loss carryforward $ 2,642,171 967,556
Organization costs and license agreement,
due to differences in amortization 39,055 44,538
----------- -----------
Total deferred tax assets 2,681,226 1,012,094
Less valuation allowance (2,681,226) (1,012,094)
----------- -----------
Net deferred tax assets $ -- --
=========== ===========
At December 31, 2000, the Company had an unused net operating loss
carryforward of approximately $7,771,000 for tax reporting purposes,
which expires in 2111 through 2112 and 2118 through 2120. Included in the
2000 carryforward is a net operating loss carryforward acquired from
Biokeys, Inc. of approximately $3,475,000.
(10) NET LOSS PER COMMON SHARE
The computation of basic and diluted net loss per share for the years
ended December 31, 2000 and 1999 is as follows:
2000 1999
----------- -----------
Numerator:
Net loss $(3,701,084) (1,055,485)
Less preferred stock dividends (85,000) --
----------- -----------
Numerator for basic and diluted
loss per share $(3,786,084) (1,055,485)
=========== ===========
Denominator for basic and diluted loss
per share - weighted average shares 8,582,707 5,183,447
=========== ===========
Loss per common share - basic and diluted $ (0.44) (0.20)
=========== ===========
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 December 31, 2000 and 1999, 4,022,331 and 1,253,807 potentially
dilutive shares, respectively, and 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 2000 and 1999.
(Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(Formerly BioQuest, Inc.)
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(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 $3,701,084 and $1,055,485 for the years ended December 31, 2000
and 1999, respectively.
To date, the Company has been principally engaged in licensing and
research and development efforts. The Company has no current revenues, is
not marketing any products, and projects a loss from operations for 2001.
The Company will require additional capital, which it intends to obtain
through equity and debt offerings and/or strategic partnership in order
to continue to operate its business. The Company's ability to meet its
obligations as they become due and to continue as a going concern must be
considered in light of the expenses, difficulties and delays frequently
encountered in operating a new business, particularly since the Company
will focus on research, development and unproven technology which may
require a lengthy period of time and substantial expenditures to
complete. Even if the Company is able to successfully develop new
products or technologies, there can be no assurance that the Company will
generate sufficient revenues from the sale or licensing of such products
and technologies to be profitable. Management believes that the Company's
ability to meet its obligations as they become due and to continue as a
going concern through December 2001 are dependent upon obtaining
additional financing.
(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 not predictable with assurance. Management
is not aware of any pending or threatened lawsuit or proceeding that
would have a material adverse effect on the Company's financial position,
liquidity or results of operations.
OPERATING LEASES
The Company has operating leases for office space and equipment. Rent
expense was $23,522 and $19,099 during the years ended December 31, 2000
and 1999, respectively. A lease for office space expired in November 2000
and was renewed for an additional one-year term.
(13) SUBSEQUENT EVENTS
In January 2001, the Company entered into a one-year consulting agreement
with an individual who will serve as a medical director and provide
assistance for anticipated applications to the U.S Food and Drug
Administration. The consulting agreement provides for fees of $42,000.
BIOKEYS, INC.
Financial Statements
September 30, 2000 and December 31, 1999
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Board of Directors
BioKeys, Inc.:
We have audited the accompanying balance sheets of BioKeys, Inc. (the Company)
as of September 30, 2000 and December 31, 1999, and the related statements of
operations, shareholders' equity (deficit), and cash flows for the nine months
ended September 30, 2000 and the year ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in note 1 to the financial statements, the Company's outstanding
common stock and warrants were acquired in October 2000 in a business
combination accounted for as a purchase.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BioKeys, Inc. as of September
30, 2000 and December 31, 1999, and the results of its operations and its cash
flows for the nine months ended September 30, 2000 and the year ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 11 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 11. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ KPMG LLP
Houston, Texas
March 16, 2001
BIOKEYS, INC.
Balance Sheets
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
ASSETS
Current assets - cash and cash equivalents $ -- 11,135
Property and equipment, net (note 3) -- 520
Other assets 5,812 --
----------- -----------
Total assets $ 5,812 11,655
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 102,982 325,791
Due to BioQuest, Inc. 494,722 --
Accrued salaries 97,962 107,902
----------- -----------
Total current liabilities 695,666 433,693
Notes payable (note 4) -- 617,673
----------- -----------
Total liabilities 695,666 1,051,366
----------- -----------
Commitments and contingencies (notes 5, 10 and 11)
Shareholders' equity (deficit) (notes 4 and 7):
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; issued and outstanding zero shares in
2000 and 250,000 shares in 1999 -- 2,500
Common stock, $0.001 par value, 25,000,000 shares
authorized; issued and outstanding 6,330,320 shares
in 2000 and 4,858,440 shares in 1999 6,330 4,858
Additional paid-in capital 5,461,787 3,348,500
Accumulated deficit (6,157,971) (3,895,569)
Preferred shareholder note receivable -- (500,000)
----------- -----------
Total shareholders' equity (deficit) (689,854) (1,039,711)
----------- -----------
Total liabilities and shareholders' equity (deficit) $ 5,812 11,655
=========== ===========
See accompanying notes to financial statements.
BIOKEYS, INC.
Statements of Operations
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
Operating expenses:
Research and development $ 220,470 154,183
General and administrative (note 7) 2,087,356 323,918
----------- -----------
Total operating expenses 2,307,826 478,101
Extraordinary income - gain on forgiveness
of debt (note 9) 45,424 --
----------- -----------
Net loss $(2,262,402) (478,101)
=========== ===========
Loss per common share -
basic and diluted (note 2) $ (0.45) (0.10)
=========== ===========
Weighted average number of
common shares outstanding 5,021,982 4,858,440
=========== ===========
See accompanying notes to financial statements.
BIOKEYS, INC.
Statements of Shareholders' Equity (Deficit)
Nine months ended September 30, 2000
and year ended December 31, 1999
PREFERRED TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL SHAREHOLDER SHAREHOLDERS'
----------------------- ---------------------- PAID-IN ACCUMULATED NOTE EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE (DEFICIT)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1998 250,000 $ 2,500 4,858,440 $ 4,858 3,348,500 (3,417,468) (500,000) (561,610)
Net loss -- -- -- -- -- (478,101) -- (478,101)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1999 250,000 2,500 4,858,440 4,858 3,348,500 (3,895,569) (500,000) (1,039,711)
Conversion of preferred stock
to common stock (note 4) (250,000) (2,500) 1,000,000 1,000 1,500 -- 500,000 500,000
Issuance of common stock at
conversion of notes payable
(note 4) -- -- 471,880 472 235,468 -- -- 235,940
Expense related to stock
warrants issued (note 7) -- -- -- -- 1,876,319 -- -- 1,876,319
Net loss -- -- -- -- -- (2,262,402) -- (2,262,402)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 2000 -- $ -- 6,330,320 $ 6,330 5,461,787 (6,157,971) -- (689,854)
========== ========== ========== ========== ========== ========== ========== ==========
See accompanying notes to financial statements.
BIOKEYS, INC.
Statements of Cash Flows
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
Cash flows from operating activities:
Net loss $(2,262,402) (478,101)
Adjustments to reconcile net loss to
net cash used in operating activities:
Extraordinary gain on forgiveness of debt (45,424) --
Depreciation 520 3,386
Expense related to stock warrants issued 1,876,319 --
Changes in assets and liabilities:
Increase in other assets (5,812) --
Decrease in deposits -- 3,910
Increase (decrease) in accounts payable and
accrued liabilities (177,385) 1,000
Increase in due to BioQuest, Inc. 494,722 --
Increase (decrease) in accrued salaries (9,940) 100,323
----------- -----------
Net cash used in operating activities (129,402) (369,482)
----------- -----------
Cash flows from financing activities - proceeds from
issuance of notes payable 118,267 317,716
----------- -----------
Net decrease in cash and cash equivalents (11,135) (51,766)
Cash and cash equivalents, beginning of period 11,135 62,901
----------- -----------
Cash and cash equivalents, end of period $ -- 11,135
=========== ===========
See accompanying notes to financial statements.
BIOKEYS, INC.
Notes to Financial Statements
September 30, 2000 and December 31, 1999
(1) DESCRIPTION OF THE COMPANY
BioKeys, Inc. (BioKeys or the Company) was organized as a corporation in
the State of Delaware in November 1997, and was formed to develop
biotechnology. BioKeys' business strategy is to develop leading-edge
medical research, currently being conducted at leading universities and
research institutes throughout the world, into commercial medical products.
Business opportunities BioKeys has identified include the development of a
vaccine for use in cancer chemotherapy and the development of an effective
oral anti-AIDS drug.
In October 2000, the Company was acquired by BioQuest, Inc. (BioQuest) of
Houston, Texas. Company shareholders received 6,999,990 shares of BioQuest
common stock, an aggregate amount equal to 50% of the total common stock of
BioQuest outstanding immediately after the transaction. All outstanding
BioKeys warrants were replaced with warrants to purchase BioQuest common
stock at $0.49 per share that expire December 15, 2003 (see note 4). The
terms further specified that BioQuest change its name to Biokeys
Pharmaceuticals, Inc. and that BioKeys, Inc. become a wholly-owned
subsidiary. For financial reporting purposes, the acquisition transaction
was accounted for as a purchase.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
CASH EQUIVALENTS
Highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents. There were no cash
equivalents at September 30, 2000 and December 31, 1999.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is 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.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed as incurred, including
Company-sponsored research and development (see note 6).
(Continued)
BIOKEYS, INC.
Notes to Financial Statements
September 30, 2000 and December 31, 1999
LICENSE AGREEMENTS
Costs of license agreements for patent rights and technology rights that
currently have no alternative future uses are expensed as research and
development costs.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that property and
equipment and intangible or other noncurrent assets related to specifically
acquired assets may be impaired, an evaluation of the recoverability of
currently recorded costs will be made. If an evaluation is required, the
estimated value of undiscounted future net cash flows associated with the
asset is compared to the asset's carrying value to determine if a
write-down to fair value is required. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of these assets exceeds the fair value of the
assets.
INCOME TAXES
Income taxes are accounted for using the asset and liability method under
which deferred tax assets and liabilities are recognized for estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. Deferred tax expense or
benefit is recognized as a result of the change in the asset or liability
during the period.
NET LOSS PER COMMON SHARE
Net loss per common share - basic is calculated according to Statement of
Financial Accounting (SFAS) No. 128, EARNINGS PER SHARE, using the weighted
average number of shares of common stock outstanding during the period. At
September 30, 2000 and December 31, 1999, 1,227,825 and 710,000 potentially
dilutive shares, respectively, relating to outstanding warrants 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 for the nine months ended September 30, 2000 and the year ended
December 31, 1999.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for employee stock-based compensation, and
includes the required footnote disclosures of Statement of Financial
Accounting Standards No. 123.
The Company accounts for non-employee stock-based compensation in
accordance with Emerging Issues Task Force Issue No. 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.
(Continued)
BIOKEYS, INC.
Notes to Financial Statements
September 30, 2000 and December 31, 1999
SUPPLEMENTARY CASH FLOW INFORMATION
No interest expense or income taxes were paid during the nine months ended
September 30, 2000 or the year ended December 31, 1999.
Noncash investing and financing transactions excluded from the statement of
cash flows for the nine months ended September 30, 2000 are as follows:
Conversion of notes payable into common stock (note 4) $ 235,940
Payment of shareholder note receivable with offset of
notes payable (note 4) 500,000
(3) PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2000 and December 31, 1999 were as
follows:
USEFUL
LIVES 2000 1999
------- --------- --------
Computer equipment 3 years $ 10,157 10,157
Less accumulated depreciation (10,157) (9,637)
--------- --------
$ -- 520
========= ========
(4) NOTES PAYABLE
At December 31, 1999, notes payable consisted of advances from investors
and related parties for operating purposes. This debt was non-interest
bearing. During the nine months ended September 30, 2000, additional
advances totaling $118,267 were received by the Company.
During September 2000, advances totaling $235,940 were converted into
471,880 shares of common stock at a conversion price of $0.50 per share. An
additional $500,000 of outstanding advances were used toward the payment of
the preferred shareholder note receivable. The preferred stock was
simultaneously converted to 10,000 shares of common stock at a conversion
rate of four shares of common stock for every share of preferred stock.
(5) LICENSE AGREEMENT
Under an Option and License Agreement with the University of Southern
California (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
(Continued)
BIOKEYS, INC.
Notes to Financial Statements
September 30, 2000 and December 31, 1999
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 a running royalty 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.
(6) RESEARCH AGREEMENT
On November 17, 1997, BioKeys entered into a Research Agreement (RA) with
USC.
The RA will involve further studies in the therapeutic potential of
particular anti-AIDS agents. The RA will involve the following objectives:
(1) acquire initial in vitro data relating to the potential use of an oral
anti-AIDS drug with other HIV and/or CMV inhibitor drugs as part of a
combination therapy; (2) conduct additional research into other potential
applications of the oral anti-AIDS drug; (3) conduct additional research
into other proprietary compounds related to the oral anti-AIDS drug; (4)
transfer to the Company technology related to the oral anti-AIDS drug
family of compounds; and (5) continue to patent findings.
(7) WARRANTS
In exchange for consulting services, in September 2000, the Company issued
warrants with a fair value of $1,876,319 to purchase 517,825 shares of
common stock. These transactions have been reported as a noncash general
and administrative expense in the accompanying 2000 statement of
operations. These warrants were valued using the Black-Scholes pricing
model with the following assumptions: no dividend yield, expected
volatility of 160%, risk-free interest rate of 5.91%, and expected life of
3.2 years. Because there was not a reliable fair value of the Company's
common stock in September 2000, the pricing model used the BioQuest closing
price on October 10, 2000, the effective date of the merger.
In conjunction with 1997 and 1998 private placements of common stock, the
Company issued warrants to purchase 710,000 shares of common stock.
In conjunction with the acquisition of BioKeys in October 2000 (see note
1), all outstanding Company warrants were exchanged for warrants to
purchase common stock in Biokeys Pharmaceuticals, Inc. (New Warrants). The
New Warrants expire December 15, 2003 and have an exercise price of $0.49
per share of common stock.
(Continued)
BIOKEYS, INC.
Notes to Financial Statements
September 30, 2000 and December 31, 1999
(8) INCOME TAXES
Significant components of income tax expense for the nine months ended
September 30, 2000 and the year ended December 31, 1999 are as follows:
2000 1999
------------------------
Deferred tax benefit $ 129,568 159,154
Increase in valuation allowance for
deferred tax assets (129,568) (159,154)
------------------------
Income tax expense $ -- --
========================
The tax effects of temporary differences that give rise to deferred tax
assets at September 30, 2000 and December 31, 1999 are as follows:
2000 1999
------------------------
Net operating loss carryforward $ 1,181,515 1,051,947
Less valuation allowance (1,181,515) (1,051,947)
------------------------
Net deferred tax assets $ -- --
========================
At September 30, 2000, BioKeys had an unused net operating loss
carryforward of approximately $3,475,000 for tax reporting purposes which
expires in 2112 and 2118 through 2120.
(9) EXTRAORDINARY INCOME
During 2000, the Company negotiated reductions in certain payables.
Payables of $228,175 were settled with a cash payment of $182,751, and
$45,424 was recognized as forgiveness of debt. The forgiveness of debt is
reflected as an extraordinary item in the accompanying 2000 statement of
operations.
(10) CONTINGENCIES
In the normal course of business, the Company may become subject to
lawsuits and other claims and proceedings. Such matters are subject to
uncertainty and outcomes are not predictable with assurance. Management is
not aware of any pending or threatened lawsuit or proceeding that would
have a material adverse effect on the Company's financial position,
liquidity or results of operations.
(11) OPERATIONAL STATUS
The accompanying 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 $2,262,402 and
$478,101 for the nine months ended September 30, 2000 and the year ended
December 31, 1999, respectively.
(Continued)
BIOKEYS, INC.
Notes to Financial Statements
September 30, 2000 and December 31, 1999
Through September 30, 2000, the Company has been principally engaged in
licensing and research and development efforts. The Company has no current
revenues and is not marketing any products. Before the acquisition of the
Company by BioQuest, Inc. in October 2000 (see note 1), the Company
projected a loss from operations for the remainder of 2000 and for 2001.
Following the acquisition, the combined Company will require additional
capital, which it intends to obtain through equity and debt offerings
and/or strategic partnership, in order to continue to operate its business.
The combined 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 combined 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 combined Company
is able to successfully develop new products or technologies, there can be
no assurance that the combined Company will generate sufficient revenues
from the sale or licensing of such products and technologies to be
profitable. Management believes that the combined Company's ability to meet
its obligations as they become due and to continue as a going concern
through December 2001 are dependent upon obtaining additional financing.
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Financial Statements
Nine months ended September 30, 2001
(Unaudited)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Balance Sheets
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED)
Assets
Current assets:
Cash and cash equivalents $ 165,535 467,878
Certificate of deposit -- 1,016,330
Note receivable 35,000 --
Advances to employees 10,500 10,500
Prepaid expenses 243 71,624
------------ ------------
Total current assets 211,278 1,566,332
Property and equipment, net 14,771 6,356
Goodwill, net of accumulated amortization of $7,602,836 and $1,900,709 7,602,839 13,304,966
Other assets 4,053 1,180
------------ ------------
Total assets $ 7,832,941 14,878,834
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 241,847 67,537
Accrued salary and related taxes 215,702 116,034
Accrued dividends payable 277,000 85,000
------------ ------------
Total current liabilities 734,549 268,571
------------ ------------
Shareholders' equity:
Cumulative convertible preferred stock, $.01 par value, (aggregate
involuntary liquidation preference $3,477,000), 1,000,000 shares
authorized; issued and outstanding, 3,200 shares 32 32
Common stock, $.001 par value, 50,000,000 shares authorized;
issued and outstanding, 14,906,387 and 14,586,984 shares 14,906 14,587
Additional paid-in capital 22,611,007 22,299,866
Deficit accumulated during the development stage (15,527,553) (7,704,222)
------------ ------------
Total shareholders' equity 7,098,392 14,610,263
Commitments and contingencies
------------ ------------
Total liabilities and shareholders' equity $ 7,832,941 14,878,834
============ ============
See accompanying notes to consolidated financial statements.
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Operations
(unaudited)
INCEPTION
NINE MONTHS ENDED (JUNE 12, 1996)
SEPTEMBER 30, THROUGH
---------------------------- SEPTEMBER 30,
2001 2000 2001
----------- ----------- -----------
Net sales $ -- -- 174,830
Cost of goods sold -- -- 51,094
----------- ----------- -----------
Gross margin -- -- 123,736
Grant revenue -- -- 80,338
Interest income 30,693 8,014 87,698
----------- ----------- -----------
30,693 8,014 291,772
----------- ----------- -----------
Operating expenses:
Research and development 591,384 328,706 3,308,928
General and administrative 1,555,539 567,625 4,992,637
Depreciation and amortization 5,707,101 4,974 7,696,617
Interest expense -- 24,251 111,989
Equity in loss of subsidiary -- -- 178,936
----------- ----------- -----------
Total operating expenses 7,854,024 925,556 16,289,107
----------- ----------- -----------
Loss before cumulative effect of
change in accounting principle (7,823,331) (917,542) (15,997,335)
Cumulative effect of change in accounting
principle -- -- (25,821)
----------- ----------- -----------
Net loss $(7,823,331) (917,542) (16,023,156)
=========== =========== ===========
Loss per common share -
basic and diluted $ (0.55) (0.07)
=========== ===========
See accompanying notes to consolidated financial statements.
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(unaudited)
INCEPTION
NINE MONTHS ENDED (JUNE 12, 1996)
SEPTEMBER 30, THROUGH
--------------------------- SEPTEMBER 30,
2001 2000 2001
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(7,823,331) (917,542) (16,023,156)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 5,707,101 4,974 7,696,617
Expense related to stock warrants issued 135,998 140,000 747,998
Expenses paid by issuance of common stock -- 186,712 211,209
Equity in loss of subsidiary -- -- 178,936
Write-off of license agreement -- -- 152,866
Cumulative effect of change in accounting principle -- -- 25,821
Changes in assets and liabilities, net of effect of
acquisitions:
(Increase) decrease in other assets 33,508 (348,216) (108,645)
Increase in inventory -- -- (13,490)
Increase (decrease) in accounts payable
and accrued liabilities 273,978 119,759 (201,161)
Increase in sponsored research
payable and license obligation -- -- 924,318
----------- ----------- -----------
Net cash used in operating activities (1,672,746) (814,313) (6,408,687)
----------- ----------- -----------
Cash flows from investing activities:
(Purchase) maturity of certificate of deposit, net 1,016,330 (2,500,000) --
Purchases of property and equipment (13,389) -- (101,019)
Payment on obligation under license agreement -- -- (106,250)
Cash acquired in acquisition of subsidiary -- -- 64,233
Payments on note receivable -- -- 370,000
Advance to subsidiary -- -- (90,475)
Cash transferred in rescission of acquisition -- -- (19,475)
Cash received in rescission of acquisition -- -- 230,000
----------- ----------- -----------
Net cash provided by (used in) investing activities 1,002,941 (2,500,000) 347,014
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of preferred stock -- 3,000,000 3,200,000
Proceeds from sale of common stock 375,000 -- 2,310,965
Payment for repurchase of warrants (55,279) -- (55,279)
Proceeds from sale of warrants 47,741 -- 47,741
Payment of financing and offering costs -- (76,500) (98,976)
Payment of notes payable and long-term debt -- (17,718) (67,718)
Proceeds from issuance of notes payable -- 472,000 894,718
Principal payments on capital lease obligations -- -- (4,243)
----------- ----------- -----------
Net cash provided by financing activities 367,462 3,377,782 6,227,208
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (302,343) 63,469 165,535
Cash and cash equivalents at beginning of period 467,878 58,463 --
----------- ----------- -----------
Cash and cash equivalents at end of period $ 165,535 121,932 165,535
=========== =========== ===========
See accompanying notes to consolidated financial statements.
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Nine months ended September 30, 2001 (unaudited) and December 31, 2000
(1) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Biokeys
Pharmaceuticals, Inc., a Delaware corporation, formerly known as BioQuest,
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. The Company currently does not
market any product. Through its license agreements with University of Texas
M.D. Anderson Cancer Center (M.D. Anderson) and University of Southern
California (USC), the Company has rights to drug candidates in varying
early stages of development.
On October 10, 2000, a wholly-owned subsidiary of BioQuest, Inc. merged
with Biokeys, Inc. (Biokeys) of San Diego, California (see note 2).
BioQuest, Inc. (BioQuest) changed its name to Biokeys Pharmaceuticals, Inc.
Pursuant to the merger, Biokeys shareholders received 6,999,990 shares of
BioQuest common stock, representing 50% of the total common stock of
BioQuest outstanding upon consummation of the merger. All previously
outstanding Biokeys shares were canceled, and all outstanding Biokeys
warrants were replaced with warrants to purchase a total of 1,468,018
shares of Company common stock at $0.49 per share expiring December 15,
2003, representing 50% of the outstanding warrants to purchase common stock
upon consummation of the merger. A Biokeys liability was settled through
the issuance of 8,727 shares of Company common stock. The Company issued
150,000 shares of common stock in payment of certain direct acquisition
costs. The officers and directors of BioQuest have continued as the
officers and directors of the Company after consummation of the merger. For
financial reporting purposes, the merger was accounted for as a purchase.
Biokeys operating activity is included in the Company's consolidated
financial statements from the date of the merger.
The consolidated financial statements of the Company include the accounts
of Biokeys Pharmaceuticals, Inc. and its wholly-owned subsidiary, Biokeys.
All intercompany balances and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly,
the statements do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America
for complete financial statements.
In the opinion of management, the accompanying unaudited financial
statements contain all necessary adjustments (consisting only of normal
recurring adjustments) to present fairly the Company's financial position,
results of operations and cash flows for the interim periods presented.
Operating results for the nine months ended September 30, 2001 are not
necessarily indicative of the results expected for the entire year.
(continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Nine months ended September 30, 2001 (unaudited) and December 31, 2000
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.
COMMON STOCK
On June 20, 2000, the Company effected a reverse stock split of its common
stock of approximately 1.9899 to 1. All share and per-share information
included in the accompanying consolidated financial statements and related
notes has been adjusted to reflect the stock split.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS (SFAS 141).
SFAS 141 eliminates the pooling of interests method of accounting and
requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method. The Company does not expect the
adoption of SFAS 141 to have a material impact on its business because it
currently has no planned or pending acquisitions.
The FASB has also issued Statement of Financial Accounting Standards No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS 142), which will be
effective for the Company as of January 1, 2002. SFAS 142 requires that
goodwill and other intangible assets with indefinite lives no longer be
amortized. SFAS 142 further requires that the fair value of goodwill and
other intangible assets with indefinite lives be tested for impairment upon
adoption of this statement, annually and upon the occurrence of certain
events and be written down to fair value if considered impaired. Adoption
of SFAS 142 will result in the elimination of annual amortization expense
related to goodwill; however, because of the extensive effort needed to
comply with this statement, the impact of related impairment, if any, on
financial position or results of operations has not been determined.
The FASB has issued Statement of Financial Accounting Standards No. 143,
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS (SFAS 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 asset.
SFAS 143 is effective for fiscal years beginning after June 15, 2001. The
Company does not expect the adoption of SFAS 143 to have a significant
impact on its financial condition or results of operations.
(continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Nine months ended September 30, 2001 (unaudited) and December 31, 2000
The FASB has also issued Statement of Financial Accounting Standards No.
144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (SFAS
144), which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. While SFAS 144 supercedes SFAS Statement
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 144 also supercedes 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 144 is
effective for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The Company does not expect adoption of
SFAS 144 to have a significant impact on its financial condition or results
of operations.
(2) ACQUISITION OF BIOKEYS, INC.
On October 10, 2000, the Company merged with Biokeys, Inc. (see note 1).
The cost of the acquisition follows:
Value of 6,999,990 shares of common stock $ 9,332,769
Value of warrants to purchase 1,468,018 shares of
common stock, including warrants to purchase
103,904 shares of common stock to settle Biokeys,
Inc. obligations at closing 4,767,664
Value of common stock issued to settle Biokeys, Inc.
liability at closing 29,670
Direct costs of acquisition 580,850
-----------
$14,710,953
===========
The value of the 6,999,990 shares of common stock is based on the average
closing price of BioQuest's common stock between the dates the acquisition
was agreed to and announced. The value of the warrants to purchase
1,468,018 shares of common stock was based on the Black-Scholes pricing
model with assumptions of expected life of 3.2 years, risk-free interest
rate of 5.91%, volatility of 160%, and no dividends.
The cost of the acquisition has been allocated on the basis of the
estimated fair value of the assets acquired and liabilities assumed. This
allocation resulted in goodwill of $15,205,675 which is being amortized
using the straight-line method over two years. In connection with the
acquisition, net liabilities were assumed by the Company as follows:
Other assets $ 5,812
Current liabilities (500,534)
-----------
$ (494,722)
===========
(continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Nine months ended September 30, 2001 (unaudited) and December 31, 2000
The following unaudited pro forma results of operations for the year ended
December 31, 2000 have been prepared as though the merger occurred January
1, 1999. The pro forma results include amortization of goodwill arising
from the merger of $1,900,709 per quarter. This pro forma information is
not necessarily indicative of any future results of the Company.
Interest income $ 40,922
Operating expenses (11,706,535)
------------
Net loss $(11,665,613)
------------
Loss per common share $ (0.83)
============
Weighted average number of common
shares outstanding 14,027,144
============
(3) NOTES PAYABLE
At December 31, 1999, the Company had overdue unsecured promissory notes
payable to investors in the principal amounts of $80,000 and $17,718,
bearing interest at 8% and 12% per annum, respectively. The notes had
original maturity dates of November 30, 1999 and July 31, 1999,
respectively, but the investors agreed to forbear any action to collect the
notes in 1999. The two notes were paid in full, including accrued interest,
during 2000. The $80,000 note and accrued interest were converted to common
stock in March 2000. The $17,718 note and accrued interest were repaid with
cash in May 2000.
(4) EQUITY TRANSACTIONS
In November and December 1999, the Company agreed to sell to four investors
a total of 678,412 shares of its common stock at a price of approximately
$0.20 per share for a total of $135,000. Each share was accompanied by a
warrant to purchase shares of common stock at an exercise price of $0.40
cents per share. The warrants were exercised in March 2000 under a
provision permitting cashless exercise, with 599,066 shares being issued to
the holders as a result of such exercise.
Beginning in April 2000, the Company sold an aggregate of $472,000
principal amount of 8.5% subordinated convertible promissory notes in a
private placement offering to accredited investors. The principal amounts
of the notes, together with accrued interest of $20,497, was converted into
shares of common stock at a conversion price of $1.19 per share, effective
as of the consummation of the merger between the Company and Biokeys.
(continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Nine months ended September 30, 2001 (unaudited) and December 31, 2000
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, 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 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. At September 30,
2001, dividends payable totaled $277,000. The preferred stock is redeemable
at the option of the Company at any time the closing price of common stock
remains at a level of at least $8 per share for 20 consecutive days if the
Company is listed on the American Stock Exchange or NASDAQ at such time,
with the redemption price being equal to the liquidation preference. In
addition, at any time after July 1, 2003, the Company may call all of any
portion of the outstanding preferred stock for redemption on at least 30
days notice, at a redemption price equal to 105% of the liquidation
preference plus all accrued and unpaid dividends. The Company 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.
In conjunction with the acquisition of Biokeys as discussed in note 1, all
outstanding Biokeys warrants were replaced with warrants to purchase a
total of 1,468,018 shares of the Company's common stock at $0.49 per share
that expire December 15, 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 in the first and second
quarters of 2001.
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 the issuance of a total of 218,493 shares of common
stock.
(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 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.
(continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Nine months ended September 30, 2001 (unaudited) and December 31, 2000
The Company has not incurred any income tax expense since its inception due
to operating losses and the related increase in the valuation allowance.
Significant components of income tax expense for the nine months ended
September 30, 2001 and 2000 are as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
--------- ---------
Deferred tax benefit $ 542,441 306,864
Increase in valuation allowance (542,441) (306,864)
--------- ---------
Income tax expense $ -- --
========= =========
The tax effects of temporary differences that give rise to deferred tax
assets at September 30, 2001 and December 31, 2000 are as follows:
SEPTEMBER 30, DECEMBER 31,
2001 2000
----------- -----------
Net operating loss carryforward $ 3,188,618 2,642,171
Intangible assets, due to differences in
amortization 35,049 39,055
----------- -----------
Total deferred tax assets 3,223,667 2,681,226
Less valuation allowance (3,223,667) (2,681,226)
----------- -----------
Net deferred tax assets $ -- --
=========== ===========
The Company has established a valuation allowance for the full amount of
these deferred tax assets.
(continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Nine months ended September 30, 2001 (unaudited) and December 31, 2000
(6) NET LOSS PER COMMON SHARE
The computation of basic and diluted net loss per share for the nine months
ended September 30, 2001 and 2000 is as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2001 2000
------------ ------------
Numerator:
Net loss $ (7,823,331) (917,542)
Less preferred stock dividends (192,000) (21,000)
------------ ------------
Numerator for basic and diluted
loss per share $ (8,015,331) (938,542)
============ ============
Denominator for basic and diluted loss
per share - weighted average shares 14,679,929 13,376,368
============ ============
Loss per common share - basic
and diluted $ (0.55) (0.07)
============ ============
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 September 30,
2001 and 2000, 3,783,905 and 4,022,330 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.
(7) LITIGATION
In the normal course of business, the Company may become subject to
lawsuits and other claims and proceedings. Such matters are subject to
uncertainty and outcomes are not predictable with assurance. Management is
not aware of any pending or threatened lawsuit or proceeding that would
have a material adverse effect on the Company's financial position,
liquidity or results of operations.
(8) OPERATIONAL STATUS
The accompanying consolidated financial statements have been prepared on a
going-concern basis which contemplates the realization of assets and
satisfaction of liabilities and commitments in the normal course of
business. The Company has incurred losses since inception and had a net
loss of $7,823,331 for the nine months ended September 30, 2001.
(continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
September 30, 2001 (unaudited) and December 31, 2000
To date, the Company has been principally engaged in licensing and research
and development efforts. The Company has no current revenues, is not
marketing any products, and projects a loss from operations for 2001. The
Company will require additional capital, which it intends to obtain through
equity and debt offerings and/or strategic partnership in order to continue
to operate its business. The Company's ability to meet its obligations as
they become due and to continue as a going concern must be considered in
light of the expenses, difficulties and delays frequently encountered in
operating a new business, particularly since the Company will focus on
research, development and unproven technology which may require a lengthy
period of time and substantial expenditures to complete. Even if the
Company is able to successfully develop new products or technologies, there
can be no assurance that the Company will generate sufficient revenues from
the sale or licensing of such products and technologies to be profitable.
Management believes that the Company's ability to meet its obligations as
they become due and to continue as a going concern are dependent upon
obtaining additional financing.
10.1 (REFILED)
PATENT AND TECHNOLOGY LICENSE AGREEMENT
THIS thirteen (13) page AGREEMENT ("AGREEMENT") is made on this 14th day of
June, 1996 by and between the BOARD OF REGENTS ("BOARD") of THE UNIVERSITY OF
TEXAS SYSTEM ("SYSTEM"), an agency of the State of Texas, whose address is 201
West 7th Street, Austin, Texas 78701, THE UNIVERSITY OF TEXAS M. D. ANDERSON
CANCER CENTER ("MDA"), a component Institution of the SYSTEM and BioQuest, Inc.,
a Houston, Texas corporation having a principal place of business located at 333
N. Sam Houston Pkwy, Suite 1150, Houston, Texas 77060 ("LICENSEE").
TABLE OF CONTENTS
RECITALS Page 2
I. EFFECTIVE DATE Page 2
II. DEFINITIONS Page 2
III. LICENSE Page 3
IV. CONSIDERATION, PAYMENTS AND REPORTS Page 4
V. SPONSORED RESEARCH Page 6
VI. PATENTS AND INVENTIONS Page 6
VII. INFRINGEMENT BY THIRD PARTIES Page 7
VIII. PATENT MARKING Page 7
IX. INDEMNIFICATION Page 7
X. USE OF BOARD AND COMPONENT'S NAME Page 8
XI. CONFIDENTIAL INFORMATION Page 8
XII. ASSIGNMENT Page 8
XIII. TERMS AND TERMINATION Page 9
XIV. WARRANTY: SUPERIOR-RIGHTS Page 10
XV. GENERAL Page 11
SIGNATURES Page 12
EXHIBIT I Page 13
1
RECITALS
A. BOARD owns certain PATENT RIGHTS and TECHNOLOGY RIGHTS related to LICENSED
SUBJECT MATTER, which were developed at MDA, a component institution of SYSTEM.
B. BOARD desires to have the LICENSED SUBJECT MATTER developed in the LICENSED
FIELD and used for the benefit of LICENSEE, the inventor, BOARD, and the public
as outlined in the Intellectual Property Policy promulgated by the BOARD.
C. LICENSEE wishes to obtain a license from BOARD to practice LICENSED SUBJECT
MATTER.
NOW, THEREFORE, in consideration of the mutual covenants and premises herein
contained, the parties hereto agree as follows:
I. EFFECTIVE DATE
1.1 Subject to approval by BOARD, this AGREEMENT shall be effective as of the
date written herein above ("EFFECTIVE DATE").
II. DEFINITIONS
As used in this AGREEMENT, the following terms shall have the meanings
indicated:
2.1 AFFILIATE shall mean any business entity more than 50% owned by LICENSEE,
any business entity which owns more than 50% of LICENSEE, or any business entity
that is more than 50% owned by a business entity that owns more than 50% of
LICENSEE.
2.2 LICENSED FIELD shall mean all fields of use within the LICENSED SUBJECT
MATTER.
2.3 LICENSED PRODUCTS shall mean any product or service SOLD by LICENSEE
comprising LICENSED SUBJECT MATTER pursuant to this AGREEMENT.
2.4 LICENSED SUBJECT MATTER shall mean inventions and discoveries defined herein
as PATENT RIGHTS or as TECHNOLOGY RIGHTS.
2.5 LICENSED TERRITORY shall mean all national and international political
jurisdiction in which LICENSED PRODUCTS are sold.
2.6 NET SALES shall mean the gross revenues received by LICENSEE from the SALE
of LICENSED PRODUCTS less sales and/or use taxes actually paid, import and/or
export duties actually paid, outbound transportation prepaid or allowed, and
amounts allowed or credited due to returns (not to exceed the original billing
or invoice amount).
2.7 PATENT RIGHTS shall only mean any and all of BOARD'S rights in information
or
2
discoveries claimed in invention disclosures, patents, and/or patent
applications, whether domestic or foreign, and all divisionals, continuations,
continuations-in-part, reissues, reexaminations or extensions thereof, and any
letters patent that issue thereon as defined in Exhibit I hereto subject to the
limitations, if any, set forth therein.
2.8 SALE or SOLD shall mean the transfer or disposition of a LICENSED PRODUCT
for value to a party other than LICENSEE or an AFFILIATE.
2.9 Subject to the limitations, if any, set forth in Exhibit I hereto,
TECHNOLOGY RIGHTS shall mean BOARD'S rights in any technical information,
know-how, process, procedure, composition, device, method, formula, protocol,
technique, software, design, drawing or data created by the inventors listed in
Exhibit I hereto and relating to LICENSED SUBJECT MATTER which is not claimed in
PATENT RIGHTS but which is necessary for practicing PATENT RIGHTS regardless of
whether any patent is actually issued during the term of this AGREEMENT.
III. LICENSE
3.1 BOARD hereby grants to LICENSEE a royalty-bearing, exclusive license under
LICENSED SUBJECT MATTER to manufacture, have manufactured, use and/or sell
LICENSED PRODUCTS within LICENSED TERRITORY for use within LICENSED FIELD and,
subject to Paragraph 4.5 herein, shall extend to BOARD's undivided interest in
any LICENSED SUBJECT MATTER developed during the term of this AGREEMENT and
jointly owned by BOARD and LICENSEE. This grant shall be subject to Paragraph
14.2 and 14.3, hereinbelow, the payment by LICENSEE to BOARD of all
consideration as provided in Paragraph 4.1 of this AGREEMENT, (as well as the
timely payment of all amounts due under any Sponsored Research Agreement between
MDA and LICENSEE in effect during the term of this AGREEMENT) and shall be
further subject to rights retained by BOARD and MDA to:
(a) Publish the general scientific findings from research related to LICENSED
SUBJECT MATTER; AND
(b) Subject to the provisions of ARTICLE XI herein below, use any information
contained in LICENSED SUBJECT MATTER for research, teaching, patient care, and
other educationally-related purposes.
3.2 LICENSEE shall have the right to extend the license granted herein to any
AFFILIATE provided that such AFFILIATE consents to be bound by all of the terms
and conditions of this AGREEMENT.
3
3.3 Subject to the Paragraph 3.4 herein below, LICENSEE shall have the right to
grant sublicenses under LICENSED SUBJECT MATTER consistent with the terms of
this AGREEMENT provided that LICENSEE shall be responsible for its sublicensees
relevant to this AGREEMENT, and for diligently collecting all amounts due
LICENSEE from subicensees. In the event a sublicensee pursuant hereto becomes
bankrupt, insolvent or is placed in the hands of a receiver or trustee,
LICENSEE, to the extent allowed under applicable law and in a timely manner,
agrees to use its best reasonable efforts to collect any and all consideration
owed to LICENSEE and to have the sublicense agreement confirmed or rejected by a
court of proper jurisdiction.
3.4 LICENSEE agrees to deliver to BOARD a true and correct copy of each
sublicense granted by LICENSEE, and any modification or termination thereof,
within thirty (30) days after execution, modification, or termination.
3.5 Upon termination of this AGREEMENT, BOARD agrees to accept as successors to
LICENSEE, existing sublicensees in good standing at the date of termination
provided that such sublicensees consent to be bound by all of the terms and
conditions of this AGREEMENT.
IV. CONSIDERATION, PAYMENTS AND REPORTS
4.1 In consideration of rights granted by BOARD to LICENSEE under this
AGREEMENT, LICENSEE agrees to pay MDA the following:
(a) Reimbursement for all out-of-pocket expenses paid by MDA through May 31,
1996 in filing, prosecuting, enforcing and maintaining PATENT RIGHTS licensed
hereunder as follows: (i) $53,125.00 due September 1, 1996, (ii) $53,125.00 due
April 1, 1997, and (iii) $53,125.00 due January 1, 1998; and all future expenses
paid by MDA, for so long as, and in such countries as, this AGREEMENT remains in
effect. MDA will invoice LICENSEE in accordance with the schedule herein, and
upon a quarterly basis thereafter beginning March 1, 1998 for expenses paid by
MDA after May 31, 1996 and the amounts invoiced will be due and payable by
LICENSEE within thirty (30) days thereafter; AND
4
(b) A running royalty equal to six percent (6%) of LICENSEE's NET SALES of
LICENSED PRODUCTS in national political jurisdictions in the LICENSED TERRITORY
where LICENSED SUBJECT MATTER is covered by one (1) or more issued patents or
pending patent applications and three percent (3%) of LICENSEE'S NET SALES of
LICENSED PRODUCTS in national political jurisdictions in the LICENSED TERRITORY
where LICENSED SUBJECT MATTER is NOT covered by one (1) or more issued patents
or pending patent applications, and fifty percent (50%) (or forty percent (40%)
when LICENSEE has expended or committed to expend and is current in its
obligations to expend Two Million Dollars ($2,000,000.00) on research and
development of the LICENSED SUBJECT MATTER) of all consideration other than
Research and Development ("R&D") money received by LICENSEE from (i) any
sublicensee pursuant to Paragraphs 3.3 and 3.4 herein above, and (ii) any
assignee pursuant to Paragraph 12.1 hereinbelow including but not limited to
royalties, up-front payments, marketing, distribution, franchise, option,
license, or documentation fees, bonus and milestone payments and equity
securities, all payable within thirty (30) days after March 31, June 30,
September 30, and December 31 of each year during the term of this AGREEMENT, at
which time LICENSEE shall also deliver to BOARD and MDA a true and accurate
report, giving such particulars of the business conducted by LICENSEE and its
sublicensees, if any exist, during the preceding three (3) calendar months under
this AGREEMENT as necessary for BOARD are to account for LICENSEE's payments
hereunder. Such report shall include all pertinent data, including, but not
limited to: (a) the total quantities of LICENSED PRODUCTS produced; (b) the
total SALES, (c) the calculation of royalties thereon; (d) the total royalties
(or minimum royalties) so computed and due MDA; and (e) all other amounts
covered and due herein. Simultaneously with the delivery of each such report,
LICENSEE shall pay to MDA the amount, if any, due for the period of such report.
If no payments are due, it shall be so reported. Should LICENSEE be obligated to
pay running royalties to third parties to avoid infringing such third parties'
patent rights which dominate BOARD'S PATENT RIGHTS, LICENSEE may reduce the
running royalty due MDA by such running royalties to such third parties,
provided, however, the running royalty due MDA shall in no case be less than
one-half the rates stated herein.
4.2 During the Term of this AGREEMENT and for one (1) year thereafter, LICENSEE
shall keep complete and accurate records of its and its sublicensees' SALES and
NET SALES of LICENSED PRODUCTS to enable the royalties payable hereunder to be
determined. LICENSEE shall permit MDA or its representatives, at MDA's expense,
to periodically examine its books, ledgers, and records during regular business
hours for the purpose of and to the extent necessary to verify any report
required under this AGREEMENT. In the event that the amounts due to MDA are
determined to have been underpaid in an amount equal to or greater than five
percent (5%) of the total amount due during the period of time so examined,
LICENSEE shall pay the cost of such examination, and accrued interest at the
highest allowable rate.
5
4.3 Upon the request of BOARD or MDA but not more often than once per calendar
year, LICENSEE shall deliver to BOARD and MDA a written report as to LICENSEE'S
(and sublicensees') efforts and accomplishments during the preceding year in
diligently commercializing LICENSED SUBJECT MATTER in the LICENSED TERRITORY and
LICENSEE'S (and sublicensees') commercialization plans for the upcoming year.
4.4 All amounts payable hereunder by LICENSEE shall be payable in United States
funds without deductions for taxes, assessments, fees, or charges of any kind.
Checks shall be made payable to The University of Texas M. D. Anderson Cancer
Center and mailed by U.S. Mail to Box 297402, Houston, Texas 77297 Attention:
Manager, Sponsored Programs.
4.5 No payments due or royalty rates under this AGREEMENT shall be reduced as
the result of co-ownership of LICENSED SUBJECT MATTER by BOARD and another
party, including LICENSEE.
V. SPONSORED RESEARCH
5.1 If LICENSEE desires to fund sponsored research within the LICENSED SUBJECT
MATTER, and particularly where LICENSEE receives money for sponsored research
payments pursuant to a sublicense under this AGREEMENT, LICENSEE shall notify
MDA in writing of all opportunities to conduct such sponsored research
(including clinical trials, if applicable), shall solicit research and/or
clinical proposals from MDA for such purpose, and shall give good faith
consideration to funding such proposals at MDA.
VI. PATENTS AND INVENTIONS
6.1 If after consultation with LICENSEE it is agreed by BOARD and LICENSEE that
a new patent application should be filed for LICENSED SUBJECT MATTER, BOARD will
prepare and file appropriate patent applications, and LICENSEE will pay the cost
of searching, preparing, filing, prosecuting and maintaining same. If LICENSEE
notifies BOARD that it does not intend to pay the cost of an application, or if
LICENSEE does not respond or make an effort to agree with BOARD on the
disposition of rights of the subject invention, then BOARD may file such
application at its own expense and LICENSEE shall have no rights to such
invention. BOARD shall provide LICENSEE with a copy of the application for which
LICENSEE has paid the cost of filing, as well as copies of any documents
received or filed during prosecution thereof.
6
VII. INFRINGEMENT BY THIRD PARTIES
7.1 LICENSEE shall have the obligation of enforcing at its expense any patent
exclusively licensed hereunder against infringement by third parties and shall
be entitled to retain recovery from such enforcement. LICENSEE shall pay MDA a
royalty on any monetary recovery to the extent that such monetary recovery by
LICENSEE is held to be damages or a reasonable royalty in lieu thereof. In the
event that LICENSEE does not file suit against a substantial infringer of such
patents within six (6) months of knowledge thereof, then BOARD shall have the
right to enforce any patent licensed hereunder on behalf of itself and LICENSEE
(MDA retaining all recoveries from such enforcement) and/or reduce the license
granted hereunder to non-exclusive.
7.2 In any suit or dispute involving an infringer, the parties shall cooperate
fully, and upon the request and at the expense of the party bringing suit, the
other party shall make available to the party bringing suit at reasonable times
and under appropriate conditions all relevant personnel, records, papers,
information, samples, specimens, and the like which are in its possession.
VIII. PATENT MARKING
8.1 LICENSEE agrees that all packaging containing individual LICENSED
PRODUCT(S), and documentation therefor, sold by LICENSEE, SUBSIDIARIES, and
sublicensees of LICENSEE will be marked permanently and legibly with the number
of the applicable patent(s) licensed hereunder in accordance with each country's
patent laws, including Title 35, United States Code.
IX. INDEMNIFICATION
9.1 LICENSEE shall hold harmless and indemnify BOARD, SYSTEM, MDA, its Regents,
officers, employees, students, and agents from and against any claims, demand,
or causes of action whatsoever, costs of suit and reasonable attorney's fees
including without limitation those costs arising on account of any injury or
death of persons or damage to property caused by, or arising out of, or
resulting from, the exercise or practice of the license granted hereunder by
LICENSEE or its officers, employees, agents or representatives.
7
X. USE OF BOARD AND COMPONENT'S NAME
10.1 LICENSEE shall not use the name of (or the name of any employee of) MDA,
SYSTEM or BOARD without the advance, express written consent of BOARD secured
through:
The University of Texas
M. D. Anderson Cancer Center
Office of Public Affairs
1515 Holcombe Boulevard
Box 229
Houston, Texas 77030
ATTENTION: Stephen C. Stuyck
XI. CONFIDENTIAL INFORMATION
11.1 BOARD and LICENSEE each agree that all information contained in documents
marked "confidential" which are forwarded to one by the other shall be received
in strict confidence, used only for the purposes of this AGREEMENT, and not
disclosed by the recipient party (except as required by law or court order), its
agents or employees without the prior written consent of the other party, unless
such information (a) was in the public domain at the time of disclosure, (b)
later became part of the public domain through no act or omission of the
recipient party, its employees, agents, successors or assigns, (c) was lawfully
disclosed to the recipient party by a third party having the right to disclose
it, (d) was already known by the recipient party at the time of disclosure, (e)
was independently developed or (f) is required to be submitted to a government
agency pursuant to any preexisting obligation.
11.2 Each party's obligation of confidence hereunder shall be fulfilled by using
at least the same degree of care with the other party's confidential information
as it uses to protect its own confidential information. This obligation shall
exist while this AGREEMENT is in force and for a period of three (3) years
thereafter.
XII. ASSIGNMENT
12.1 Except in connection with the sale of substantially all of the assets of
LICENSEE to a third party, this AGREEMENT may not be assigned by LICENSEE
without the prior written consent of BOARD.
8
XII. TERMS AND TERMINATION
13.1 Subject to Articles 13.2, 13.3, 13.4, and 13.5 hereinbelow, the term of
this AGREEMENT shall extend from the Effective Date set forth hereinabove to the
full end of the term or terms for which PATENT RIGHTS have not expired, and if
only TECHNOLOGY RIGHTS are licensed and no PATENT RIGHTS are applicable, for a
term of fifteen (15) years.
13.2 BOARD shall have the right at any time after one (1) year from the
EFFECTIVE DATE of this AGREEMENT to terminate the license granted herein in any
national political jurisdiction within the LICENSED TERRITORY if LICENSEE,
within ninety days after written notice from BOARD of such intended termination,
fails to provide written evidence satisfactory to BOARD that LICENSEE has
commercialized or is actively and effectively attempting to commercialize an
invention licensed hereunder within such jurisdiction(s). Accurate, written
evidence provided by LICENSEE to BOARD within said ninety (90) day period that
LICENSEE has an effective, ongoing and active research, development,
manufacturing, marketing, or sales program, as appropriate, directed toward
obtaining regulatory approval and/or production and/or sale of LICENSED PRODUCTS
incorporating PATENT RIGHTS or incorporating TECHNOLOGY RIGHTS within such
jurisdiction shall be deemed satisfactory evidence.
13.3 Subject to any rights herein which survive termination, this AGREEMENT will
earlier terminate in its entirety:
(a) automatically if LICENSEE shall become bankrupt or insolvent and/or if the
business of LICENSEE shall be placed in the hands of a receiver or trustee,
whether by voluntary act of LICENSEE or otherwise; or
(b) (i) upon thirty (30) days written notice by BOARD if LICENSEE shall breach
or default on the payment obligations of ARTICLE IV, or use of name obligations
of ARTICLE X; or (ii) upon ninety (90) days written notice by BOARD if LICENSEE
shall breach or default on any other obligation under this AGREEMENT; provided,
however, LICENSEE may avoid such termination if before the end of such thirty
(30) or ninety (90) day period if LICENSEE provides notice and accurate, written
evidence satisfactory to BOARD that such breach has been cured and the manner of
such cure; or.
(c) at any time by mutual written agreement between LICENSEE and BOARD, or
without cause upon one hundred eighty (180) days written notice by LICENSEE to
BOARD, subject to any terms herein which survive termination.
9
13.4 Upon termination of this AGREEMENT for any cause:
(a) nothing herein shall be construed to release either party of any obligation
matured prior to the effective date of such termination.
(b) LICENSEE covenants and agrees to be bound by the provisions of ARTICLES IX,
X AND XI of this AGREEMENT.
(c) LICENSEE may, after the effective date of such termination, sell all
LICENSED PRODUCTS and parts therefore that it may have on hand at the date of
termination, provided that LICENSEE pays the earned royalty thereon and any
other amounts due pursuant to ARTICLE IV of this AGREEMENT.
(d) LICENSEE grants to BOARD a non-exclusive royalty bearing license with the
right to sublicense others with respect to improvements made by LICENSEE
(including improvements licensed by LICENSEE from third parties) in the LICENSED
SUBJECT MATTER. LICENSEE and BOARD agree to negotiate in good faith the royalty
rate for said non-exclusive license. BOARD's right to sublicense others
hereunder shall be solely for purposes of permitting others to develop and
commercialize the entire technology package.
13.5 This AGREEMENT shall automatically terminate if LICENSEE fails to deliver
to MDA by September 1, 1996 (i) payment of $53,125.00 pursuant to 4.1(a)
hereinabove and (ii) notice that LICENSEE has legally binding funding
commitments from its investors totaling Two Million Dollars ($2,000,000.00) or
more.
XIV. WARRANTY: SUPERIOR-RIGHTS
14.1 Except for the rights, if any, of the Government of the United States as
set forth hereinbelow, BOARD represents and warrants its belief that it is the
owner of the entire right, title, and interest in and to LICENSED SUBJECT
MATTER, and that it has the sole right to grant licenses thereunder, and that it
has not knowingly granted licenses thereunder to any other entity that would
restrict rights granted hereunder except as stated herein.
14.2 LICENSEE understands that the LICENSED SUBJECT MATTER may have been
developed under a funding agreement with the Government of the United States of
America and, if so, that the Government may have certain rights relative
thereto. This AGREEMENT is explicitly made subject to the Government's rights
under any such agreement and any applicable law or regulation, including P.L.
96-517 as amended by P.L. 98-620. To the extent that there is a conflict between
any such agreement, applicable law or regulation and this AGREEMENT, the terms
of such Government agreement, applicable law or regulation shall prevail.
10
14.3 LICENSEE understands and agrees that BOARD, by this AGREEMENT, makes no
representation as to the operability or fitness for any use, safety, efficacy,
approvability by regulatory authorities, time and cost of development,
patentability, and/or breadth of the LICENSED SUBJECT MATTER. BOARD, by this
AGREEMENT, makes no representation as to whether there are any patents now held,
or which will be held, by others or by BOARD in the LICENSED FIELD, nor does
BOARD make any representation that the inventions contained in PATENT RIGHTS do
not infringe any other patents now held or that will be held by others or by
BOARD.
14.4 LICENSEE, by execution hereof, acknowledges, covenants and agrees that
LICENSEE has not been induced in anyway by BOARD, SYSTEM, MDA or employees
thereof to enter into this Agreement, and further agrees that LICENSEE has
conducted sufficient due diligence with respect to all items and issues
pertaining to Article XIV herein and all other matters pertaining to this
Agreement and agrees to accept all risks inherent herein.
XV. GENERAL
15.1 This AGREEMENT constitutes the entire and only AGREEMENT between the
parties for LICENSED SUBJECT MATTER and all other prior negotiations,
representations, agreements and understandings are superseded hereby. No
agreements altering or supplementing the terms hereof may be made except by
means of a written document signed by the duly authorized representatives of the
parties.
15.2 Any notice required by this AGREEMENT shall be given by prepaid, first
class, certified mail, return receipt requested, and addressed in the case of
BOARD to:
BOARD OF REGENTS
The University of Texas System
201 West Seventh Street
Austin, Texas 78701
ATTENTION: System Intellectual
Property Office
with copy to: The University of Texas
M.D. Anderson Cancer Center
Office of Technology Development
1020 Holcombe Boulevard, Suite 1405
Houston, Texas 77030
ATTENTION: William J. Doty
or in the case of LICENSEE to: BioQuest, Inc.
333 N. Sam Houston Pkwy, Suite 1150
Houston, Texas 77060
ATTENTION: Warren C. Lau
or such other address as may be given from time to time under the terms
of this
11
notice provision.
15.3 LICENSEE covenants and agrees to comply with all applicable federal, state
and local laws and regulations in connection with its activities pursuant to
this AGREEMENT.
15.4 This AGREEMENT shall be construed and enforced in accordance with the laws
of the United States of America and of the State of Texas.
15.5 Failure of BOARD to enforce a right under this AGREEMENT shall not act as a
waiver of that right or the ability to later assert that right relative to the
particular situation involved.
15.6 Headings included herein are for convenience only and shall not be used to
construe this AGREEMENT.
15.7 If any provision of this AGREEMENT shall be found by a court to be void,
invalid or unenforceable, the same shall be reformed to comply with applicable
law or stricken if not so conformable, so as not to affect the validity or
enforceability of this AGREEMENT.
IN WITNESS WHEREOF, parties hereto have caused their duly authorized
representatives to execute this AGREEMENT.
THE UNIVERSITY OF TEXAS BOARD OF REGENTS OF THE
M.D. ANDERSON CANCER CENTER UNIVERSITY OF TEXAS SYSTEM
By /s/ DAVID J. BACHRACH By /s/ RAY FARABEE
-------------------------------------- ------------------------------
David J. Bachrach Ray Farabee
Executive Vice President Vice Chancellor and
for Administration and Finance General Counsel
APPROVED AS TO CONTENT: APPROVED AS TO FORM:
By /s/ WILLIAM J. DOTY By /s/ DUDLEY R. DOBIE. JR
-------------------------------------- ------------------------------
William J. Doty Dudley R. Dobie, Jr.
Director, Technology Development Manager, Intellectual
Property
BIOTEX,INC.
By /s/ WARREN C. LAU
---------------------------------------
Warren C. Lau
President
12
EXHIBIT I
Ralph Arlinghaus, Ph.D., et al, Principal Investigator
o (MDA REF: UTSC:060-1) (CIP of UTSC:060) entitled "Prophylaxis and
Therapy of Acquired Immunodeficiency Syndrome"
o U.S. Patent No. 5,128,319 entitled "Prophylaxis and Therapy of
Acquired Immunodeficiency Syndrome", (MDA REF: UTSC:234)
o MDA REF: UTSC:242 entitled "Methods and Compositions for the
Priming of Specific Cytotoxic T-Lymphocyte Response"
o MDA REF: UTSC:267 (Divisional of UTSC:234) "Prophylaxis and
Therapy of Acquired Immunodeficiency Syndrome"
o MDA REF: UTSC:305 entitled "Compositions and Methods for Eliciting
Immune or Anti-Infective Responses"
o MDA REF: UTSC:331 entitled "CD4 Peptides for Binding to Viral
Envelope Proteins"
o MDA REF: UTSC:381 entitled "Peptides for Inhibitiing the Infection
of Target Cells by Lentiviruses"
13
10.2 (REFILED)
* PLEASE NOTE THAT CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED BASED ON A
REQUEST FOR CONFIDENTIAL TREATMENT FILED WITH THE COMMISSION ALONG WITH THE
INFORMATION REQUESTED TO BE OMITTED.
AMENDMENT NO. 1 TO
PATENT AND TECHNOLOGY LICENSE AGREEMENT
This AMENDMENT NO. 1 dated and effective as of the 15th day of June,
2000, to the Patent and Technology License Agreement dated June 14, 1996
(hereinafter referred to as the "AGREEMENT") is between THE UNIVERSITY OF TEXAS
M.D. ANDERSON CANCER CENTER (hereinafter referred to as "MDA"), located at 1515
Holcombe Boulevard, Houston, Texas, and which is a component institution of THE
UNIVERSITY OF TEXAS SYSTEM (hereinafter referred to as "SYSTEM") which is
governed by a BOARD OF REGENTS (hereinafter referred to as "BOARD") and
BioQuest, Inc., which subsequently merged to become BIOKEYS PHARMACEUTICALS,
INC., a Delaware corporation, located at 333 N. Sam Houston Parkway, Suite 1035,
Houston, Texas 77060 (hereinafter referred to as "LICENSEE").
RECITALS
A. On or about __________________, BIOQUEST, INC. merged to become BIOKEYS
PHARMACEUTICALS, INC., wherein LICENSEE agreed to accept all terms and
conditions of the 1996 Agreement.
B. MDA, BOARD and LICENSEE wish to amend the terms of the AGREEMENT as set
forth below to modify the consideration for the license granted under
the AGREEMENT to provide for the payment by LICENSEE of a portion of
such modified consideration by issuing and delivering shares of Common
Stock of LICENSEE to MDA as prepaid royalties, and to incorporate
additional LICENSED SUBJECT MATTER.
NOW, THEREFORE, it is hereby agreed as follows:
The AGREEMENT is hereby amended as follows:
1. EXHIBIT 1 of the AGREEMENT is hereby replaced in its entirety
with the following:
EXHIBIT I Ralph Arlinghaus, Ph.D., et al, Principal
Investigator
1) MDA Ref: UTSC:060-1 (CIP of UTSC:060) entitled
"Prophylaxis and Therapy of Acquired Immunodeficiency
Syndrome"
2) U.S. Patent No. 5,128,319 entitled "Prophylaxis and
Therapy of Acquired Immunodeficiency Syndrome", (MDA
Ref: UTSC:234)
3) MDA Ref: UTSC:242 entitled "Methods and Compositions
for the
-1-
Priming of Specific Cytotoxic T-Lymphocyte Response"
4) MDA Ref: UTSC:267 (Divisional of UTSC:234)
"Prophylaxis and Therapy of Acquired Immunodeficiency
Syndrome"
5) MDA Ref: UTSC:305 entitled "Compositions and Methods
for Eliciting Immune or Anti-Infective Responses"
6) MDA Ref: UTSC:331 entitled "CD4 Peptides for Binding
to Viral Envelope Proteins"
7) MDA Ref: UTSC:381 entitled "Peptides for Inhibiting
the Infection of Target Cells by Lentiviruses"
8) MDA Ref: UTSC:538 entitled "Compositions and Methods
for Eliciting Immune or Anti-Infective Responses"
9) MDA Ref: UTSC:561PZ1 entitled "HIV-Specific T-Cell
Induction"
10) MDA Ref: UTSC:561PZ2 entitled "HIV-Specific T-Cell
Induction"
2. New Section 5.2 below is added to the existing Article 5:
5.2 The parties agree that all amounts and balances due to MDA or
the BOARD under existing sponsored research agreements (i)
SR96-006 Studies on Therapeutic Potential of HIV Synthetic
Peptides, (ii) SR96-006/A1 Studies on Therapeutic Potential of
HIV Synthetic Peptides: Clinical and Preclinical Studies and
(iii) SR96-006/A2 Studies on Therapeutic Potential of HIV
Synthetic Peptides: Development of Peptidometic Form of R15K
((i), (ii) and (iii) collectively referred to as the "Existing
Sponsored Research Agreements"), shall be considered paid in
full and upon the execution by all parties of this AMENDMENT
NO. 1 LICENSEE shall owe nothing to MDA or BOARD under the
Existing Sponsored Research Agreements. The parties agree that
all amounts paid under AMENDMENT NO. 1, paragraph 3 relating
to Section 4.1(e) for new sponsored research agreements,
further relating to AMENDMENT No. 4 to Research
Agreement(SR96-006/A4), are not part of the amounts and
balances due under the Existing Sponsored Research Agreements.
The parties also agree to terminate the Existing Sponsored
Research Agreements and enter into new sponsored research
agreements in compliance with this AMENDMENT NO. 1.
3. Article 4.1 is hereby replaced in its entirety with the
following:
In consideration of rights granted by BOARD to LICENSEE under
this AGREEMENT, LICENSEE agrees to pay MDA the following:
(a) Payment of $172,490.24 for reimbursement of
all out-of-pocket expenses paid by MDA
through June 15, 2000 in filing,
prosecuting, enforcing and maintaining
PATENT RIGHTS
-2-
licensed hereunder (the "Balance Payment"),
to be paid by LICENSEE within six (6) weeks
of the date the Office of the General
Counsel of MDA approves this AMENDMENT NO.
1. LICENSEE agrees to pay all future
expenses paid by MDA, for so long as, and in
such countries as this Agreement remains in
effect. The Balance Payment may be made to
MDA either in the form of a cash payment or
in lieu of such cash payment, LICENSEE will
give BOARD a total of 71,555 duly
authorized, validly issued and fully paid
shares of Common Stock of LICENSEE, the
amount of such shares of Common Stock being
calculated by dividing the Balance Payment
by the average stock-split adjusted closing
price of the LICENSEE's Common Stock during
the 10-day period, beginning May 28, 2000
and ending June 7, 2000. Such shares of
Common Stock shall be issued by LICENSEE in
the name of BOARD within six (6) weeks of
the date The University of Texas System
Office of the General Counsel approves this
AMENDMENT NO. 1. In connection with its
receipt of such shares, BOARD is making the
representations, and shall have the
registration and other rights (subject to
the conditions), set forth in Exhibit 2
hereto; and
(b) A running royalty equal to (SPACE) of
LICENSEE's NET SALES of LICENSED PRODUCTS in
national political jurisdictions in the
LICENSED TERRITORY where LICENSED SUBJECT
MATTER is covered by one (1) or more issued
patents or pending patent applications;
(SPACE) of LICENSEE'S NET SALES of LICENSED
PRODUCTS in national political jurisdictions
in the LICENSED TERRITORY where LICENSED
SUBJECT MATTER is not covered by one (1) or
more issued patents or pending patent
applications; and (SPACE) of all
consideration other than payments covering
direct, out-of-pocket Research and
Development (R&D) expenses received by
LICENSEE from (i) any sublicensee pursuant
to Paragraphs 3.3 and 3.4 of the PATENT AND
TECHNOLOGY LICENSE AGREEMENT, and (ii) any
assignee pursuant to Paragraph 12.1 of the
PATENT AND TECHNOLOGY LICENSE AGREEMENT,
including but not limited to royal-ties,
up-front payments, marketing, distribution,
franchise, option, license, or documentation
fees, bonus and milestone payments and
equity securities, all payable within thirty
(30) days after March 31, June 30, September
30, and December 31 of each year during the
term of this AGREEMENT, at which time
LICENSEE shall also deliver to MDA a true
and accurate report, giving such particulars
of the business conducted by LICENSEE and
its sublicensees, if any, during the
preceding three (3) calendar months under
this AGREEMENT as necessary for MDA to
account for LICENSEE's payments hereunder.
Such
-3-
report shall include all pertinent data,
including, but not limited to: (a) the total
quantities of LICENSED PRODUCTS produced;
(b) the total SALES, (c) the calculation of
royalties thereon; (d) the total royalties
(or minimum royalties) so computed and due
MDA; and (e) all other amounts covered and
due herein and (f) copies of all executed
agreements between LICENSEE and third
parties pursuant to Paragraphs 3.3, 3.4 and
12.1 of the PATENT AND TECHNOLOGY LICENSE
AGREEMENT. Simultaneously with the delivery
of each such report, LICENSEE shall pay to
MDA the amount, if any, due for the period
of such report. If no payments are due, it
shall be so reported. Should LICENSEE be
obligated to pay running royalties to third
parties to avoid infringing such third
parties' patent rights which dominate
BOARD's PATENT RIGHTS, LICENSEE may reduce
the running royalty due MDA by such running
royalties to such third parties, provided,
however, the running royalty due MDA shall
in no case be less than one-half the rates
stated herein. For the avoidance of any
doubt, the parties hereto acknowledge and
agree that any running royalties due MDA
under this Paragraph 4.1(b) shall in no
event be reduced by any of the consideration
due MDA under Paragraph 4.1(a), (c), (d) and
(e).
(c) As a prepaid royalty, Four Hundred and
Fourteen Thousand Eight Hundred and Thirty
(414,830) duly authorized, validly issued
and fully paid shares of Common Stock in
LICENSEE, which, the parties agree, had a
value of One Million Dollars ($1,000,000),
calculated by dividing $1,000,000 by the
average stock-split adjusted closing price
of the LICENSEE's Common Stock for the ten
(10) day period of May 28, 2000 through June
7, 2000. Such shares of Common Stock shall
be issued in the name of BOARD within five
days following execution of this AMENDMENT
NO. 1, and, in connection with its receipt
of such shares, MDA is making the
representations, and shall have the
limitations as well as registration and
other rights (subject to the conditions),
set forth in Exhibit 2 hereto.
(d) As a prepaid royalty, the number of duly
authorized, validly issued and fully paid
shares of Common Stock in LICENSEE equal to
a value of One Million Dollars ($1,000,000),
calculated by dividing $1,000,000 by the
average closing price of the LICENSEE's
Common Stock during the ten (10)day period
immediately prior to the LICENSEE enrolling
the first patient in the first Phase I Trial
of any product which utilizes LICENSED
SUBJECT MATTER; provided, however, that, the
minimum price of the shares so calculated
shall be no lower than $0.99 per share and
that no more than One Million Five Thousand
and Fifty (1,005,000) shares will
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be issued under this paragraph, as adjusted
for stock splits. Such shares of Common
Stock shall be issued in the name of BOARD
within fifteen days following such
enrollment of the first patient, and, in
connection with its receipt of such shares,
MDA is making the representations, and shall
have the registration and other rights
(subject to the conditions), set forth in
Exhibit 2 hereto.
(e) LICENSEE shall enter into one or more
sponsored research agreement(s) with MDA
(which agreement shall be satisfactory in
form and substance to the parties), in which
LICENSEE agrees to provide MDA researchers
with at least one million dollars
($1,000,000) in sponsored research funding
by December 31, 2001. The monies owed MDA
under Amendment No. 4 to Research Agreement
(SR96-006/A4) signed September 7, 2000 shall
count towards this one million dollars
($1,000,000) owed MDA under this section.
4. New Section 6.2 below is added to the existing Article 6:
6.2 Any new invention, development, or discovery made in the
laboratories of a MDA researchers receiving sponsored research
monies from LICENSEE and resulting from the LICENSED SUBJECT
MATTER (the "New Technology") shall be promptly disclosed in
writing to the LICENSEE under a confidentiality agreement
(which agreement shall be satisfactory in form and substance
to the parties), provided that the LICENSEE has a sponsored
research agreement(s) in effect with MDA at that time under
which MDA is due to receive payments from LICENSEE aggregating
at least Two Hundred Thousand ($200,000) Dollars per year.
LICENSEE is hereby granted, without an option fee other than
consideration of research sponsored by LICENSEE and the
reimbursement of the BOARD for all patent expenses incurred to
the date of disclosure related to the New Technology, an
option to acquire an exclusive, worldwide, royalty bearing
license of BOARD' rights to such New Technology, which option
shall continue for a period of one hundred and twenty (120)
days after LICENSEE' receipt of a reasonable written
disclosure concerning the New Technology; If LICENSEE notifies
BOARD in writing of its intent to exercise its option within
the option period, then the parties will proceed in good faith
to negotiate a license agreement on commercially reasonable
terms within one hundred and twenty (120) days of BOARD's
notification to LICENSEE of New Technology. If LICENSEE does
not exercise this option, or notifies BOARD that it will not
exercise this option, or the parties fail to sign a license
agreement within said one hundred and twenty (120) day period,
then LICENSEE shall no longer have an option or any other
rights in the New Technology.
5. Article 13.3 is hereby replaced in its entirety with the
following:
13.3 Subject to any rights herein, which survive termination, this
AGREEMENT will earlier terminate in its entirety:
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(a) automatically if LICENSEE shall become bankrupt or
insolvent and/or if the business of LICENSEE shall be
placed in the hands of a receiver or trustee, whether
by voluntary act of LICENSEE or otherwise; or
(b) (i) upon thirty (30) days written notice by MDA if
LICENSEE shall breach or default on the payment
obligations of ARTICLE IV, or use of name obligations
of ARTICLE X, ; (ii) or upon ninety (90) days written
notice by MDA if LICENSEE shall breach or default on
any other obligation under this AGREEMENT; provided,
however, LICENSEE may avoid such termination if
before the end of such thirty (30) or ninety (90) day
period, LICENSEE provides notice and accurate,
written evidence satisfactory to MDA that such breach
has been cured and the manner of such cure; or
(c) at any time by mutual written agreement between
LICENSEE and MDA, or without cause upon one hundred
eighty (180) days written notice by LICENSEE to MDA,
subject to any terms herein which survive
termination.
6. New Section 13.6 below is added to the existing Article 13:
13.6 Termination of the AGREEMENT will not obligate MDA, the SYSTEM
or the BOARD to return the shares of Common Stock issued
pursuant to Article 4, nor will it affect the status of such
shares as duly authorized, validly issued, fully paid and
non-assessable shares of Common Stock.
OTHERWISE, the terms and provisions of the AGREEMENT shall remain in full force
and effect, provided, however, that in the event of a conflict in the terms and
conditions between this AMENDMENT NO. 1 and the AGREEMENT, AMENDMENT NO. 1 shall
prevail. THIS AMENDMENT NO. 1 and AGREEMENT constitute the entire agreement
between the parties in connection with the subject matter hereof and thereof and
supersedes all prior and contemporaneous agreements, understandings,
negotiations and discussions, whether oral or written, of the parties.
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized representatives to execute this AMENDMENT NO. 1.
THE UNIVERSITY OF TEXAS BOARD OF REGENTS OF THE
M.D. ANDERSON CANCER CENTER UNIVERSITY OF TEXAS SYSTEM
By: /s/ LEON LEACH By: /s/ JOHN MENDELSOHN, M.D.
------------------------------------ --------------------------------
Leon Leach John Mendelsohn, M.D.
Executive Vice President President, MDA
-6-
Date: Date:
------------------------------------ ------------------------------
APPROVED AS TO CONTENT APPROVED AS TO FORM
By: /s/ WILLIAM J. DOTY By: /s/ BETHLYNN MAXWELL, ESQ.
------------------------------------- --------------------------------
William J. Doty BethLynn Maxwell, Esq.
Director, Technology Development Office of General Counsel
Date: Date:
------------------------------------ ------------------------------
BIOKEYS PHARMACEUTICALS, INC.
By: /s/ WARREN LAU
-------------------------------------
Warren Lau
President
Date:
-----------------------------------
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EXHIBIT 2
The following additional provisions shall apply to the securities being
issued to MDA under this Agreement:
(a) MDA, SYSTEM AND BOARD (collectively or singly,
LICENSOR) acknowledge that the securities (together
with any securities issued in respect thereof upon
any stock split, stock dividend, recapitalization,
merger, consolidation or similar event, the
"Registrable Securities") being issued under this
AGREEMENT, are being acquired from LICENSEE in a
transaction not involving a public offering, that
they are not being registered for public sale prior
to such issuance and that, under such laws and
applicable regulations, such securities may not be
transferred or resold without registration under the
Securities Act of 1933, as amended (the "Securities
Act"), or pursuant to an exemption therefrom. For
purposes of this Agreement, "HOLDER" shall mean any
LICENSOR who holds any of the Registrable Securities
and any holder of Registrable Securities to whom the
registration rights conferred by this Agreement have
been transferred pursuant hereto. In this connection,
LICENSOR represents that it is familiar with Rule 144
under the Securities act as presently in effect, and
understands the resale limitations imposed by the
Securities Act and Rule 144.
(b) LICENSOR is acquiring such securities solely for
investment purposes and not with a view to a
distribution of all or any part thereof. LICENSOR has
the financial ability to bear the economic risk of
its investment for an indefinite period, and has
adequate means of providing for its current needs and
anticipated contingencies without reference to the
liquidity of the securities, which may be issued to
it. LICENSOR is a not-for-profit organization with
more than $5,000,000 in total assets. LICENSOR has
such knowledge and experience in financial and
business matters that it is fully capable of
evaluating the merits and risks of an investment in
LICENSEE.
(c) If the LICENSEE proposes to make an underwritten
public offering of securities solely for cash (except
in the case of a first public offering of securities
by LICENSEE) the LICENSEE shall, no later than 10
days prior to the filing of a registration statement,
send notice of such proposed filing, accompanied by a
draft copy of the preliminary prospectus included in
such registration statement, to each
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Holder. Upon the written request of a Holder to be
included in such registration statement as a selling
stockholder, given within 20 days after receipt of
such notice, the LICENSEE shall include in such
registration statement all or any portion of the
securities of such Holder, as such Holder shall so
request. However, if the managing underwriter of such
public offering shall express objection to the
inclusion of all or part of such securities of Holder
in such public offering because of prevailing market
conditions or other factors, the amount of such
securities of such Holder to be so registered in such
offering shall be reduced to the level which such
managing underwriter deems appropriate in relation to
the size of the underwritten offering and the ability
of the market to accommodate the sale of such
securities of such Holder, provided, however, that if
any securities are being included in such offering on
behalf of any selling stockholders other than such
Holder, any reduction of offered securities imposed
on such Holder shall be proportional to any reduction
imposed on such other selling stockholders.
Notwithstanding any provision hereof to the contrary,
LICENSEE shall not be required to include any
securities of Holder in a registration statement
covering a first public offering of securities by
LICENSEE.
(d) Each Holder hereby agrees that such Holder will not,
without the prior written consent of the LICENSEE,
during the period commencing on the date hereof and
ending March 15, 2002 (i) lend, offer, pledge, sell,
contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or
indirectly, any Common Stock or (ii) enter into any
swap or other arrangement that transfers to another,
in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is
to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing
provisions of this paragraph (d) shall not apply to
the sale of any shares to an underwriter pursuant to
an underwriting agreement.
(e) If Holder does not sell all of the Common Stock owned
by it under paragraph (c) above, such Holder shall
have additional rights to include such securities in
any underwritten public offering of securities to be
undertaken by the LICENSEE, and the terms and
conditions of
-9-
paragraph (c) above and this paragraph (e) shall be
applicable to any registration request of such Holder
in connection with any such subsequent public
offering. The rights of Holder under this paragraph
(e) shall cease when it no longer owns at least 1% of
the outstanding Common Stock.
(f) Whenever required under this Exhibit 2 to effect the
registration of any securities, the LICENSEE shall,
as expeditiously as reasonably possible:
(i) Prepare and file with the SEC a registration
statement with respect to such securities
and use its best efforts to cause such
registration statement to become effective,
and, upon the request of the Holder, keep
such registration statement effective for at
least nine (9) months.
(ii) Prepare and file with the SEC such
amendments and supplements to such
registration statement and the prospectus
used in connection with such registration
statement as may be necessary to comply with
the provisions of the Securities Act with
respect to the disposition of all securities
covered by such registration statement.
(iii) Furnish to the Holder such numbers of copies
of a prospectus, including a preliminary
prospectus, in conformity with the
requirements of the Act, and such other
documents as they may reasonably request in
order to facilitate the disposition of
securities owned by them.
(iv) Use its best efforts to register and qualify
the securities covered by such registration
statement under the securities laws of such
jurisdictions as shall be reasonably
requested by the Holder for the distribution
of the securities covered by the
registration statement, provided that the
LICENSEE shall not be required in connection
therewith or as a condition thereto to
qualify to do business or to file a general
consent to service of process in any such
jurisdiction.
(v) In the event of an underwritten public
offering, enter into and perform its
obligations under an underwriting agreement
with terms generally
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satisfactory to the LICENSEE and the
managing underwriter of such offering.
(vi) Notify the Holders promptly after the
LICENSEE shall have received notice thereof,
of the time when the registration statement
becomes effective or any supplement to any
prospectus forming a part of the
registration statement has been filed.
(vii) Notify the Holders of any stop order
suspending the effectiveness of the
registration statement and use its
reasonable best efforts to remove such stop
order.
(viii) Notify the Holders if the registration
statement is no longer effective or the
registration statement or the prospectus or
any prospectus supplement is required to be
amended in order to comply with the
provisions of the Securities Act with
respect to the disposition of all securities
covered by such registration statement.
(g) It shall be a condition precedent to the obligations
of the LICENSEE to take any action pursuant to this
Exhibit 2 that the Holder shall furnish to the
LICENSEE such information in writing regarding
itself, the securities held by it, and the intended
method of disposition of such securities, as the
LICENSEE shall reasonably request and as shall be
required to effect the registration of such
securities. In that connection, the Holder shall be
required to represent to the LICENSEE that all such
information, which is given, is both complete and
accurate in all material respects. Holder shall also
deliver to the LICENSEE a statement in writing that
it has a bona fide intention to sell, transfer or
otherwise dispose of such securities.
(h) "Registration Expenses" shall mean all expenses
incurred by the LICENSEE in complying with this
Exhibit 2, including, without limitation, all
registration and filing fees, printing expenses, fees
and disbursements of counsel for the LICENSEE, blue
sky fees and expenses, and the expense of any special
audits incident to or required by any such
registration. Registration Expenses shall also
include fees and disbursements of one special counsel
for Holders and other selling stockholders, in an
amount not to exceed $10,000. "Selling Expenses"
shall mean all underwriting
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discounts, selling commissions and underwriters'
expense allowances applicable to the sale of the
securities of Holders. All Registration Expenses
incurred in connection with any registration,
qualification or compliance pursuant to this Exhibit
2 shall be borne by the LICENSEE, and all Selling
Expenses shall be borne by the Holders.
(i) If the Holders propose to distribute their securities
through an underwriter, the LICENSEE shall enter into
an underwriting agreement in customary form with the
underwriter or underwriters, provided that the terms
thereof shall not be materially less favorable to the
LICENSEE than those customarily arranged in
comparable underwritten offerings.
(j) Holders shall have no right to obtain or seek an
injunction restraining or otherwise delaying any such
registration as the result of any controversy that
might arise with respect to the interpretation or
implementation of this Exhibit 2.
(k) Nothing contained herein shall be deemed to limit the
rights of the Holders to offer or make a public sale
of all or any portion of such securities under Rule
144 of the SEC or any other applicable provisions of
federal and state securities laws. Furthermore, if,
in the opinion of counsel for a Holder, the offering
or transfer by such Holder in the manner proposed
(including, without limitation, the number of shares
proposed to be offered or transferred and the method
of offering or transfer) is exempt from the
registration requirements of the Securities Act under
Rule 144 or otherwise, LICENSEE shall not be required
to effect any registration of such securities under
the Securities Act.
(l) At such time as LICENSEE is eligible to register its
Common Stock for public sale under the Securities Act
using Form S-3 (or similar successor form), Holders
shall have a one-time right to demand that the
LICENSEE file a registration statement on Form S-3
covering the offering and sale by Holders of all or a
portion of the shares owned by them, such sales to be
either at the market from time to time or in an
underwritten public offering, or both. LICENSEE will
as promptly as practicable after the receipt of such
demand file such registration statement and take such
other actions with respect to such registration
statement as are required by the provisions of
paragraphs (f) through (i) of this Exhibit 2. The
rights of the Holders under this paragraph (k) shall
cease when they no longer
-12-
own collectively at least 1% of the outstanding
Common Stock of LICENSEE.
(m) The rights to cause LICENSOR to register a Holder's
securities granted by LICENSOR under this Exhibit 2
may be transferred or assigned by a Holder to a
transferee or assignee of any Registrable Securities.
-13-
10.3 (REFILED)
* PLEASE NOTE THAT CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED BASED ON A
REQUEST FOR CONFIDENTIAL TREATMENT FILED WITH THE COMMISSION ALONG WITH THE
INFORMATION REQUESTED TO BE OMITTED.
OPTION AND LICENSE AGREEMENT
1. INTRODUCTION
THIS AGREEMENT is between the UNVERSITY OF SOUTHERN CALIFORNIA,
(hereinafter USC) a California nonprofit corporation with its principal
place of business at University Par, Los Angeles, California 90089, and
Biokeys, Inc., a Delaware corporation, with its principal place of
business at 16 South Market Street, Petersburg, Virginia 23803
(hereinafter Licensee).
WHEREAS USC warrants that it is the owner and that it has the right
to exclusively license those inventions which are the subject matter of
the patents and patent applications listed in Appendix A and of which the
inventors are Colin Spears and Sang-Ihn Kang (File 2199A) and Colin Spears
and Bengt Gustavsson (Files 2266B & 2266C) (Hereinafter Inventors);
WHEREAS Licensee desires to obtain an exclusive license in the
defined FIELD OF USE to manufacture and market products utilizing the
inventions as hereinafter defined:
WHEREAS, USC is willing to grant a worldwide, exclusive license in
the defined FIELD OF USE to Licensee subject to the terms, conditions,
limitations, and restrictions set forth below:
NOW, THEREFORE, in consideration of the covenants herein contained,
the parties agree as follows:
2. DEFINITIONS
For the purposes of this Agreement the following terms have meanings
specified below:
a. The term "PATENT" or "PATENTS" shall mean any and all patents listed
in Appendix A, and all patent applications listed in Appendix A
including any and all patents issued thereon or any continuation,
division, extensions or reissue thereof.
b. "PRODUCT" or "PRODUCTS" shall mean any article, composition,
apparatus, substance, chemical, material, method or service which is
made, used, distributed or sold by Licensee which:
1
i. is covered in whole or in part by one or more pending or
unexpired claims contained in a PATENT in the country in which
the PRODUCT(S) is made, used, distributed or sold;
ii. is manufactured using a method or process which is covered in
whole or in part by one or more pending or un-expired claims
contained in a PATENT in the country in which (a) the
PRODUCT(S) is made, used, distributed or sold, or (b) the
method or process is used or sold; or
iii. the use of which is covered in whole or in part by one or more
pending or un-expired claims contained in a PATENT in the
country in which (a) the PRODUCT(S) is made, used, distributed
or sold, or (b) the method or process is used or sold.
A PRODUCT is covered by a pending or un-expired claim of a PATENT if in
the course of manufacture, use distribution or sale, it would in the absence of
this Agreement, infringe one or more claims of the PATENT which has not been
held invalid by a court from which no appeal can be taken.
c. "FIELD OF USE" shall mean all fields.
d. "NET SALES PRICE" shall mean:
i. the gross billing price of any PRODUCT received by Licensee or
SUBLICENSEE for the sale or distribution of any PRODUCT, less
the following amounts actually paid by Licensee or
SUBLICENSEE:
(1) discounts allowed;
(2) returns;
(3) transportation charges or allowances;
(4) packing and transportation packing material costs (not
including product containers or product packing
containers as manufactured by the Company);
(5) customs and duties charges: and
(6) sales, transfer and other excise taxes or other
governmental charges levied on or measured by the sales
but no franchise or income tax of any kind whatsoever.
ii. Every commercial use or disposition of any PRODUCT, in
addition to a bona fide sale to a customer, shall be
considered a sale of such PRODUCT. The NET SALES PRICE, in the
case or a use or disposition other than a bona fide sale,
shall be
2
equivalent the then payable NET SALES PRICE of such PRODUCT in
an arm's length transaction. Excluded from the calculation of
NET SALES PRICE shall be any PRODUCT that is: (1) used by
Licensee or provided to SUBLICENSEE free of charge for testing
and/or conducting clinical trials; (2) that is donated by
Licensee or a SUBLICENSEE to a charitable organization; (3)
sales between Licensee and any subsidiary, or between Licensee
or any subsidiary and a SUBLICENSEE, provided they are for
development, testing or re-sale purposes (the latter of which
licensee will pay USC a royalty for such re-sale) and not for
intended end use;
e. "SUBLICENSEE" shall mean any third party licensed by Licensee to
make, or sell any PRODUCT in accordance with the terms of this
Agreement.
f. "EFFECTIVE DATE" of this Agreement shall be the date when the last
party has signed this agreement.
3. OPTION PHASE
a. USC hereby grants Licensee the exclusive rights to conduct various
technical, pre-clinical, marketing, patent, and other studies on
PRODUCTS in the FIELD OF USE during a six (6) month period
commencing on the EFFECTIVE DATE of this Agreement.. The option
period may be extended by mutual written agreement of the parties.
4. LICENSE PHASE
a. In consideration of the license fees and royalties, and subject to
the terms and conditions, as set forth in this Agreement and
effective upon written notification to USC during the option phase
that Licensee desires to license the PATENT(S), USC hereby grants to
Licensee:
i. the exclusive worldwide license in the FIELD OF USE to use the
PATENT to manufacture and sell the PRODUCT(S); and
ii. the right to grant sublicenses to any PATENT licensed
exclusively hereunder, provided that any SUBLICENSEE agrees to
be bound by the terms and conditions of this Agreement
applicable to SUBLICENSEES.
b. If USC is not notified of Licensee's desire to enter the license
phase by the end of the option phase or any extensions thereto, this
Agreement and the license granted herein shall immediately
terminate.
c. All licenses pursuant to 4.a. and 4.b. to inventions conceived or
first actually reduced to practice during the course of research
funded by a U.S. Federal Agency are subject to the rights,
conditions and limitations imposed by U.S. Law. USC agrees to use
reasonable efforts to comply with the requirements of such laws and
applicable regulations.
3
The words "exclusive license" as used herein shall mean exclusive
except for the royalty free non-exclusive license granted to the
U.S. government by USC pursuant to 35 USC Section 202(c)(4) for any
PATENT claiming an invention subject to 35 USC Section 201 and
except for the rights of USC and Inventors as set forth in
Paragraphs 6.
d. In addition to the royalty referred to in Paragraph 5 the Licensee
shall pay USC a license fee of One Hundred Thousand Dollars
($100,000) payable within thirty (30) days of the first private
placement of equity in Biokeys (exclusive of the original capital
invested by the founders Licensee) and an additional license fee of
One Hundred Thousand Dollars ($100,000) due and payable within
thirty (30) days of the first public offering of equity in Biokeys.
5. ROYALTY
a. On all sales of Products anywhere in the world by Licensee or
SUBLICENSEE, Licensee shall pay USC a royalty of (SPACE) of the NET
SALES PRICE.
b. Licensee shall pay to USC a prepaid royalty of One Hundred Thousand
($100,000) due and payable within thirty (30) days of market
approval of a NEW DRUG APPLICATION (NDA) by the FDA for any product
covered by the claims of any PATENT. The prepaid royalty shall be
deductible from running royalties based on sales made after the date
that the prepaid royalty is due.
c. The obligation to pay a royalty under this Agreement on the NET
SALES PRICE of a PRODUCT shall be imposed only once with respect to
the same unit of the PRODUCT regardless of the number of valid
issued or, assuming they were to issue, pending claims included
within the PATENTS.
d. In the event Licensee is required to pay third party royalty(ies) on
patents not owned by USC in order to manufacture, use or sell a
PRODUCT, then the royalty rate on the NET SALES PRICE of such
PRODUCT shall be reduced by the following formula:
New Royalty Rate = (SPACE) minus either (i) (SPACE)
or (ii) (SPACE) of the
royalty rate owed to the third party, whichever is less.
e. Licensee shall pay such royalties to USC on a calendar quarter
basis. With each quarterly payment, Licensee shall deliver to USC a
full and accurate accounting to include at least the following
information:
i. Quantity of each PRODUCT sold (by country) by Licensee and its
SUBLICENSEES;
ii. Total receipts for each PRODUCT (by country);
4
iii. Quantities of each PRODUCT used by Licensee and its
SUBLICENSEES;
iv. Names and addresses of SUBLICENSEES of Licensee;
v. Total number of PRODUCTS manufactured (by country); and
vi. Total royalties payable to USC.
f. In each year the amount of royalty due shall be calculated quarterly
as of March 31, June 30, September 30 and December 31 and shall be
paid quarterly within the thirty next (30) days following such date.
Every such payment shall be supported by the accounting prescribed
in Paragraph 5.e. and shall be made in United States currency.
Whenever for the purpose of calculating royalties conversion from
foreign currency shall be required, such conversion shall be at the
rate of exchange thereafter published in the Wall Street Journal for
the business day closest to the applicable end of calendar quarter.
g. The royalty payments due under this Agreement shall, if overdue,
bear interest until payment at a per annum rate equal to one and a
half percent (1.5%) in effect at 5:00pm (Eastern Time) on the due
date, not to exceed the maximum permitted by law. The payments of
such interest shall not preclude USC from exercising any other
rights it may have as a consequence of the lateness of the payment.
6. RIGHTS RETAINED BY UNIVERSITY
Notwithstanding the exclusive license granted in Paragraph 4a, USC and
Inventors will have the absolute, nontransferable right to use the technology
covered by the PATENTS and all improvements thereof, for conducting research and
educational purposes.
7. PATENT PROSECUTION
a. USC shall prosecute and maintain the PATENTS during the course of
this Agreement.
b. Licensee shall reimburse all reasonable legal expenses incurred and
paid by USC in filing, prosecuting and maintaining the U.S. and
foreign PATENTS, including the expenses associated with parent
patent applications listed in Appendix A whether such expenses were
incurred before or after the date of this Agreement. These legal
expenses shall include the attorneys' and agents' fees, filing fees
and out-of-pocket costs associated with responding to office actions
and any other fees and costs directly related to obtaining and/or
maintaining patent protection. Licensee shall advance payments of
maintenance fees and annuities as part of such legal expenses to be
reimbursed by Licensee within thirty (30) days of request by USC,
unless Licensee is advised otherwise by timely notice from USC.
5
c. The first reimbursement payment made by Licensee shall be for the
reimbursement of USC's patent expenses to date and shall be made
upon the earlier of (i) thirty (30) days following the first public
offering of equity in Biokeys or (ii) one year from the date that
the option granted herein is exercised by Licensee. Thereafter,
reimbursement payments shall be made by Licensee within thirty (30)
days of receipt of an invoice from USC citing any additional
expenses.
d. If the Licensee elects (i) not to pursue a PATENT or (ii) to
terminate the prosecution or maintenance of a PATENT, the Licensee
surrenders its right to make, use or sell PRODUCTS covered by the
non-elected PATENT and shall grant to USC the exclusive rights
previously granted to Licensee, without limitation. Licensee agrees
to execute all necessary documents to carry out this grant of rights
to USC. Payments referred to in Paragraphs 7.b. and 7.c. shall not
be refunded upon such non-election or termination.
8. PATENT INFRINGEMENT
a. Defensive Controversy.
Licensee shall promptly notify USC of all claims, allegations and
notifications of infringement of third party patents. Except for the placing in
escrow of a portion of royalties as referred to hereinafter, USC shall have no
obligation or liability in the event that legal action is brought against
Licensee for patent infringement. Such obligation and liability shall be borne
by Licensee. Licensee may choose legal counsel and defend the patent
infringement lawsuit. During such lawsuit, Licensee may place all of the
royalties derived from the sale of the PRODUCT in the country where such
lawsuit, Licensee may place all of the royalties derived from sales of the
PRODUCT in the country where such lawsuit is pending in an interest-bearing
escrow account. The escrow account shall be established in a bank mutually
acceptable to both parties under escrow instructions insulating the funds from
claims of any creditor. Upon termination of the action, one half (1/2) of any
judgement amount, reasonable attorneys' fees and costs, or $100,000, whichever
amount is greater, may be paid from this escrow account to be applied against
such judgement, fees and costs. If the application of the escrow funds is not
sufficient to pay for one half (1/2) of such judgement, fees, and costs, then up
to (1/2) of all royalties payable to USC may be applied against any such
deficit. In addition, should the settlement of any such patent infringement
lawsuit involve payment of royalties by Licensee to a third party for the
continued right to manufacture, use and sell the PRODUCT, then funds in the
escrow account and royalties payable to USC may be applied against up to one
half (1/2) of such royalties to a third party. Any funds thereafter remaining in
the escrow shall be paid to USC. The above shall constitute USC's sole liability
and responsibility in the event of such action. During the patent infringement
litigation both parties shall keep each other informed in writing of significant
developments in the lawsuit.
a. Offensive Controversy.
Licensee shall promptly notify USC of any potential infringement of a
PATENT. In the event that a third party infringes on a PATENT, Licensee shall
have the right but not an obligation to bring legal action to enforce any such
patent. If Licensee exercises such right,
6
Licensee shall select legal counsel and pay all legal fees and costs of
prosecution of such action. In the event that Licensee shall choose not to take
such action, USC shall have the right, at its option and at its own expense, to
prosecute any action to enjoin such infringement or to prosecute any claim for
damages. The party prosecuting any such action shall be entitled to retain any
funds received as a result of settlement or judgement of such action. The
parties may also agree to jointly pursue infringers. After deduction and payment
to the parties of their respective costs and fees (including without limitation
reasonable attorneys' fees) incurred in prosecuting any such actions, the net
funds obtained as a result of settlement or of judgement of any such jointly
prosecuted action shall be divided in the following manner: 25% of all net funds
shall be divided equally by the parties and 75% of all the net funds shall be
divided between the parties in the proportion to the amount of legal fees and
costs incurred by the parties in the prosecution of such actions. If funds are
insufficient to pay all costs and fees then all of the funds shall be paid to
the parties in said proportion.
c. During any litigation hereunder both parties shall keep each other
timely informed of any significant development in the litigation and
provide all reasonably requested technical assistance. During any
said controversy, full royalty payment shall continue, except as
otherwise provided herein.
9. RECORDS
Licensee shall keep and shall require its SUBLICENSEES to keep complete,
true and accurate books of account and records for the purpose of showing the
derivation of all amounts payable to USC under this Option and License
Agreement. Said books and records shall be kept at Licensee's principal place of
business for at least four (4) years following the end of the calendar year to
which they pertain, and shall be open at all reasonable times for inspection by
a representative of USC for the purpose of verifying Licensee's royalties
statement or Licensee's compliance in other respects with this Option and
License Agreement. All information obtained as a result of such audit shall be
maintained in confidence, except that the representative may disclose to USC the
aggregate amount of royalties due to USC during each year, as determined in such
audit. Should an audit by USC show an underpayment of royalties by more than
10%, Licensee shall immediately pay such underpayment and all interest, as well
as for USC's reasonable audit expenses.
10. SERVICES OF INVENTORS
USC shall make reasonable efforts to make Inventors available during
regular business hours to answer questions concerning certain technical aspects
of the technology. Should Licensee desire to use the services of Inventors for
further testing and/or market studies of the technology, a separate research and
development and/or consulting agreement should be negotiated with Inventors and
the USC Office of Contracts and Grants.
7
11. SUBLICENSE PERMISSION
Licensee may sublicense the PATENT(S) only with prior written permission
from USC, which permission will not be unreasonably withheld. Notwithstanding
the foregoing, no permission will be granted for a sublicense unless the
SUBLICENSEE agrees in writing to be bound by the terms of this Agreement.
12. PATENT MARKETING
Licensee shall use reasonable efforts to place all appropriate patent and
other intellectual property notices, markings and indicia on product and
marketing literature for the PRODUCTS as needed to protect the patent and other
intellectual property rights of USC and right for damages for infringement
thereof.
13. PUBLICATIONS
Nothing in this Agreement shall limit or prevent USC or Inventors from
publishing any information about the PATENT. Thirty (30) days prior to
submission for publication, USC and Inventors will use their reasonable efforts
to submit the proposed publication, for review only, to Licensee.
14. PUBLICITY
Neither party shall use the name, trade name, trademark or other
designation of the other party in connection with any products, promotion or
advertising without the prior written permission of the other party.
15. ASSIGNMENTS/TRANSFERS
Licensee may not assign or transfer this Agreement in whole or part to any
third party without the prior written permission of USC, which permission shall
be granted in the sole discretion of USC. However, the Licensee may assign the
entire Agreement to successors of the entire business of the PRODUCTS if the
successor agrees to be bound by this Agreement and prior written notice is
provided to USC.
16. TERMINATION
a. Upon the breach or default under this Option and License Agreement
by either party, the non-breaching party may terminate this Option
and License Agreement by forty-five (45) days written notice to the
breaching party. Notwithstanding, USC may terminate this Option and
License Agreement upon twenty (20) days written notice to Licensee
if the Licensee
8
fails to obtain and maintain the insurance coverages required by
Paragraph 24 hereof. Said notice shall be effective at the end of
such period unless during said period breaching party shall remedy
such defect or default. Licensee may also terminate this Agreement
at any time, for any reason, by providing USC a thirty (30) days
written notice. No option fees, license fees, or royalties shall be
returnable. This Agreement may also be terminated immediately by USC
upon notice to Licensee upon the occurrence of any of the following:
(i) Licensee attempts to use, sublicense, transfer or assign its
rights or obligations under this Agreement in any manner contrary to
the terms of this Agreement or in derogation of USC's proprietary
rights; or ii) Licensee is determined to be insolvent or makes an
assignment for the benefit of creditors, or has a bankruptcy
petition filed by or against it, or a receiver or trustee in
bankruptcy or similar officer is appointed to take charge of all or
part of Licensees property. Upon termination of the Agreement all
rights granted to or provided by each party to the other shall
automatically and irrevocably revert to the granting party.
b. Surviving any termination are:
i. Licensee's obligation to pay royalties accrue or accruable.
ii. Licensee's obligation of Paragraph 9 to keep and allow a final
audit.
iii. Any cause of action or claim of Licensee or USC, accrue or to
accrue, because of any breach or default by the other party.
iv. The provisions of paragraphs 22, 23 and 24.
c. Upon termination of this Agreement, Licensee agrees to immediately
discontinue the manufacture and sale of the PRODUCTS and the use of
the PATENTS. Within twenty (20) days after such termination,
Licensee shall provide USC with a written inventory of all PRODUCTS
currently in its stock as of the date of termination (the
"INVENTORY"). USC shall have the option to grant to Licensee the
privilege of disposing of such INVENTORY at its normal prices within
three (3) months after said termination. Licensee shall dispose of
this INVENTORY only to customers who had previously purchased
PRODUCTS from Licensee during the term of this Agreement, and in no
event shall Licensee sell such INVENTORY to wholesalers, diverters,
jobbers or any other entity which does not sell at retail
exclusively or to any one else who intends to sell such INVENTORY at
close-out. The disposition of all such INVENTORY, however, shall be
subject to all of the terms and conditions of this Agreement. After
the three (3) month sell-off period, Licensee shall destroy or
return to USC all remaining unsold PRODUCTS, all packaging and
marketing materials, and shall certify their destruction or return
to USC specifying the number of each destroyed or returned. All
royalty obligations, shall be accelerated and shall become
immediately due and payable. In addition, Licensee shall immediately
deliver to USC (i.) all materials relating to the PATENTS, together
with all copies thereof, and (ii) all market studies or other tests
or studies conducted by Licensee with respect to the PRODUCTS, all
at no cost whatsoever to USC. This Paragraph 16.c. shall not apply
if the termination of this Agreement arises from the expiration of
the term of this Agreement under Paragraph 21.
9
d. Licensee acknowledges and agrees that any violation of Agreement by
Licensee would result in irreparable harm to USC. Accordingly,
Licensee consents and agrees that, if Licensee violates any of the
provisions of this Agreement, USC shall be entitled, in addition to
other remedies available to it, to an injunction to be issued by any
court of competent jurisdiction restraining Licensee from committing
or continuing any violation of this Agreement, without the need for
posting any bond or any other undertaking.
17. NOTICES, REPORTS AND PAYMENTS
Any notice, report or payment permitted or required under this Agreement
shall be in writing, and shall be sent or delivered to the receiving party at
the address set forth below or at such address as either party may from time to
time designate in writing.
USC: Office of Patent and Copyright Administration
University of Southern California
3716 South Hope Street, Suite 313
Los Angeles, CA 90007-4344 (U.S.A.)
Attn: Director
LICENSEE: Biokeys Incorporated
709 Hamptons Lane
Chesterfield, MO 63017
Attn: Francis E. O'Donnell Jr., Chief Executive Officer
18. PARAGRAPH HEADINGS
Paragraph headings are for the convenience of this Agreement only and
shall not add to or detract from any of the terms or provisions.
19. SEVERABILITY
If any provision of this Agreement is held invalid under any law
applicable to the parties, SUBLICENSEES and/or assignees, that provision shall
be considered severable and its invalidity shall not affect the remainder of
this Agreement, which shall continue in full force and effect.
20. CONTROLLING LAW, JURISDICTION AND VENUE
This Agreement shall be deemed to be executed and to be performed in the
State of California, and shall be construed in accordance with the laws of the
State of California as to all
10
matters, including but not limited to matters of validity, construction, effect
and performance. In the event of any controversy, claim or dispute between the
parties hereto arising out of or relating to this agreement, such controversy,
claim or dispute may be tried exclusively in the courts of the State of
California or in the United States Federal District Court for the Central
District of California, as either party may elect. Each of the parties hereby
waives any defense of lack of in personam jurisdiction, improper venue and forum
non conveniens, and agrees that service of process of such court may be made
upon each of them by personal delivery or by mailing certified or registered
mail, return receipt requested, to the other party at the address provided for
in Paragraph 16 hereof. Both parties hereby submit to the jurisdiction of the
court so selected, to the exclusion of any other courts which may have had
jurisdiction apart from this Paragraph 20.
21. TERMS OF AGREEMENT
Except as otherwise terminated pursuant to the other provisions of this
OPTION AND LICENSE AGREEMENT, this Agreement shall terminate upon expiration of
the last to expire of the PATENTS.
22. NEGATION OF WARRANTIES
a. Nothing in this Agreement shall be construed as:
i. a warranty or representation by USC as to the validity or
scope of the PATENT and/or PATENT Application; or
ii. a warranty or representation that any PRODUCTS made, used,
sold or otherwise disposed of under any license granted in
this Agreement is or will be free from infringement of patents
of third parties; or
iii. an obligation to bring or prosecute actions or suits against
third parties for infringement; or
iv. conferring the rights to use in advertising, publicity or
otherwise any trademark, trade name, or names or any
contraction, abbreviation, simulation or adoption thereof, of
USC or Licensee; or
v. any obligation to furnish any know-how not provided.
b. USC MAKES NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, nor does USC represent that the
rights granted hereunder will result in PRODUCTS that are
commercially successful.
11
c. Licensee further agrees that it will not rely upon technical
information provided by USC and Inventors in developing and
manufacturing any PRODUCTS hereunder, but will independently test,
analyze and evaluate all PRODUCTS prior to manufacture and
distribution of such PRODUCTS.
23. INDEMNITY
a. Licensee shall defend, indemnify and hold harmless USC and its
trustees, officers, medical and professional staff, employees and
agents and their respective successors, heirs and assigns (the
"Indemnitees"), against all liabilities, demands, losses, costs, and
expenses (including without limitation attorneys' fees) incurred by
or imposed upon the Indemnitees or any one of them in connection
with any claims, suits, actions, demands or judgements arising out
of any theory of liability (including but not limited to, actions in
the form of tort, warrantee, or strict liability) for death,
personal injury, illness, or property damage arising from Licensee's
use, sale, or other disposition of the PRODUCTS.
b. Licensee agrees, at its own expense, to provide attorneys reasonably
acceptable to USC to defend against any actions brought or filed
against any party indemnified hereunder with respect to the subject
of indemnity contained herein, whether or not such actions are
rightfully brought.
24. INSURANCE
a. Prior to Licensee exercising the option granted herein, Licensee
shall at its sole cost and expense, procure and maintain in effect a
comprehensive general liability policy of insurance in single limit
coverage of not less than One Million Dollars ($1,000,000) per
incident and One Million Dollars ($1,000,000) annual aggregate for
death, bodily injury or illness and Two Hundred Thousand Dollars
($200,000) annual aggregate in property damage. Such comprehensive
general liability insurance shall provide (i) product liability
coverage and (ii) broad form contractual liability coverage for
Licensee's indemnification. If Licensee elects to self-insure all or
part of the limits described above (including deductibles or
retention which are in excess of $50,000 annual aggregate) such
self-insurance program must be acceptable to USC. Each such policy
of insurance shall name USC as an additional insured and shall
provide for not less than thirty (30) days prior written notice
before any cancellation or material change in coverage shall be
effective. A Certificate evidencing the comprehensive general
liability policy herein defined shall be delivered to USC within ten
(10) days of the EFFECTIVE DATE of this Agreement. Licensee shall
maintain such comprehensive general liability insurance until such
time as the policy in Paragraph 25.b. is procured, or until fifteen
(15) years after the term of this Agreement.
b. During such time and in each country where PRODUCT, or any
modification thereof, is administered to humans, manufactured or
distributed for any purpose (including for the purpose of obtaining
regulatory approvals) Licensee or any SUBLICENSEE, Licensee shall at
its sole cost and expense, procure and maintain in effect a
comprehensive general liability policy of
12
insurance in single limit coverage of not less than Ten Million
Dollars ($10,000,000) per incident and Ten Million Dollars
($10,000,000) annual aggregate for death, bodily injury, illness or
property damage. Such comprehensive general liability insurance
shall provide (i) product liability coverage and (ii) broad form
contractual liability coverage for Licensee's indemnification. If
Licensee elects to self-insure all or part of the limits described
above (including deductibles or retention which are in excess of
$250,000 annual aggregate) such self-insurance program must be
acceptable to USC. Each such policy of insurance shall name USC as
an additional insured and shall provide for not less than thirty
(30) days prior written notice before any cancellation or material
change in coverage shall be effective. A Certificate evidencing the
comprehensive general liability policy herein defined shall be
delivered to USC prior to any manufacture, sale, distribution or
administration to humans. Licensee shall maintain such comprehensive
general liability insurance during the period that the PRODUCT or
any modification thereof is being manufactured, sold, distributed or
administered to humans by the Licensee or its SUBLICENSEES and a
reasonable period thereafter which in no event shall be less than
fifteen (15) years.
c. Alternatively, Licensee and USC may obtain an independent opinion
from legal counsel mutually agreeable to the parties in each country
in which Licensee intends to manufacture and/or distribute PRODUCTS,
such opinion to assist in determining the amount of general and
products liability insurance required to be carried by Licensee in
such country. Where independent legal counsel determines that little
or no liability risk to USC exists under the present and reasonably
anticipated future legal trends in that country, Licensee will be
required to maintain liability insurance on USC's behalf which is
determined by USC to be reasonably adequate to pay litigation
defense costs. Where independent legal counsel determines that the
risk of liability on the part of USC is more than minimal in that
country, USC and Licensee will evaluate such risk and negotiate in
good faith to determine the amounts of liability insurance necessary
to reasonably insure USC's interests. If USC and Licensee cannot
agree on the amounts and types of insurance reasonably necessary to
protect USC's interest in a particular country, Licensee will not
manufacture or market PRODUCTS in that country.
d. In the event that Licensee does not maintain such insurance, but is
self-insured, or carries a substantial self-retention, USC may grant
permission for such self-insurance only if, in the sole discretion
of USC, the net worth, assets and earnings of the Licensee are
deemed sufficient to protect USC's economic interests in the event
of claims, liability, demands, damages, expenses and losses from
death, personal injury, illness, or property damage.
e. The minimum amounts of insurance coverage required under this
Paragraph (subparts 24.a., 24.b., and 24.c.) shall not be construed
to create a limit of Licensee's liability with respect to its
indemnification in Paragraph 23 or any other provision of this
Agreement.
f. By SUBLICENSEES
As a condition precedent to a grant of permission by USC for Licensee to
sublicense the PATENT rights herein, the prospective SUBLICENSEE shall agree to
indemnify Licensee and USC to the same extent and degree as Licensee has agreed
to indemnify USC herein. Such SUBLICENSEE shall also provide insurance identical
in coverage and amount to that required
13
of Licensee in subparagraph b, above, naming both Licensee and USC as additional
insured. A Certificate evidencing the product liability coverage shall be
delivered prior to first manufacture of any PRODUCTS by the SUBLICENSEE. In the
event a prospective SUBLICENSEE does not maintain such insurance, but rather is
self-insured, or carries a substantial self-retention, USC may grant permission
for such sublicense only if, in the sole discretion of USC, the net worth,
assets and earnings of such prospective SUBLICENSEE are deemed sufficient to
protect USC's economic interests in the event of claims, liability, demands,
damages, expenses and losses from death, personal injury, illness, or property
damage.
26. PRODUCT DEVELOPMENT
If Licensee exercises its option, Licensee shall use its reasonable
efforts to test, develop the PRODUCT for commercial purposes through the world.
On or before January 1 of each year during the term of this Agreement,
commencing January 1, 1998, Licensee shall submit to USC a report detailing its
research, regulatory approval, marketing and product development objectives the
coming year as well as the research, regulatory approval, marketing and
development activities which Licensee undertook during the preceding year. The
reports shall identify specific future milestones (regulatory approval and
product development) and information demonstrating that the Licensee is
providing sufficient financial and manpower resources to evidence its use of
reasonable efforts. Within six (6) months after the signing of this Agreement
and each two (2) years thereafter, a representative of the Office of Patent and
Copyright Administration of USC, at Licensee's expense (including
transportation, and, if appropriate, lodging and meals), shall visit the
manufacturing and marketing facilities of Licensee and be presented with an
in-depth updating of the manufacturing capability and marketing network of
Licensee.
27. EXPORT CONTROLS
It is understood that USC is subject to United State laws and regulations
controlling the export of technical data, computer software, laboratory
prototypes and other commodities (such laws include the Arms Export Control Act,
as amended and the Export Administration Act), and that its obligations
hereunder are contingent on compliance with applicable United States export laws
and regulations. The transfer of certain technical data and commodities by the
Licensee may require a license from the cognizant agency of the United States
Government and/or written assurances by Licensee that Licensee shall not export
data or commodities to certain foreign countries without prior approval of such
agency. USC neither represents that a license shall not be required nor that, if
required, it shall be issued. Licensee shall not engage in any activity in
connection with this Agreement that is in violation of any applicable U.S. law.
28. INDEPENDENT CONTRACTOR
In rendering performances under this Agreement, Licensee will function
solely as an independent contractor and not as an agent, partner, employee or
joint venturer with USC.
14
Nothing in this Agreement shall be deemed or construed to create the
relationship of principal and agent, or of partnership or joint venture, and
neither party shall hold itself out as an agent, legal representative, partner,
subsidiary, joint venturer, servant or employee of the other. Neither party nor
any officer, employee, agent or representative thereof shall, in any event, have
any right collectively or individually, to bind the other party, to make any
representations or warranties, to accept service of process, to receive notice
or to perform any act or thing on behalf of the other party, except as expressly
authorized under this Agreement or in writing by such other party in its sole
discretion.
29. WAIVER
No waiver by either party of any default or breach shall be deemed as a
waiver of prior or subsequent default or breach of the same or other provisions
of this Agreement.
30. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof. No amendment, modification, extension or
cancellation of this Agreement shall be binding on the parties unless mutually
agreed to and executed in writing by each of the parties.
UNIVERSITY OF SOUTHERN CALIFORNIA BIOKEYS, INC.
/s/ DENNIS F. DOUGHERTY /s/ FRANCIS E. O'DONNELL, JR.
- --------------------------------- ------------------------------------
Signature Signature
Dennis F. Dougherty Francis E. O'Donnell, Jr.
Sr. V.P. Admin Chairman
1/20/98 1/23/98
15
10.5 (REFILED)
* PLEASE NOTE THAT CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED BASED ON A
REQUEST FOR CONFIDENTIAL TREATMENT FILED WITH THE COMMISSION ALONG WITH THE
INFORMATION REQUESTED TO BE OMITTED.
OPTION & LICENSE AGREEMENT
1. INTRODUCTION
THIS AGREEMENT is between the UNIVERSITY OF SOUTHERN CALIFORNIA,
(hereinafter USC) a California nonprofit corporation with its principal place of
business at University Park, Los Angeles, California 90089, and BioKeys, Inc., a
Delaware corporation, with its principal place of business at 11466 Winding
Ridge Drive, San Diego, California 92141 (hereinafter Licensee).
WHEREAS USC warrants that it is the owner and that it has the right to
exclusively license those rights it has in the inventions which are the subject
matter of the patent applications listed in Appendix A and of which the inventor
is Charles McKenna of USC (hereinafter Inventor);
WHEREAS Licensee desires to obtain an exclusive license in the defined FIELD
OF USE to manufacture and market products utilizing the inventions as
hereinafter defined;
WHEREAS, USC is willing to grant a worldwide, exclusive license in the
defined FIELD OF USE to Licensee subject to the terms, conditions, limitations,
and restrictions set forth below;
NOW, THEREFORE, in consideration of the covenants herein contained, the
parties agree as follows:
2. DEFINITIONS
For all purposes of this Agreement the following terms shall have the
meanings specified below:
a. The term "PATENT" or "PATENTS" shall mean any and all patent
applications listed in Appendix A (Appendix A may be added to from time
to time by USC and USC shall notify Licensee of any such additions), any
and all patents issued thereon or any continuation, division, extensions
or reissue thereof, and any and all foreign patents issuing from any
application filed which corresponds to claims contained in any of the
foregoing patents or applications.
b. "PRODUCT" or "PRODUCTS" shall mean any article, composition, apparatus,
substance, chemical, material, method or service which is made, used,
distributed or sold by Licensee which:
i. is covered in whole or in part by one or more pending or unexpired
claims contained in a PATENT in the country in which the PRODUCT(S)
is made, used, distributed or sold;
ii. is manufactured using a method or process which is covered in whole
or in part by one or
1
more pending or unexpired claims contained in a PATENT in the
country in which (a) the PRODUCT(S) is made, used, distributed or
sold, or (b) the method or process is used or sold; or
iii. the use of which is covered in whole or in part by one or more
pending or unexpired claims contained in a PATENT in the country in
which (a) the PRODUCT(S) is made, used, distributed or sold, or (b)
the method or process is used or sold;
iv. incorporates technology transferred to Licensee pursuant to the
confidential disclosure agreement dated May 22, 2000 between USC and
Licensee.
A PRODUCT is covered by a pending or unexpired claim of a PATENT if in the
course of manufacture, use, distribution or sale, it would, in the absence of
this Agreement, infringe one or more claims of the PATENT which has not been
held invalid by a court from which no appeal can be taken.
c. "FIELD OF USE" shall mean use of thiophosphonoformic acid (TPFA) and
derivatives thereof for treatment of infection by Human Immunodeficiency
Virus (HIV), Human Papillomavirus (HPV) and other viral infections.
d. "NET SALES PRICE" shall mean the gross billing price of any PRODUCT
received by Licensee or its SUBLICENSEE for the sale or distribution of
any PRODUCT, less the following amounts actually paid by Licensee or
SUBLICENSEE:
i. discounts allowed;
ii. returns;
iii. transportation charges or allowances;
iv. packing and transportation packing material costs (not including
product containers or product packing containers as manufactured by
the Company);
v. customs and duties charges; and
vi. sales, transfer and other excise taxes or other governmental charges
levied on or measured by the sales but no franchise or income tax of
any kind whatsoever.
Every commercial use or disposition of any PRODUCT, in addition to a bona
fide sale to a customer, shall be considered a sale of such PRODUCT. The NET
SALES PRICE, in the case of a use or disposition other than a bona fide sale,
shall be equivalent to the then payable NET SALES PRICE of such PRODUCT in an
arm's length transaction.
e. "SUBLICENSEE" shall mean any third party licensed by Licensee to make,
or sell any PRODUCT in accordance with the terms of this Agreement.
2
f. "EFFECTIVE DATE" of this Agreement shall be the date when the last party
has signed this Agreement.
3. OPTION PHASE
a. USC hereby grants Licensee the exclusive right to conduct various
technical, pre-clinical, marketing, patent, and other studies on
PRODUCTS in the FIELD OF USE during a three (3) month period commencing
on the EFFECTIVE DATE of this Agreement. The option period may be
extended by mutual written agreement of the parties.
b. The consideration for the grant of this option phase shall be One
Hundred Fifty Thousand Dollars ($150,000). Such payment shall be due on
the earlier to occur of: (i) within three (3) months of the EFFECTIVE
DATE of this Agreement or (ii) thirty (30) days from the date Licensee
raises its next round of private funding.
4. LICENSE PHASE
a. In consideration of the license fee and royalties, and subject to the
terms and conditions, as set forth in this Agreement and effective upon
written notification to USC during the option phase that Licensee
desires to license the PATENT(S), USC hereby grants to Licensee:
i. the exclusive worldwide license to use the PATENT to manufacture and
sell the PRODUCT(S) for application in the FIELD OF USE; and
ii. the right to grant sublicenses to any PATENT licensed exclusively
hereunder, provided that any SUBLICENSEE agrees to be bound by the
terms and conditions of this Agreement applicable to SUBLICENSEES.
b. In addition to the consideration referred to in Paragraph 3.b., Licensee
and USC shall during the option phase negotiate in good faith the terms
of a mutually agreeable research agreement for the purpose of testing
and developing the PRODUCT(S) for commercial purposes throughout the
world.
c. If USC is not notified of Licensee's desire to enter the license phase
by the end of the option phase or any extensions thereto and Licensee
and USC are not able to agree to the terms of a research agreement
pursuant to Paragraph 4.b., this Agreement and the license granted
herein shall immediately terminate. Payments referred to in Section 3
shall not be refunded upon such termination.
d. All licenses pursuant to Paragraphs 4.a. and 4.c. to inventions
conceived or first actually reduced to practice during the course of
research funded by a U.S. federal agency are subject to the rights,
conditions and limitations imposed by U.S. law, including but not
limited to the following:
i. The words "exclusive license" as used herein shall mean exclusive
except for the
3
royalty free non-exclusive license granted to the U.S. government by
USC pursuant to 35 USC Section 202(c)(4) for any PATENT claiming an
invention subject to 35 USC Section 201 and except for the rights of
USC and Inventor as set forth in Paragraph 6.
ii. Licensee agrees that PRODUCTS used or sold in the United States
shall be manufactured substantially in the United States, unless a
written waiver is obtained in advance from the relevant U.S. federal
agency.
5. ROYALTY
a. On all sales of PRODUCTS anywhere in the world by Licensee, Licensee
shall pay USC a royalty of (SPACE) the NET SALES PRICE.
b. If any PRODUCT is manufactured and sold under sublicense from the
Licensee, the Licensee shall pay USC a royalty equal to (SPACE) of all
of the Licensee's revenue received from the sublicense, including but
not limited to earned royalty, prepaid royalty and license fees.
c. The Licensee will pay an annual minimum royalty. The minimum royalty on
each PRODUCT will be Twenty-Five Thousand Dollars ($25,000.00)
commencing on the first anniversary date of this Agreement, Seventy-Five
Thousand Dollars ($75,000) on the second anniversary date and on the
third anniversary date and thereafter One Hundred Twenty-Five Thousand
Dollars ($125,000.00) for each succeeding year up to the date of
expiration of the last PATENT. Minimum royalties are to be paid
biannually to USC, one half due and payable on January 1 of each year
and the second half due and payable on July 1 of each year. Should
Licensee fail to make earned royalty payments sufficient to meet said
minimum royalty requirements, it may pay the difference between the
earned royalty and the minimum royalty requirement to keep this
Agreement in force.
d. Licensee shall pay such royalties to USC on a calendar quarter basis.
With each quarterly payment, Licensee shall deliver to USC a full and
accurate accounting to include at least the following information:
i. Quantity of each PRODUCT sold (by country) by Licensee and its
SUBLICENSEES;
ii. Total receipts for each PRODUCT (by country);
iii. Quantities of each PRODUCT used by Licensee and its SUBLICENSEES;
iv. Names and addresses of SUBLICENSEES of Licensee;
v. Total number of PRODUCTS manufactured (by country); and
vi. Total royalties payable to USC.
e. In each year the amount of royalty due shall be calculated quarterly as
of March 31, June 30,
4
September 30 and December 31 and shall be paid quarterly within the next
thirty (30) days following such date. Every such payment shall be
supported by the accounting prescribed in Paragraph 5.d. and shall be
made in United States currency. Whenever for the purpose of calculating
royalties conversion from foreign currency shall be required, such
conversion shall be at the rate of exchange thereafter published in the
Wall Street Journal for the business day closest to the applicable end
of calendar quarter.
f. The royalty payments due under this Agreement shall, if overdue, bear
interest until payment at a per annum rate equal to (SPACE) above the
prime rate in effect at Bank of America on the due date, not to exceed
the maximum permitted by law. The payments of such interest shall not
preclude USC from exercising any other rights it may have as a
consequence of the lateness of any royalty payment.
6. RIGHTS RETAINED BY UNIVERSITY
Notwithstanding the exclusive license granted in Paragraph 4.a., USC and
Inventor will have the absolute, nontransferable right to use the technology
covered by the PATENTS and all improvements thereof, for conducting research and
educational purposes.
7. PATENT PROSECUTION
a. USC shall file, prosecute and maintain, during the course of this
Agreement, the patent applications and patents listed in Appendix A.
Should Licensee require the filing of foreign patents, USC shall take
responsibility for filing, prosecuting and maintaining said foreign
patents.
b. Licensee shall reimburse all reasonable legal expenses incurred and paid
by USC in filing, prosecuting and maintaining the U.S. and foreign
applications listed (or to be listed pursuant to Paragraph 2.a.) in
Appendix A, whether such expenses were incurred before or after the date
of this Agreement. These legal expenses shall include the attorneys' and
agents' fees, foreign filing fees and out-of-pocket costs associated
with responding to office actions and any other fees and costs directly
related to obtaining and/or maintaining patent protection in the
countries listed in Appendix A. Licensee shall advance payments of
maintenance fees and annuities as part of such legal expenses to be
reimbursed by Licensee within thirty (30) days of request by USC, unless
Licensee is advised otherwise by timely notice from USC.
c. Licensee agrees to pay to USC an initial deposit of Twenty-Five Thousand
Dollars ($25,000.00) within fifteen (15) days of the EFFECTIVE DATE of
this Agreement. Such deposit will be held in a trust account. Licensee
authorizes USC to use that account to pay all legal expenses incurred
pursuant to Paragraph 7.b. When the trust account drops below
Twenty-Five Thousand Dollars ($25,000.00), Licensee agrees to pay within
thirty (30) days of USC's written demand, the amount to maintain the
balance of the trust account at a minimum of Twenty-Five Thousand
Dollars ($25,000.00). Upon termination of this Agreement, any unused
deposit shall be refunded.
d. If the Licensee elects (i) not to pursue a PATENT or (ii) to terminate
the prosecution or
5
maintenance of a PATENT in any country, the Licensee surrenders its
right to make, use or sell PRODUCTS covered by the non-elected PATENT in
that particular country and shall grant to USC the exclusive rights
previously granted to Licensee, without limitation, for that country.
Licensee agrees to execute all necessary documents to carry out this
grant of rights to USC. Payments referred to in Paragraphs 7.a. and 7.b.
shall not be refunded upon such non-election or termination.
e. If the Licensee decides to terminate this agreement pursuant to
Paragraph 16, Licensee shall reimburse all reasonable legal expenses
incurred up to six (6) months from the date written notification of
termination is sent to Licensee; provided, however, such legal expenses
shall not exceed (SPACE).
8. PATENT INFRINGEMENT
a. Defensive Controversy.
Licensee shall promptly notify USC of all claims, allegations and
notifications of infringement of third party patents. Except for the placing in
escrow of a portion of royalties as referred to hereinafter, USC shall have no
obligation or liability in the event that legal action is brought against
Licensee for patent infringement. Such obligation and liability shall be borne
by Licensee. Licensee may choose legal counsel and defend the patent
infringement lawsuit. During such lawsuit, Licensee may place all of the
royalties derived from sales of the PRODUCT in the country where such lawsuit is
pending in an interest-bearing escrow account. The escrow account shall be
established in a bank mutually acceptable to both parties under escrow
instructions insulating the funds from claims of any creditor. Upon termination
of the action, one-half (1/2) of any judgment amount, reasonable attorneys' fees
and costs, may be paid from this escrow account. Should the settlement of any
such patent infringement lawsuit involve payment of royalties by Licensee to a
third party for the continued right to manufacture, use, and sell the PRODUCT,
then funds in the escrow account and royalties payable to USC may be applied
against up to one-half (1/2) of such royalties to a third party. Any funds
thereafter remaining in the escrow shall be paid to USC. The above shall
constitute USC's sole liability and responsibility in the event of such action.
Royalties paid to third parties as provided for above shall be included when
determining whether the minimum royalty provided for in this Agreement has been
paid in a given year. During the patent infringement litigation both parties
shall keep each other informed in writing of significant developments in the
lawsuit.
b. Offensive Controversy.
Licensee shall promptly notify USC of any potential infringement of a
PATENT. In the event that a third party infringes on a PATENT, Licensee shall
have the right but not an obligation to bring legal action to enforce any such
patent. If Licensee exercises such right, Licensee shall select legal counsel
and pay all legal fees and costs of prosecution of such action. In the event
that Licensee shall choose not to take such action, USC shall have the right, at
its option and at its own expense, to prosecute any action to enjoin such
infringement or to prosecute any claim for damages. The party prosecuting any
such action shall be entitled to retain any funds received as a result of
settlement
6
or judgment of such action. The parties may also agree to jointly pursue
infringers. After deduction and payment to the parties of their respective costs
and fees (including without limitation reasonable attorneys' fees) incurred in
prosecuting any such actions, the net funds obtained as a result of settlement
or of judgment of any such jointly prosecuted action shall be divided in the
following manner: 25% of all net funds shall be divided equally by the parties
and 75% of all the net funds shall be divided between the parties in the
proportion to the amount of legal fees and costs incurred by the parties in the
prosecution of such actions. If funds are insufficient to pay all costs and fees
then all of the funds shall be paid to the parties in said proportion.
c. During any litigation hereunder both parties shall keep each other
timely informed of any signifi cant development in the litigation and
provide all reasonably requested technical assistance. During any said
controversy, full royalty payment shall continue, except as otherwise
provided herein.
9. RECORDS
Licensee and SUBLICENSEES shall keep complete, true and accurate books of
account and records for the purpose of showing the derivation of all amounts
payable to USC under this Option and License Agreement. Said books and records
shall be kept at Licensee's principal place of business for at least four (4)
years following the end of the calendar year to which they pertain and shall be
open at all reasonable times for inspection by a representative of USC for the
purpose of verifying Licensee's royalties statement or Licensee's compliance in
other respects with this Option and License Agreement. All information obtained
as a result of such audit shall be maintained in confidence, except that the
representative may disclose to USC the aggregate amount of royalties due to USC
during each year, as determined in such audit. Should an audit by USC show an
underpayment of royalties by more than 10%, Licensee shall immediately pay such
underpayment and all interest, as well as for USC's reasonable audit expenses.
10. SERVICES OF INVENTOR
USC shall make reasonable efforts to make Inventor available during regular
business hours to answer questions concerning technical aspects of the
technology necessary to understand the PATENT(S). Should Licensee desire to use
the services of Inventor for further technical information and/or market studies
of the technology, a separate research and development and/or consulting
agreement should be negotiated with Inventor and the USC Office of Contracts and
Grants.
11. SUBLICENSE PERMISSION
Licensee may sublicense the PATENT(S) only with prior written permission
from USC, which permission will not be unreasonably withheld. Notwithstanding
the foregoing, no permission will be granted for a sublicense unless the
SUBLICENSEE agrees in writing to be bound by the terms of this Agreement.
12. PATENT MARKING
7
Licensee shall use reasonable efforts to place all appropriate patent and
other intellectual property notices, markings and indicia on product and
marketing literature for the PRODUCTS as needed to protect the patent and other
intellectual property rights of USC and right for damages for infringement
thereof.
13. PUBLICATIONS
Nothing in this Agreement shall limit or prevent USC or Inventor from
publishing any information about the PATENT. Thirty (30) days prior to
submission for publication, USC and Inventor will use their reasonable efforts
to submit the proposed publication, for review only, to Licensee.
14. PUBLICITY
Neither party shall use the name, trade name, trademark or other designation
of the other party in connection with any products, promotion or advertising
without the prior written permission of the other party.
15. ASSIGNMENTS/TRANSFERS
Licensee may not assign or transfer this Agreement in whole or part to any
third party without the prior written permission of USC, which permission shall
be granted in the sole discretion of USC. The Licensee may only assign the
entire Agreement to successors of the entire business of the PRODUCTS if the
successor agrees to be bound by this Agreement and prior written notice is
provided to USC.
16. TERMINATION
a. Upon the breach of or default under this Option and License Agreement by
either party, the non-breaching party may terminate this Option and
License Agreement by forty-five (45) days written notice to the
breaching party. Said notice shall be effective at the end of such
period unless during said period breaching party shall remedy such
defect or default. Licensee may also terminate this Agreement at any
time, for any reason, by providing USC a thirty (30) day written notice
and paying to USC the legal expenses incurred up to six (6) months from
the date written termination is sent to Licensee. No option fees,
license fees, or royalties shall be returnable. This Agreement may also
be terminated immediately by USC upon notice to Licensee upon the
occurrence of any of the following: (i) Licensee attempts to use,
sublicense, transfer or assign its rights or obligations under this
Agreement in any manner contrary to the terms of this Agreement or in
derogation of USC's proprietary rights; (ii) Licensee fails to obtain
and maintain the insurance coverages required by Paragraph 24 hereof; or
(iii) Licensee is determined to be insolvent or makes an assignment for
the benefit of creditors, or has a bankruptcy petition filed by or
against it, or a receiver or trustee in bankruptcy or similar officer is
appointed to take charge of all or part of Licensee's property. Upon
termination of the Agreement all rights granted to or provided by each
party to the other shall automatically and irrevocably revert to the
granting party.
8
b. Surviving any termination are:
i. Licensee's obligation to pay the amount for consideration for the
grant of the option phase and royalties accrued or accruable.
ii. Licensee's obligation of Paragraph 9 to keep and allow a final
audit.
iii. Any cause of action or claim of Licensee or USC, accrue or to
accrue, because of any breach or default by the other party.
iv. The provisions of Paragraphs 22, 23 and 24.
c. Upon termination of this Agreement, Licensee agrees to immediately
discontinue the manufacture and sale of the PRODUCTS and the use of the
PATENTS. Within twenty (20) days after such termination, Licensee shall
provide USC with a written inventory of all PRODUCTS currently in its
stock as of the date of termination (the "INVENTORY"). USC shall have
the option to grant to Licensee the privilege of disposing of such
INVENTORY at its normal prices within three (3) months after said
termination. Licensee shall dispose of this INVENTORY only to customers
who had previously purchased PRODUCTS from Licensee during the term of
this Agreement, and in no event shall Licensee sell such INVENTORY to
wholesalers, diverters, jobbers or any other entity which does not sell
at retail exclusively or to anyone else who intends to sell such
INVENTORY at close-out. The disposition of all such INVENTORY, however,
shall be subject to all of the terms and conditions of this Agreement.
After the three (3) month sell-off period, Licensee shall destroy or
return to USC all remaining unsold PRODUCTS, all equipment used in the
manufacture of the PRODUCTS and all packaging and marketing materials,
and shall certify their destruction or return to USC specifying the
number of each destroyed or returned. All royalty obligations, including
any unpaid portions of the minimum royalty, shall be accelerated and
shall become immediately due and payable. In addition, Licensee shall
immediately deliver to USC (i) all materials relating to the PATENTS,
together with all copies thereof, and (ii) all market studies or other
tests or studies conducted by Licensee with respect to the PRODUCTS, all
at no cost whatsoever to USC.
d. LICENSEE acknowledges and agrees that any violation of this Agreement by
Licensee would result in irreparable harm to USC. Accordingly, Licensee
consents and agrees that, if Licensee violates any of the provisions of
this Agreement, USC shall be entitled, in addition to other remedies
available to it, to an injunction to be issued by any court of competent
jurisdiction restraining Licensee from committing or continuing any
violation of this Agreement, without the need for posting any bond or
any other undertaking.
17. NOTICES, REPORTS AND PAYMENTS
Any notice, report or payment permitted or required under this Agreement
shall be in writing, and shall be sent or delivered to the receiving party at
the address set forth below or at such address as either party may from time to
time designate in writing.
9
USC: Office of Technology Licensing
University of Southern California
3716 South Hope Street, Suite 313
Los Angeles, California 90007-4344 (U.S.A.)
Attn: Director
LICENSEE: BioKeys, Inc.
11466 Winding Ridge Drive
San Diego, California 92141
Attn: Nicholas Jon Virca
President & Chief Executive Officer
18. PARAGRAPH HEADINGS
Paragraph headings are for the convenience of this Agreement only and shall
not add to or detract from any of the terms or provisions.
19. SEVERABILITY
If any provision of this Agreement is held invalid under any law applicable
to the parties, SUBLICENSEES and/or assignees, that provision shall be
considered severable and its invalidity shall not affect the remainder of this
Agreement, which shall continue in full force and effect.
20. CONTROLLING LAW, JURISDICTION AND VENUE
This Agreement shall be deemed to be executed and to be performed in the
State of California, and shall be construed in accordance with the laws of the
State of California as to all matters, including but not limited to matters of
validity, construction, effect and performance. In the event of any controversy,
claim or dispute between the parties hereto arising out of or relating to this
agreement, such controversy, claim or dispute may be tried exclusively in the
courts of the State of California or in the United States Federal District Court
for the Central District of California, as either party may elect. Each of the
parties hereby waives any defense of lack of in personam jurisdiction, improper
venue and forum non conveniens, and agrees that service of process of such court
may be made upon each of them by personal delivery or by mailing certified or
registered mail, return receipt requested, to the other party at the address
provided for in Paragraph 17 hereof. Both parties hereby submit to the
jurisdiction of the court so selected, to the exclusion of any other courts
which may have had jurisdiction apart from this Paragraph 20.
10
21. TERM OF THE AGREEMENT
Except as otherwise terminated pursuant to the other provisions of this
OPTION AND LICENSE AGREEMENT, this Agreement shall terminate upon expiration of
the last to expire of the patents or fifteen (15) years from the Effective Date
of this Agreement, whichever is longer.
22. NEGATION OF WARRANTIES
a. Nothing in this Agreement shall be construed as:
i. a warranty or representation by USC as to the validity or scope of
the PATENT and/or PATENT Application; or
ii. a warranty or representation that any PRODUCTS made, used, sold or
otherwise disposed of under any license granted in this Agreement is
or will be free from infringement of patents of third parties; or
iii. an obligation to bring or prosecute actions or suits against third
parties for infringement; or
iv. conferring the rights to use in advertising, publicity or otherwise
any trademark, trade name, or names or any contraction,
abbreviation, simulation or adoption thereof, of USC or Licensee; or
v. any obligation to furnish any know-how not provided.
b. USC MAKES NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE, nor does USC represent that the rights granted
hereunder will result in PRODUCTS that are commercially successful.
c. Licensee further agrees that it will not rely upon technical information
provided by USC and Inventor in developing and manufacturing any
PRODUCTS hereunder, but will independently test, analyze and evaluate
all PRODUCTS prior to manufacture and distribution of such PRODUCTS.
d. UNDER NO CIRCUMSTANCES SHALL USC BE LIABLE TO LICENSEE OR ANY OF ITS
SUBLICENSEES FOR ANY INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR
PUNITIVE DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE AGREEMENT.
NOTWITHSTANDING THE FOREGOING, UNDER NO CIRCUMSTANCE SHALL USC HAVE ANY
CUMULATIVE LIABILITY FOR ANY CLAIM ARISING FROM THIS AGREEMENT IN EXCESS
OF THE TOTAL AMOUNTS PAID BY LICENSEE TO USE UNDER THIS AGREEMENT.
23. INDEMNITY
a. Licensee shall defend, indemnify and hold harmless USC and its trustees,
officers, medical and
11
professional staff, employees and agents and their respective
successors, heirs and assigns (the "Indemnitees"), against all
liabilities, demands, losses, costs, and expenses (including without
limitation attorneys' fees) incurred by or imposed upon the Indemnitees
or any one of them in connection with any claims, suits, actions,
demands or judgments arising out of any theory of liability (including
but not limited to, actions in the form of tort, warrantee, or strict
liability) for death, personal injury, illness, or property damage
arising from Licensee's use, sale, or other disposition of the
PRODUCT(S).
b. Licensee agrees, at its own expense, to provide attorneys reasonably
acceptable to USC to defend against any actions brought or filed against
any party indemnified hereunder with respect to the subject of indemnity
contained herein, whether or not such actions are rightfully brought. To
the extent that any proposed settlement directly affects USC, the
Licensee shall obtain the approval of USC before finally agreeing to
such settlement proposal, which consent shall not be unreasonably
withheld.
24. INSURANCE
a. Not less than thirty (30) days prior to the exercise of the license
phase of this Agreement, Licensee shall at its sole cost and expense,
procure and maintain in effect a comprehensive general liability policy
of insurance in single limit coverage of not less than One Million
Dollars ($1,000,000) per incident and One Million Dollars ($1,000,000)
annual aggregate for death, bodily injury or illness and Two Hundred
Thousand Dollars ($200,000) annual aggregate in property damage. Such
comprehensive general liability insurance shall provide (i) product
liability coverage and (ii) broad form contractual liability coverage
for Licensee's indemnification. If Licensee elects to self-insure all or
part of the limits described above (including deductibles or retention
which are in excess of annual aggregate) such self-insurance program
must be acceptable to USC. Each such policy of insurance shall name USC
as an additional insured and shall provide for not less than thirty (30)
days prior written notice before any cancellation or material change in
coverage shall be effective. A Certificate evidencing the comprehensive
general liability policy herein defined shall be delivered to USC within
ten (10) days of the EFFECTIVE DATE of this agreement. Licensee shall
maintain such comprehensive general liability insurance until such time
as the policy in Paragraph 24.b. or Paragraph 24.c is procured, or until
fifteen (15) years after the term of this Agreement.
b. During such time and in each country where PRODUCT, or any modification
thereof, is utilized in human clinical trials by Licensee or any
SUBLICENSEE, Licensee shall at its sole cost and expense, procure and
maintain in effect a comprehensive general liability policy of insurance
in single limit coverage of not less than Five Million Dollars
($5,000,000) per incident and Five Million Dollars ($5,000,000) annual
aggregate for death, bodily injury, illness or property damage. Such
comprehensive general liability insurance shall provide (i) product
liability coverage and (ii) broad form contractual liability coverage
for Licensee's indemnification. If Licensee elects to self-insure all or
part of the limits described above (including deductibles or retention
which are in excess of $125,000 annual aggregate) such self-insurance
program must be acceptable to USC. Each such policy of insurance shall
name USC as an additional insured and shall provide for not less than
thirty (30) days prior written notice before any cancellation or
material change in coverage shall be effective. A Certificate evidencing
the comprehensive general liability policy herein defined shall be
delivered to USC prior to any manufacture, sale, distribution or
administration to humans. Licensee shall maintain such comprehensive
12
general liability insurance until such time as the policy in Paragraph
24.c is procured, or until fifteen (15) years after the term of this
Agreement.
c. During such time and in each country where PRODUCT, or any modification
thereof, is administered to humans, manufactured or distributed for any
purpose other than for human clinical trials as specified in Paragraph
23.b (including for the purpose of obtaining regulatory approvals) by
Licensee or any SUBLICENSEE, Licensee shall at its sole cost and
expense, procure and maintain in effect a comprehensive general
liability policy of insurance in single limit coverage of not less than
Ten Million Dollars ($10,000,000) per incident and Ten Million Dollars
($10,000,000) annual aggregate for death, bodily injury, illness or
property damage. Such comprehensive general liability insurance shall
provide (i) product liability coverage and (ii) broad form contractual
liability coverage for Licensee's indemnification. If Licensee elects to
self-insure all or part of the limits described above (including
deductibles or retention which are in excess of $250,000 annual
aggregate) such self-insurance program must be acceptable to USC. Each
such policy of insurance shall name USC as an additional insured and
shall provide for not less than thirty (30) days prior written notice
before any cancellation or material change in coverage shall be
effective. A Certificate evidencing the comprehensive general liability
policy herein defined shall be delivered to USC prior to any
manufacture, sale, distribution or administration to humans. Licensee
shall maintain such comprehensive general liability insurance during the
period that the PRODUCT or any modification thereof is being
manufactured, sold, distributed or administered to humans by the
Licensee or its SUBLICENSEES and a reasonable period thereafter which in
no event shall be less than fifteen (15) years.
d. In the event that Licensee does not maintain such insurance, but is
self-insured, or carries a substantial self-retention, USC may grant
permission for such self-insurance only if, in the sole discretion of
USC, the net worth, assets and earnings of the Licensee are deemed
sufficient to protect USC's economic interests in the event of claims,
liability, demands, damages, expenses and losses from death, personal
injury, illness, or property damage.
e. The minimum amounts of insurance coverage required under this Paragraph
(subparts 24.a., 24.b., and 24.c.) shall not be construed to create a
limit of Licensee's liability with respect to its indemnification in
Paragraph 23 or any other provision of this Agreement.
f. By SUBLICENSEES
As a condition precedent to a grant of permission by USC for Licensee to
sublicense the PATENT rights herein, the prospective SUBLICENSEE shall agree to
indemnify Licensee and USC to the same extent and degree as Licensee has agreed
to indemnify USC herein. Such SUBLICENSEE shall also provide insurance identical
in coverage and amount to that required of Licensee in subparagraph b, above,
naming both Licensee and USC as additional insured. A Certificate evidencing the
comprehensive general liability policy shall be delivered to USC prior to USC's
giving permission for such sublicensing agreement and a Certificate evidencing
the product liability coverage shall be delivered prior to first manufacture of
any PRODUCTS by the SUBLICENSEE. In the event a prospective SUBLICENSEE does not
maintain such insurance, but is self-insured, or carries a substantial
self-retention, USC may grant permission for such sublicense only if, in the
sole discretion of USC, the net worth, assets and earnings of such prospective
SUBLICENSEE are deemed sufficient to
13
protect USC's economic interests in the event of claims, liability, demands,
damages, expenses and losses from death, personal injury, illness, or property
damage.
25. ATTORNEYS' FEES
In any action on or concerning this Agreement, the prevailing party shall be
awarded its reasonable attorneys' fees, costs and necessary disbursements, to be
paid by the nonprevailing party.
26. PRODUCT DEVELOPMENT
If Licensee exercises its option, Licensee shall use diligent efforts to
test and develop the PRODUCT for commercial purposes throughout the world. On or
before January 1 of each year during the term of this Agreement, commencing on
the EFFECTIVE DATE of this Agreement, Licensee shall submit to USC a report
detailing its research, regulatory approval, marketing and product development
objectives the coming year as well as the research, regulatory approval,
marketing and development activities which Licensee undertook during the
preceding year. The reports shall identify specific future milestones
(regulatory approval and product development) and information demonstrating that
the Licensee is providing sufficient financial and manpower resources to
evidence its use of reasonable efforts. If USC desires to know the status of the
development of PRODUCTS before January 1, USC shall make a request in writing
for the status and Licensee shall provide, within fifteen (15) days, a written
summary of the status of such development of PRODUCT(S). Within six (6) months
after the signing of this Agreement and each two (2) years thereafter, a
representative from the USC Technology Licensing Office, at Licensee's expense
(including transportation, and, if appropriate, lodging and meals), shall visit
the manufacturing and marketing facilities of Licensee and be presented with an
in-depth updating of the manufacturing capability and marketing network of
Licensee.
27. EXPORT CONTROLS
It is understood that USC is subject to United States laws and regulations
controlling the export of technical data, computer software, laboratory
prototypes and other commodities (such laws include the Arms Export Control Act,
as amended and the Export Administration Act), and that its obligations
hereunder are contingent on compliance with applicable United States export laws
and regulations. The transfer of certain technical data and commodities by the
Licensee may require a license from the cognizant agency of the United States
Government and/or written assurances by Licensee that Licensee shall not export
data or commodities to certain foreign countries without prior approval of such
agency. USC neither represents that a license shall not be required nor that, if
required, it shall be issued. Licensee shall not engage in any activity in
connection with this Agreement that is in violation of any applicable U.S. law.
28. INDEPENDENT CONTRACTOR
14
In rendering performances under this Agreement, Licensee will function
solely as an independent contractor and not as agent, partner, employee or joint
venturer with USC. Nothing in this Agreement shall be deemed or construed to
create the relationship of principal and agent, or of partnership or joint
venture, and neither party shall hold itself out as an agent, legal
representative, partner, subsidiary, joint venturer, servant or employee of the
other. Neither party nor any officer, employee, agent or representative thereof
shall, in any event, have any right, collectively or individually, to bind the
other party, to make any representations or warranties, to accept service of
process, to receive notice or to perform any act or thing on behalf of the other
party, except as expressly authorized under this Agreement or in writing by such
other party in its sole discretion.
29. WAIVER
No waiver by either party of any default or breach shall be deemed as a
waiver of prior or subsequent default or breach of the same or other provisions
of this Agreement.
30. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof. No amendment, modification, extension or
cancellation of this Agreement shall be binding on the parties unless mutually
agreed to and executed in writing by each of the parties.
UNIVERSITY OF SOUTHERN CALIFORNIA BIOKEYS, INC.
/s/ DENNIS F. DOUGHERTY /s/ NICHOLAS JON VIRCA
- --------------------------------- ----------------------------------------
Dennis F. Dougherty Nicholas Jon Virca
Senior Vice President, President & Chief Executive Officer
Administration
8/17/00 8/17/00
- --------------------------------- ----------------------------------------
(Date) (Date)
15
APPENDIX A
USC# TITLE SERIAL # DATE PATENT # COUNTRY
- -----------------------------------------------------------------------------------------------------------
2227 Preparation and Use of Thiophosphonates 369,468 6/21/89 5,072,032 United States
and Thio-Analogues Of Phosphonoformic
Acid
2227A Preparation and Use of 768,155 9/30/91 5,183,812 United States
Thiophosphonates and Thio-Analogues
Of Phosphonoformic Acid
2633 Improved Preparations of Thiophosphites 09/304,252 5/3/99 United States
and Thiophosphonates
2633 Improved Preparations of Thiophosphites 5/3/00 PCT
and Thiophosphonates
2788A Preparation and Use of Alpha-Keto 09/352,236 7/13/99 United States
Bisphosphonates
2789 Preparation and Use of Sulfur-Containing 60/092,560 7/13/98 United States
Phosphonoformate Analogues
2871 Synthesis and Use Of Lipophilic 60/125,805 3/23/99 United States
Phosphonocarboxylate Derivatives
16
