SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/SB
/X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDING DECEMBER 31, 2001
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________TO ___________________
COMMISSION FILE NO. 0 - 33219
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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
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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)
Check whether the issuer (1) filed all reports required to be fled by Section 13
or 15(D) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to ITEM 405 OF
REGULATION S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definite proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based upon the closing price of the Common Stock listed in the "Pink
Sheets" on December 31, 2001, is $21,118,720.
The total number of shares outstanding of each of the Registrants common stock,
as of December 31, 2001 is 15,005,191.
DOCUMENTS INCORPORATED BY REFERENCE
Certain Exhibits filed with the Registrant's prior registration statement under
the Securities Exchange Act of 1933 are incorporated herein by reference into
Part IV of this Report.
2
TABLE OF CONTENTS
PART I
PAGE
Item 1. Description of Business................................................................................4
Item 2. Description of Properties.............................................................................20
Item 3. Legal Proceedings.....................................................................................20
Item 4. Submission of Matters to a Vote of Security Holders...................................................21
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters............................22
Item 6. Management's Discussion and Analysis of Financial Condition and Results of
Operations..............................................................................23
Item 6A. Quantitative and Qualitative Disclosures about Market Risk; Risk Factors..............................28
Item 7. Financial Statements and Supplementary Data...........................................................37
Item 8. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure..............................................................................37
PART III
Item 9. Directors and Executive Officers of the Registrant....................................................38
Item 10. Executive Compensation................................................................................41
Item 11. Security Ownership of Certain Beneficial Owners and Management........................................41
Item 12. Certain Relationships and Related Transactions........................................................43
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 10K/SB....................................45
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FORWARD LOOKING STATEMENTS AND RISK FACTORS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, which are
subject to the "safe harbor" created by those sections. These forward-looking
statements include but are not limited to statements about our strategy, our
research and development efforts, our potential products, our license rights and
the sufficiency and anticipated sources of our cash and other resources.
These forward-looking statements are generally identified by words such
as "expect," "anticipate," "intend," "believe," "hope," "assume," "estimate,"
"plan," "will" and other similar words and expressions. Discussions containing
these forward-looking statements may be found in "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as at other locations in this report. These forward-looking statements
involve risks and uncertainties that could cause our actual results to differ
materially from those contemplated in the forward-looking statements. We
undertake no obligation to publicly release any revisions to the forward-looking
statements or to reflect events or circumstances after the date of this
document. The risks set forth under "Risk Factors" in Item 6, among other
things, should be considered in evaluating our prospects and future financial
performance.
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY BACKGROUND
Biokeys Pharmaceuticals, Inc. (formerly known as BioQuest, 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 a merger transaction 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.
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 anticancer 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.
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COMPANY TECHNOLOGIES UNDER DEVELOPMENT
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We have six potential drug products in development:
PRODUCT LINE FOCUS APPLICATION
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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
COFACTOR
CoFactor (5,10-methylenetetrahydrofolate) is a patented new drug which
affects 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. In 2001, he earned $70,000; in
2002 he will receive $100,000. 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.
-5-
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;
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, and approved in December 2001 for
Phase II trials for front-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 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 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,
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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 effective, at even very low concentrations, against human ovarian, breast,
lung and head/neck cancers, and against leukemias and lymphomas. Its potency is
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 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
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showed rapidly induced immunodeficiency (profound reduction in CD-4 positive
cell countswithin 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 is Bastrop, Texas under the supervision of Dr. Jagan Sastry.
Rhesus monkeys were used along with SHIV developed by research collaborators,
Dr. Bill Narayan in Kansas and Dr. Norm Letvin in Massachusetts. (M.D.
Anderson's SHIV research work was supported in part by the Company.)
In the first trial, five test animals were vaccinated with the
antibody-negative immunity inducing agent, EradicAide, consisting of a peptide
cocktail with complete Freund's adjuvant (primary immunization) followed by two
booster immunizations with incomplete Freund's adjuvant and peptide cocktail.
Animals were then challenged with live SHIV. Compared with 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 form 0 to 10% with one animal showing a
maximum 30% reduction. Results of the study were published in Vaccine Vol. 20;
2002, pages 813-825.
Four of the animals from the first trial have been followed for over
three years. At 180 weeks, the treated monkeys have undetectable levels of
virus.
A subsequent trial of EradicAide was conducted during 2001, consisting
of a larger number of monkeys (18 total) divided into a control group, a group
treated with EradicAide peptides delivered with incomplete Freunds adjuvant (IV)
and a group treated with EradicAid peptides delivered with autologous dendrite
cells. The animals were challenged with SHIV virus. Both groups of treated
animals began showing a drop in viral load at four weeks post challenge and were
maintaining viral control at 29 weeks, verifying previous data in the
five-monkey trial.
These data demonstrate scientific proof of principle for the
cell-mediated immunity strategy. 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, upon completion of toxicology and
pharmaco-kinetic files and a manufacturing file as part of its IND submission.
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
United States National Institutes of Health (NIH), indicate that at least two
cell surface receptors are involved in the mechanism for HIV binding and immune
cell penetration. One is the CD-4 receptor,
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largely found on T helper cells. Members of a family of chemokine receptors
represent the second receptor, which has only recently been described. 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 chemokine receptors, thus initiating the
infection process.
Recent research at M.D. Anderson Cancer Center and the Institute of
Mediterranean Research and Nutrition in Marseilles has described a further
mechanism for HIV infection regarding the CD4 and chemokine receptors. HIV
boards a lipid raft that keeps it afloat as it searches for a way into the cell.
The raft is made up of glycosphingolipids "GSL", a group of
carbohydrate-containing fatty acid derivatives. HIV binds to the CD4 receptor
and then to the GSL in the lipid rafts and floats on the lipid rafts until it
finds an appropriate chemokine receptor. The coreceptor then displaces the lipid
raft and begins the membrane fusion process whereby HIV gains entry to the cell.
The lipid raft interacts with the HIV gp120 envelope glycoprotein in the
presence of CD4.
M.D. Anderson researchers believe that the BlockAide/CR, which is
structurally similar to a portion of the V3 Loop present in the outer coat
protein of HIV, mimics the V3 Loop and, by interacting with the lipid raft on
immune system cells, prevents the virus from binding to chemokine receptors and
subsequently penetrating the cell. M.D. Anderson is credited with discovering
the inhibitory effects of BlockAide/CR, and likens the V3 Loop to a key. When
HIV, using the V3 Loop as a key, tries to enter a human immune cell via the
lipid raft (the keyhole), the virus is unsuccessful because BlockAide/CR already
blocks the entrance keyhole.
In addition to blocking infection, it is believed that BlockAide/CR can
effectively block syncytium formation and prevent or limit the T-cell loss that
inevitably 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 syncytia. The syncytia quickly die,
killing the incorporated T-cells and reducing the disease-fighting capacity of
the human immune system.
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.
In an animal trial at M/D. Anderson Cancer Center, rhesus monkeys were
treated with a daily injection of BlockAide/CR to determine effectiveness of the
drug against SHIV virus. Viral load reached undetectable levels at approximately
two weeks of treatment.
The Company believes that positive results in current testing warrant
additional studies in human clinical trials. It is believed that the injection
of BlockAide/CR into an HIV-infected individual would block the spread of
infection from outside the cell in a way that would be much less toxic to the
patient than the use of current HAART (Highly Active Antireteoviral Therapy)
therapy. Assuming adequate funding, the Company intends to proceed with
preparations from
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human testing under the FDA's Fast Track Program, under a physician sponsored
IND, or Corporate IND, utilizing cGMP materials, which have already been
prepared for human use.
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 must still be
tested in animals to gauge effectiveness and toxicity before progressing to
human trials, in the same manner as described above for BlockAide/CR. If proven
safe and effective in pre-clinical 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 their HAART or as a primary therapy for newly infected
individuals.
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.
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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
is 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. If positive
research results continue, 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
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ANTICANCER 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, 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.
-11-
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 a need 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 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
-12-
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 increase to 40 million in 2001. HIV
infections are not being treated in the third world, to even the smallest
extent, because of the cost and the ability to administer complex therapy is
difficult outside a medical sitting. 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 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.
-13-
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 6A 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, including initial clinical
trial supply of BlockAide/CR by multiple peptide systems, located in San Diego,
California.
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 6A 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
-14-
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 prevention. 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 of Common Stock with a value
of $1,000,000 due to M.D. Anderson upon the enrollment of the first patient in
the first Phase I trial of any product that utilizes licensed subject matter.
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 our 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 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 from all sublicenses and assignments. A prepaid
royalty of $100,000 is due upon market approval of a New Drug Application (NDA)
by the FDA. There is also an annual minimum royalty on each product: $25,000 on
the first anniversary of the Agreement; $75,000 on the second anniversary; and
$125,000 for each succeeding year up to the date of expiration of the last
patent. An additional licence fee of $100,000 is also payable upon the first
Company's public offering.
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
-15-
administered after HIV infection as a therapeutic. This required 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 December 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-
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
-16-
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 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
17
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.
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.
18
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 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
19
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 2000, the Company incurred expenses of $1,017,198, on research
and development activities. The Company has incurred expenses of $946,419 for
research and development during the twelve months ending December 31, 2001.
ITEM 2. DESCRIPTION OF PROPERTIES
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 an annual
rental of $34,800 per year.
The Company also has an office handling administrative and finance
matters, at 333 N. Sam Houston Parkway, Suite 1035, Houston, Texas, which
consists of approximately 800 square feet. The lease on this office expired as
of October 31, 2001, and the Company presently has a month-to-month lease
arrangement at $19.00 per square foot. We believe the Company will easily be
able to find comparable space should the Company need 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 3. LEGAL PROCEEDINGS
The Company was a defendant in an action entitled KARO BIO USA, INC.
VS. BIOKEYS PHARMACEUTICALS, INC., commenced in the United States District Court
for the District of
20
Delaware on July 3, 2001. The action alleged infringement of Karo Bio's federal
trademark registration for the name "Biokey," based upon a claimed prior use in
connection with a particular Karo Bio product, and the use of "Biokeys" in our
Company's name. The plaintiff sought to prevent us from continuing to use
"Biokeys" as part of our name, as well as an unspecified amount of damages.
The action was settled and discontinued in March, 2002 without monetary
liability by either party. The Company agreed to a cessation of the commercial
use of "Biokeys", with certain permitted exceptions through a period of
transition. However, the Company will retain the use of its corporate name,
"Biokeys Pharmaceuticals, Inc. " We believe that the settlement with Karo Bio
will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of securities holders, through
solicitation of proxies or otherwise, during the fourth quarter of 2001.
21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK 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 extremely limited. All prices shown have been adjusted
to reflect a 1 for 1.989949857 reverse stock split in 2000. The Company is
presently in the process of reapplying for quotation privileges on the OTC
Bulletin Board.
The following represents high and low prices in the Pink Sheets during
the last 24 months:
QUARTER ENDING HIGH LOW
-------------- ---- ---
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
December 31, 2001 $3.30 $1.40
HOLDERS
The number of record and beneficial holders of our Common Stock as of
December 31, 2001 is approximately 600.
DIVIDENDS
The Company has never paid cash dividends on its common stock and does
not expect to pay any cash dividends on its common stock in the foreseeable
future.
TRANSFER AGENT
22
Our transfer agent is Interwest Transfer Co., Inc., 1981 East 4800
South, Salt Lake City, UT 84117.
ITEM 6. 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
$24,043,342 as of December 31, 2001. Our expenses from inception have related
to costs incurred in research activities for the development of our drug
candidates, administrative expenses required to support these efforts and,
more recently, substantial charges for amortization of goodwill and an
impairment loss resulting in a write off of goodwill totalling $15,205,675.
The goodwill resulted from the October 2000 merger with Biokeys, Inc. We
expect losses to continue for the near future, and such losses will likely
increase as we approach human clinical trials 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."
CRITICAL ACCOUNTING POLICIES
----------------------------
The most significant accounting estimates relate to valuing equity
transactions. The value assigned to stock warrants granted to non-employees are
accounted for in accordance with SFAS No. 123 and Emerging Issues Task Force
("EITF") 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services,"
which require that such costs be measured at the end of each reporting period to
account for changes in the fair value of the Company's common stock until the
options are vested.
Preferred stock is valued at the liquidation value of $1,000 per share.
Common Stock is valued using the market price of common stock on the measurement
date as defined in EITF 96-18. Common stock is valued using the market price of
common stock on the measurement date as defined in EITF 96-18. The Company
values warrants using the Black-Scholes pricing model. The model considers a
number of factors, including the market price and expected volitillity of our
common stock at the date of measurement or re-measurement. The expense related
to all equity transactions is amortized over the vesting period of the related
equity instruments.
23
The amount of compensation expense we record in future periods could
fluctuate significantly from period to period as a result of: (a) the period
re-measurement of equity instruments from non-employees principally as a result
of fluctuations in the market price of our common stock; (b) the method and
period over which the value is amortized as charges to operations; (c)
additional equity instruments granted; and (d) subsequent forfeitures or
cancellations of unvested instruments.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs consist of costs incurred for
company-sponsored as well as collaborative research and development activities.
These costs include direct and research- related overhead expenses and are
expensed as incurred. Patent costs and technology license fees for technologies
that are utilized in research and development and have no alternative future use
are expensed when incurred.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
The Company continued its research and development efforts in the year
ended December 31, 2001, and no revenues were received. The Company earned
interest income of $31,690 in 2001, which is a decrease from $40,922 earned in
the prior year, as interest-earning funds received in the Company's 2000
overseas private placement were applied to operations.
During 2001, we intensified our research and development efforts in
connection with our EradicAide and BlockAide products for HIV/AIDS. We also
funded research and development efforts in connection with CoFactor and Thiovir,
and have obtained FDA approval of our IND application for undertaking U.S.
clinical trials for CoFactor. We incurred total research and development
expenses of $946,419 in 2001, down slightly from $1,017,198 incurred in 2000,
reflecting research grants made by the Company in late 2000 which provided for
"front-loaded" payments for ongoing research projects extending into 2001 and
beyond.
General and Administrative expenses increased from $793,970 in 2000 to
$2,308,130 in 2001, primarily as a result of additional costs and expenses
related to fees paid to the Company's accountants, investment and financial
advisers, attorneys and other consultants. A significant portion of the increase
related to expanded activities after the merger and to the Company's efforts to
register as a reporting company under the Securities Exchange Act of 1934.
Depreciation and amortization amounted to $7,672,112 in 2001, primarily
reflecting amortization of goodwill resulting from the October 2000 merger with
Biokeys, Inc., at the rate of $1,900,709 for each of the four calendar quarters
during the year. This compares with a goodwill amortization charge of only
$1,900,709 for the last quarter of 2000, following the merger in October 2000.
Through December 31, 2001, the Company had not been able to raise
sufficient capital to ensure future funding of its research and development.
Consequently, the Company reviewed the carrying value of the goodwill
associated with the acquisition of Biokeys, Inc. for impairment. The
24
Company reduced its carrying value to zero through a noncash charge of
$5,702,130 on December 31, 2001, eliminating further amortization for
goodwill in 2002.
Interest expense decreased to $12,019 in 2001 from $23,497 in 2000, due
to the conversion into Common Stock of the Company's Subordinated Convertible
Notes issued in 2000, and the resulting reduction in interest.
As a result of the substantial increase in amortization of goodwill and
the non-cash impairment loss, as well as the other factors described above, the
Company's net loss increased from $(3,701,084) in 2000 to $(16,339,120) in 2001,
and the loss per share increased from $(0.44) per share in 2000 to $(1.12) per
share in 2001.
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 substantially from $351,446 in 1999 to $1,017,198 in 2000.
General and Administrative expenses increased by approximately 12% from
$708,562 in 1999 to $793,970 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 primarily 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 was 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.
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
-------------------------------
25
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, 2001, cash and cash equivalents totaled $164,476,
compared with $467,878 plus a $1,016,320 certificate of deposit on December 31,
2000.
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, since the FDA has approved our IND. 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 $3 and $4 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, and will require an
additional $2 million if initial human trials are undertaken.
We raised approximately $450,000 through the issuance of short-term
notes and warrants in October and December, 2001. We believe our current
resources are sufficient to fund our general and administrative overhead until
the end of May 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 sufficient funding is available, we
may add up to two additional 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 obtaining additional capital
will continue at least until the Company is able to begin marketing its new
technologies. The Company's future capital requirements and the adequacy of its
financing will depend upon numerous factors, including the successful
commercialization of the Company's drug candidates, progress in its product
development efforts, progress with preclinical studies and clinical trials,
government grants, the cost and timing of production arrangements, the
development of effective sales and marketing activities, the cost of filing,
prosecuting, defending and enforcing intellectual property rights, competing
technological and market developments, and the development of strategic
alliances for the marketing of its products.
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.
26
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.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS (SFAS No. 141).
SFAS No. 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. Adoption of SFAS No. 141 had no
material impact on the Company.
The FASB has also issued Statement of Financial Accounting Standards
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS No. 142), which will be
effective for the Company as of January 1, 2002. SFAS No. 142 requires that
goodwill and other intangible assets with indefinite lives no longer be
amortized. SFAS No. 142 further requires that the fair value of goodwill and
other intangible assets with indefinite lives be tested for impairment upon
adoption of this statement, annually and upon the occurrence of certain events
and be written down to fair value if considered impaired. Adoption of SFAS No.
142 will result in the elimination of annual amortization expense related to
goodwill. The Company does not expect the adoption of SFAS No. 142 will have a
material impact on its business because, as of December 31, 2001, it has no
goodwill or other intangible assets with indefinite lives.
The FASB issued Statement of Financial Accounting Standards No. 143,
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS (SFAS No. 143), which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This statement applies to all entities that have legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development, or normal use of the assets. SFAS No.
143 will be effective for the Company as of January 1, 2003. The Company does
not expect the adoption of SFAS No. 143 will have a significant impact on its
financial condition or results of operations.
The FASB issued Statement of Financial Accounting Standards No. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (SFAS No. 144),
which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, it retains many of the fundamental provisions of that statement.
SFAS No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL, AND
INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of
a business. SFAS No. 144 will be effective for the Company as of January 1,
2002. The Company does not expect the adoption of SFAS No. 144 will have a
significant impact on its financial condition or results of operations.
27
ITEM 6A. 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 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.
RISK FACTORS
------------
THERE IS A SUBSTANTIAL ACCUMULATED DEFICIT AND A WORKING CAPITAL DEFICIENCY; THE
COMPANY'S AUDITED FINANCIAL STATEMENTS ARE SUBJECT TO A GOING CONCERN
UNCERTAINTY.
The Company had an accumulated deficit of $24,043,342 as of December
31, 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. The Company has had limited working capital for its
product development and other activities, and had a working capital deficiency
of $(686,151) as of December 31, 2001. The Company's audited financial
statements have been prepared on the assumption that the Company will continue
as a going concern, and are presented subject to the uncertainty, expressed in
the report of the Company's auditors, that the Company's recurring losses from
operations raise substantial doubt as to the Company's ability to continue as a
going concern. (See the Company's Consolidated Financial Statements, included
with this Annual Report.)
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. The
Company has funded its operations primarily through the sale of Company
Securities. We cannot assure you that we will be able to consummate any future
financing
28
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.
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.
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
29
and other approval procedures mandated by the FDA and foreign regulatory
authorities. Various federal and foreign statutes and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping and
marketing of pharmaceutical products. The process of obtaining these approvals
and the subsequent compliance with appropriate U.S. and foreign statutes and
regulations are time-consuming and require the expenditure of substantial
resources. In addition, these requirements and processes vary widely from
country to country.
Among the uncertainties and risks of the FDA approval process are the
following: (i) the possibility that studies and clinical trials will fail to
prove the safety and efficacy of the drug, or that any demonstrated efficacy
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.
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.
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
30
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, Xanodyne, which is a new biotech company which acquired rights to
leucovorin from Immuney corporation 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.
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.
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.
31
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.
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, 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 DOES NOT HAVE ITS OWN RESEARCH FACILITIES AND WILL BE DEPENDENT ON
THIRD PARTIES FOR DRUG DEVELOPMENT.
The Company does not have its own research and development facilities
and engages consultants and independent contract research organizations to
design and conduct clinical trials in connection with the development of a drug.
As a result, these important aspects of a drug's development will be outside the
direct control of the Company. In addition, there can be no assurance that such
third parties will perform all of their obligations under arrangements with the
32
Company or will perform those obligations satisfactorily.
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.
THE COMPANY'S SUCCESS IS DEPENDENT ON ITS KEY PERSONNEL.
The Company is dependent on a small management group and on independent
researchers, some of whom are inventors of the patents licensed to the Company
for core technologies and drugs developed at M.D. Anderson and USC. Scientific
personnel may from time to time serve as consultants to the Company and may
devote a portion of their time to the Company's business, as well as continue to
devote substantial time to the furtherance of the Company's sponsored research
at M.D. Anderson, USC and other affiliated institutions as may be agreed to in
the future, but such personnel are not employees of the Company and are not
bound under written employment agreements. The services of such persons are
important to the Company, and the loss of any of these services may adversely
affect the Company.
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.
33
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 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.
THE COMPANY HAS NO MANUFACTURING FACILITIES.
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.
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
34
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 SHARES OF PREFERRED STOCK IN THE FUTURE MAY AFFECT THE 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 be to (i) restrict future
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 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.
35
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 December 31, 2001, there were outstanding options and warrants
for the purchase of an aggregate of 3,468,094 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 holders. Assuming that all options and warrants were exercised and that all
of the Series A Preferred Stock was converted, a total of 4,268,094 additional
shares of Common Stock would be issued, for which the Company would receive
aggregate cash proceeds of approximately $4,903,595. After various holding
period requirements under Rule 144 of the Securities and Exchange Commission are
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.
A SUBSTANTIAL PORTION OF THE COMPANY'S OUTSTANDING COMMON STOCK MAY BECOME
AVAILABLE FOR PUBLIC SALE UNDER RULE 144 IN THE FUTURE.
A substantial portion of the Company's outstanding shares of Common
Stock, including certain shares issues in the merger with Biokeys, Inc. may
become available for public sale in the future under Rule 144 of the Securities
and Exchange Commission, after the owners of such shares satisfy the holding
period and other requirements of Rule 144. Future sales of significant numbers
of shares of Common Stock could adversely affect the prevailing market price of
the Common Stock and could also impair the Company's ability to raise capital
through subsequent offerings of securities.
36
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements for the years ended
December 31, 2001 and 2000 are incorporated into this report and are attached
in a separate section following Part IV of this document. They include:
o Independent Auditor's Report dated April 10, 2002
o Consolidated Balance Sheets
o Consolidated Statements of Operations
o Consolidated Statements of Shareholders' Equity (Deficit)
o Consolidated Statements of Cash Flow
o Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
37
PART III
--------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 members of the board of directors and executive officers of each of
Biokeys Pharmaceuticals, Inc. and Biokeys, Inc., and their respective positions
and ages as of December 31, 2001, are as follows:
NAME AGE POSITION
- -----------------------------------------------------------------------------------------------------------------
Louis R. Reif 78 Chairman, Chief Executive Officer and
Member of the Board of Directors of Biokeys
Pharmaceuticals, Inc.; Member of the Board
of Directors and Secretary of Biokeys, Inc.
Nicholas Jon Virca 54 President, Chief Executive Officer and
Member of the Board of Directors of Biokeys,
Inc.
Warren C. Lau 48 President, Chief Financial Officer and
Member of the Board of Directors of Biokeys
Pharmaceuticals, Inc.; Chief Financial Officer
of Biokeys, Inc.
M. Ross Johnson, Ph.D. 56 Chairman and Member of the Board of
Directors of Biokeys, Inc.
Francis E. O'Donnell, Jr. M.D. 52 Member of the Board of Directors of Biokeys,
Inc.
Robert D. Whitworth 48 Member of the Board of Directors 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
38
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
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
39
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
Society for Testing and Materials and the International Standards Association.
Mr. Whitworth holds a B.S. degree in Chemistry from Southern Methodist
University.
KEY CONSULTANT
The Company also utilizes the consulting services of Chris Chapman,
M.D., who advises the Company on planning, preparation and implementation of the
Company's clinical trials.
CHRIS CHAPMAN, M.D. (MEDICAL DIRECTOR) is a consultant to the
pharmaceutical industry; he is President of Chapman Pharmaceutical Consulting.
Prior to starting his consulting practice, Dr. Chapman was Executive Director,
Medical Affairs, Quintiles Consulting and a founding Co-Director of Quintiles
BRI (QBRI) Medical Affairs, Drug Safety and Medical Writing Departments, where
he served from 1995 to 1999. At Quintiles, he developed a team of medical
professionals, including Board-certified physicians in Infectious Disease,
Internal Medicine, Cardiology, Allergy- Immunology, and Neurology to spearhead
clinical activities with a focus toward FDA drug approvals. Dr. Chapman was
responsible for overseeing the work of other physicians on clinical trials, the
domestic and international Serious Adverse Event Database, and the departments
performing adverse event coding and medical writing for a wide range of clinical
trial documents. Prior to Quintiles, Dr. Chapman served as Medical
Director/Safety Officer for Regeneration Pharmaceuticals, Inc. Dr. Chapman
received his M.D. degree from Georgetown University in Washington, D.C., where
he completed his internship in Internal Medicine, a residency in Anesthesiology,
and a fellowship in cardiovascular and Obstetric Anesthesiology. He is currently
a critical care physician on the staff at Doctor's Community Hospital, Lanham,
Maryland. As a consultant to the pharmaceutical industry, Dr. Chapman has been
instrumental in achieving FDA approval of many drugs including Corolopam(R),
Agrylin(TM), Zyvox(R), Arava(TM), and Integrilin(R). He is a Diplomat, National
Board of Medical Examiners, and a member of the American Medical Association,
American Society of Anesthesiologists and Academy of Pharmaceutical Physicians.
40
ITEM 10. 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, 2001:
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 2001 124,000 -0- -0- -0- -0- -0- -0-
President and CEO 2000 30,000(1)
Biokeys, Inc. 1999
Warren C. Lau 2001 114,000 -0- -0- -0- -0- -0-
President 2000 114,000
Biokeys 1999 114,000 5,000
Pharmaceuticals,
Inc.,
CFO, Biokeys
Pharmaceuticals,
Inc.
Louis R. Reif (2) -0- -0- -0- -0- -0- -0- -0- -0-
CEO and
Chairman, Biokeys
Pharmaceuticals,
Inc.
- ----------
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.
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 among other things. 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 $124,000 per year.
ITEM 11. 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 December
31, 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.)
-41-
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 2000.
Name and Address of Beneficial Owners Number of Shares Percent of Class
- ------------------------------------- ---------------- ----------------
Louis R. Reif 201,0101 1.35%
c/o Biokeys Pharmaceuticals, Inc.
333 N. Sam Houston Pkwy, Suite 1035
Houston, Texas 77060
Warren C. Lau 885,7972 5.94%
c/o Biokeys Pharmaceuticals, Inc.
333 N. Sam Houston Pkwy, Suite 1035
Houston, Texas 77060
Nicholas Jon Virca 476,6933 3.20%
c/o Biokeys Pharmaceuticals, Inc.
9948 Hibert Street, Suite 100
San Diego, CA 92131
Robert D. Whitworth 50,205 0.34%
c/o Biokeys Pharmaceuticals, Inc.
333 N. Sam Houston Pkwy, Suite 1035
Houston, Texas 77060
Francis E. O'Donnell, Jr., M.D. 1,323,6464 8.88%
709 The Hamptons Lane
Town & Country, Missouri 63017
Thomas DePetrillo 957,9225 6.57%
988 Centerville Road
Warwick, Rhode Island 02886
Matthew Balk 976,2756 6.69%
245 Park Avenue, 44th Floor
New York, NY 10167
- --------
(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.
(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.
-42-
Name and Address of Beneficial Owners Number of Shares Percent of Class
- ------------------------------------- ---------------- ----------------
M. Ross Johnson, Ph.D. 532,538(7) 3.50%
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 3,469,889 23.12%
Company (including the directors and
executive officers of Biokeys, Inc.) as a
group (6 persons)
ITEM 12. 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 $124,000.
(See Item 10 above).
Louis R. Reif, a founder, stockholder, officer and director of Biokeys
Pharmaceuticals, Inc., is not compensated, 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, 2001.
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 2000 merger arrangements
with Biokeys, Inc., for which the Company issued 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
- --------
(7) Represents currently exercisable warrants.
-43-
Agreement. The Incentive Warrants were not initially assigned to specific
individuals, but were issued to the Company's directors, and held by its counsel
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
December 31, 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
December 31, 2001. In late March 2002, the Board of Directors determined that
the Incentive Warrants should not be granted to any individuals for services,
but should instead be assigned to several investors who had offered to exercise
such warrants for cash, as a means of generating additional working capital for
the Company. All of the Incentive Warrants were exercised in March 2002 and are
no longer outstanding.
-44-
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-KSB
(a) The following documents are filed as part of this report of Form
10-KSB:
1. Financial Statements - See Financial Statements and
Supplementary Data in Item 7 of this report on Form 10KSB.
2. Financial Statement Schedules - None
3. The following Exhibits are incorporated by reference pursuant
to Rule 12b-23 of the Securities and Exchange Commission:
Exhibit DESCRIPTION
Number
- --------------------------------------------------------------------------------
2.1 o Agreement and Plan of Merger dated May 19, 2000 among BioQuest, Inc.;
BioQuest Acquisition Corp.; and Biokeys, Inc.
3.1 o Certificate of Amendment of Certificate of Incorporation of BioQuest, Inc. -
October 12, 2000
3.2 o Certificate of Amendment of Certificate of Incorporation of BioQuest, Inc. -
October 12, 2000
3.3 o Certificate of Merger of BioQuest Acquisition Corp. into Biokeys, Inc. -
October 12, 2000
3.4 o Certificate of Incorporation of BioQuest Acquisition Corp. - May 19, 2000
3.6 o Amended and Restated Bylaws of Biokeys Pharmaceuticals, Inc.
4.1 o 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 o 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)
-45-
10.6 o Employment Agreement with Warren C. Lau
11.1 o Statement Regarding Computation of Per Share Earnings
21.1 o Subsidiaries of the Registrant
24.1 o Powers of Attorney (included on signature pages)
o Filed with Form 10-SB (October 2, 2001)
* Refiled with amendment on Form 10-SB/A (January 11, 2002)
-46-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
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
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
/s/ LOUIS R. REIF Director April 15, 2002
-----------------------------
Louis R. Reif
/s/ ROBERT D. WHITWORTH Director April 15, 2002
-----------------------------
Robert D. Whitworth
/s/ WARREN C. LAU Director April 15, 2002
-----------------------------
Warren C. Lau
-47-
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Financial Statements
December 31, 2001 and 2000
(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 (a development stage enterprise) (the
Company) as of December 31, 2001 and 2000, 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, 2001. 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 (a development stage enterprise) as of
December 31, 2001 and 2000, 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, 2001, 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 12 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 12. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Houston, Texas
April 10, 2002
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Balance Sheets
DECEMBER 31,
------------------------------
2001 2000
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 164,476 467,878
Certificate of deposit -- 1,016,330
Advances to employees 29,872 10,500
Prepaid expenses -- 71,624
Note receivable - related party (note 9) 35,993 --
------------ ------------
Total current assets 230,341 1,566,332
Property and equipment, net (note 4) 13,612 6,356
Goodwill, net of accumulated amortization of $1,900,709 in 2000 -- 13,304,966
Other assets 34,053 1,180
------------ ------------
Total assets $ 278,006 14,878,834
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 430,216 67,537
Accrued salary and related taxes 303,837 116,034
Accrued dividends payable 128,000 85,000
Notes payable (note 5) 54,439 --
------------ ------------
Total current liabilities 916,492 268,571
------------ ------------
Shareholders' equity (deficit) (notes 1 and 8):
Cumulative convertible preferred stock, $0.01 par value
Authorized 1,000,000 shares; issued and outstanding, 3,337
shares in 2001 and 3,200 shares in 2000 (aggregate involuntary
liquidation preference $3,337,000 at December 31, 2001) 33 32
Common stock, $0.001 par value. Authorized 50,000,000 shares;
issued and outstanding, 15,005,191 shares in 2001 and
14,586,984 shares in 2000 15,005 14,587
Additional paid-in capital 23,389,818 22,299,866
Deficit accumulated during the development stage (24,043,342) (7,704,222)
------------ ------------
Total shareholders' equity (deficit) (638,486) 14,610,263
Commitments and contingencies (notes 5, 6, 8, 12, and 13)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 278,006 14,878,834
============ ============
See accompanying notes to consolidated financial statements.
2
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Operations
INCEPTION
(JUNE 12, 1996)
YEAR ENDED DECEMBER 31, THROUGH
------------------------------ DECEMBER 31,
2001 2000 2001
------------ ------------ ------------
Net sales $ -- -- 174,830
Cost of goods sold -- -- 51,094
------------ ------------ ------------
Gross margin -- -- 123,736
Grant revenue -- -- 80,338
Interest income 31,690 40,922 88,695
------------ ------------ ------------
31,690 40,922 292,769
------------ ------------ ------------
Operating expenses:
Research and development 946,419 1,017,198 3,697,963
General and administrative 2,038,130 793,970 5,441,228
Depreciation and amortization 7,672,112 1,907,341 9,661,628
Impairment loss - write off of goodwill
(note 2) 5,702,130 -- 5,702,130
Interest expense 12,019 23,497 124,008
Equity in loss of subsidiary -- -- 178,936
------------ ------------ ------------
Total operating expenses 16,370,810 3,742,006 24,805,893
------------ ------------ ------------
Loss before cumulative effect of
change in accounting principle (16,339,120) (3,701,084) (24,513,124)
Cumulative effect of change in accounting
principle -- -- (25,821)
------------ ------------ ------------
Net loss $(16,339,120) (3,701,084) (24,538,945)
============ ============ ============
Loss per common share - basic and
diluted (note 11) $ (1.12) (0.44)
============ ============
See accompanying notes to consolidated financial statements.
3
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Shareholders' Equity (Deficit)
Inception (June 12, 1996) through December 31, 2001
CUMULATIVE CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- -----------
Balances at June 12, 1996 (date of incorporation) -- $ -- -- $ --
Sale of common stock without par value -- -- 503 5
Change in par value of common stock -- -- -- (4)
Issuance of common stock and net liabilities assumed in acquisition -- -- 1,716,132 1,716
Issuance of common stock -- -- 2,010,111 2,010
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balances at December 31, 1996 -- -- 3,726,746 3,727
Sale of common stock, net of offering costs of $9,976 -- -- 1,004,554 1,004
Issuance of common stock in acquisition -- -- 375,891 376
Minority interest deficiency at acquisition charged to the Company -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balances at December 31, 1997 -- -- 5,107,190 5,107
Rescission of acquisition -- -- (375,891) (376)
Issuance of common stock at conversion of notes payable -- -- 450,264 451
Expense related to stock warrants issued -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balances at December 31, 1998 -- -- 5,181,564 5,182
Sale of common stock -- -- 678,412 678
Expense related to stock warrants issued -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balances at December 31, 1999 -- -- 5,859,976 5,860
Sale of preferred stock, net of offering costs of $76,500 (note 8) 3,200 32 -- --
Issuance of common stock at conversion of notes and interest payable (note 8) -- -- 412,487 412
Issuance of common stock at conversion of notes payable (note 8) -- -- 70,354 70
Issuance of common stock to settle obligations (notes 1 and 6) -- -- 495,111 496
Issuance of common stock for acquisition (note 1) -- -- 6,999,990 7,000
Issuance of warrants for acquisition (note 1) -- -- -- --
Stock issued for acquisition costs (note 1) -- -- 150,000 150
Expense related to stock warrants issued (note 8) -- -- -- --
Dividends payable on preferred stock -- -- -- --
Cashless exercise of warrants (note 8) -- -- 599,066 599
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balances at December 31, 2000 3,200 32 14,586,984 14,587
Dividends payable on preferred stock -- -- -- --
Repurchase of warrants (note 8) -- -- -- --
Sale of warrants (note 8) -- -- -- --
Cashless exercise of warrants (note 8) -- -- 218,493 219
Issuance of common stock to pay preferred dividends (note 8) -- -- 93,421 93
Detachable warrants issued with notes payable (note 6) -- -- -- --
Issuance of warrants to pay operating expenses (note 8) -- -- -- --
Issuance of common stock to pay operating expenses (note 8) -- -- 106,293 106
Issuance of preferred stock to pay operating expenses (note 8) 137 1 -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balances at December 31, 2001 3,337 $ 33 15,005,191 $ 15,005
=========== =========== =========== ===========
DEFICIT
ACCUMULATED TOTAL
ADDITIONAL DURING THE SHAREHOLDERS'
PAID-IN DEVELOPMENT EQUITY
CAPITAL STAGE (DEFICIT)
----------- ----------- -----------
Balances at June 12, 1996 (date of incorporation) -- -- --
Sale of common stock without par value 5 -- 10
Change in par value of common stock 4 -- --
Issuance of common stock and net liabilities assumed in acquisition 3,224 (18,094) (13,154)
Issuance of common stock 456 (2,466) --
Net loss -- (259,476) (259,476)
----------- ----------- -----------
Balances at December 31, 1996 3,689 (280,036) (272,620)
Sale of common stock, net of offering costs of $9,976 1,789,975 -- 1,790,979
Issuance of common stock in acquisition 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 2,681,538 (2,304,439) 382,206
Rescission of acquisition (887,874) 561,166 (327,084)
Issuance of common stock at conversion of notes payable 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 2,417,213 (2,947,653) (525,258)
Sale of common stock 134,322 -- 135,000
Expense related to stock warrants issued 212,000 -- 212,000
Net loss -- (1,055,485) (1,055,485)
----------- ----------- -----------
Balances at December 31, 1999 2,763,535 (4,003,138) (1,233,743)
Sale of preferred stock, net of offering costs of $76,500 (note 8) 3,123,468 -- 3,123,500
Issuance of common stock at conversion of notes and interest payable (note 8) 492,085 -- 492,497
Issuance of common stock at conversion of notes payable (note 8) 83,930 -- 84,000
Issuance of common stock to settle obligations (notes 1 and 6) 1,201,664 -- 1,202,160
Issuance of common stock for acquisition (note 1) 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) 487,350 -- 487,500
Expense related to stock warrants issued (note 8) 140,000 -- 140,000
Dividends payable on preferred stock (85,000) -- (85,000)
Cashless exercise of warrants (note 8) (599) -- --
Net loss -- (3,701,084) (3,701,084)
----------- ----------- -----------
Balances at December 31, 2000 22,299,866 (7,704,222) 14,610,263
Dividends payable on preferred stock (256,000) -- (256,000)
Repurchase of warrants (note 8) (55,279) -- (55,279)
Sale of warrants (note 8) 47,741 -- 47,741
Cashless exercise of warrants (note 8) (219) -- --
Issuance of common stock to pay preferred dividends (note 8) 212,907 -- 213,000
Detachable warrants issued with notes payable (note 6) 450,000 -- 450,000
Issuance of warrants to pay operating expenses (note 8) 167,138 -- 167,138
Issuance of common stock to pay operating expenses (note 8) 387,165 -- 387,271
Issuance of preferred stock to pay operating expenses (note 8) 136,499 -- 136,500
Net loss -- (16,339,120) (16,339,120)
----------- ----------- -----------
Balances at December 31, 2001 23,389,818 (24,043,342) (638,486)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
4
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
INCEPTION
(JUNE 12, 1996)
YEAR ENDED DECEMBER 31, THROUGH
------------------------------ DECEMBER 31,
2001 2000 2001
------------ ------------ --------------
Cash flows from operating activities:
Net loss $(16,339,120) (3,701,084) (24,538,945)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 7,617,673 1,907,341 9,607,189
Amortization of debt discount 54,439 -- 54,439
Impairment loss - write off of goodwill 5,702,130 -- 5,702,130
Expenses paid by warrants 167,138 -- 167,138
Expenses paid by preferred stock 136,500 136,500
Expenses related to stock warrants issued -- 140,000 612,000
Expenses paid by issuance of common stock 387,271 211,209 598,480
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 12,386 (81,382) (143,257)
Increase (decrease) in accounts payable and accrued
liabilities 550,482 (624,376) 75,343
Increase in sponsored research payable and
license obligation -- -- 924,318
------------ ------------ ------------
Net cash used in operating activities (1,711,101) (2,148,292) (6,447,042)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of certificate of deposit -- (1,016,330) (1,016,330)
Maturity of certificate of deposit 1,016,330 -- 1,016,330
Purchases of property and equipment (16,093) (3,745) (103,723)
Payment on obligation under license agreement -- -- (106,250)
Cash acquired in acquisition of subsidiary -- -- 64,233
Issuance of notes receivable - related party (35,000) -- (35,000)
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 965,237 (1,020,075) 309,310
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from sale of preferred stock -- 3,200,000 3,200,000
Proceeds from sale of common stock -- -- 1,935,965
Proceeds from sale of warrants 47,741 -- 47,741
Repurchase of warrants (55,279) -- (55,279)
Payment of financing and offering costs -- (76,500) (98,976)
Payments of notes payable and long-term debt -- (17,718) (71,961)
Proceeds from issuance of notes payable and detachable warrants 450,000 472,000 1,344,718
------------ ------------ ------------
Net cash provided by financing activities 442,462 3,577,782 6,302,208
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (303,402) 409,415 164,476
Cash and cash equivalents at beginning of period 467,878 58,463 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 164,476 467,878 164,476
============ ============ ============
See accompanying notes to consolidated financial statements.
5
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(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 49.9999% of the total
common stock of BioQuest outstanding upon consummation of the merger.
Shareholders of BioQuest maintained 50.0001% of the shares of the
combined entity and the combined entity retained the management of
BioQuest. 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 and BioQuest was considered the
acquirer for accounting purposes. 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.
6 (Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
The most significant accounting estimates relate to valuing equity
transactions. The value assigned to stock warrants granted to
non-employees are accounted for in accordance with SFAS No. 123 and
Emerging Issues Task Force (EITF) 96-18, ACCOUNTING FOR EQUITY
INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN
CONJUNCTION WITH SELLING, GOODS OR SERVICES, which require that such
costs be measured at the end of each reporting period to account for
changes in the fair value of the Company's common stock until the options
are vested. The Company values warrants using the Black-Scholes pricing
model. Common stock is valued using the market price of common stock on
the measurement date as defined in EITF 96-18. Preferred stock is valued
at the liquidation value of $1,000 per share.
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 nonemployee stock-based compensation in
accordance with EITF 96-18. Amounts are based on the fair value of the
consideration received or the fair value of the equity instruments issued
whichever is more reliably measurable.
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, note receivable, and accounts payable are
a reasonable estimate of their fair values at the balance sheet dates due
to the short-term nature of these instruments. The fair value of notes
payable at the date of issuance and at December 31, 2001 was not
determinable. 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) was being amortized using the straight-line method over two
years. The Company recorded amortization of goodwill of $7,602,836 and
$1,900,709 during the years ended December 31, 2001 and 2000,
respectively. Through December 31, 2001, the Company had not been able to
raise sufficient capital to ensure future funding of its research and
development; consequently, the Company reviewed the carrying value of
goodwill for impairment and reduced its carrying value to zero through a
noncash charge of $5,702,130 at December 31, 2001.
7 (Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are calculated using the straight-line method over the estimated useful
lives of the assets. The costs of improvements that extend the lives of
the assets are capitalized. Repairs and maintenance are expensed as
incurred.
DEFERRED FINANCING COSTS
Costs associated with arranging debt financing are deferred and amortized
using the effective interest method over the term of the notes payable.
DEBT DISCOUNT
The discount on notes payable is being amortized using the effective
interest method through the stated due date.
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.
8 (Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
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.
RECLASSIFICATIONS
Certain amounts presented in the accompanying consolidated financial
statements for 2000 have been reclassified to conform with the
presentation used for 2001.
SUPPLEMENTARY CASH FLOW INFORMATION
Interest of $0 and $3,000 was paid during 2001 and 2000, respectively. No
income taxes were paid during 2001 and 2000.
Noncash investing and financing transactions excluded from the statements
of cash flows for the years ended December 31, 2001 and 2000 are as
follows:
2001 2000
--------- ----------
Issuance of common stock to pay preferred dividends (note 8) $ 213,000 --
Detachable warrants issued with notes payable (note 5) 450,000 --
Issuance of warrants, common stock, and preferred stock to pay
operating expenses (note 8) 690,909 140,000
Dividends payable (note 8) 256,000 85,000
Cashless exercise of warrants (note 8) 219 599
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
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
9 (Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS (SFAS No.
141). SFAS No. 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. Adoption of
SFAS No. 141 had no material impact on the Company.
The FASB has also issued Statement of Financial Accounting Standards No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS No. 142), which will be
effective for the Company as of January 1, 2002. SFAS No. 142 requires
that goodwill and other intangible assets with indefinite lives no longer
be amortized. SFAS No. 142 further requires that the fair value of
goodwill and other intangible assets with indefinite lives be tested for
impairment upon adoption of this statement, annually and upon the
occurrence of certain events and be written down to fair value if
considered impaired. Adoption of SFAS No. 142 will result in the
elimination of annual amortization expense related to goodwill. The
Company does not expect the adoption of SFAS No. 142 will have a material
impact on its business because, as of December 31, 2001, it has no
goodwill or other intangible assets with indefinite lives.
The FASB issued Statement of Financial Accounting Standards No. 143,
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS (SFAS No. 143), which
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement applies to all entities that have
legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development, or normal
use of the assets. SFAS No. 143 will be effective for the Company as of
January 1, 2003. The Company does not expect the adoption of SFAS No. 143
will have a significant impact on its financial condition or results of
operations.
The FASB issued Statement of Financial Accounting Standards No. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (SFAS No.
144), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While SFAS No. 144
supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, it retains many of
the fundamental provisions of that statement. SFAS No. 144 also
supersedes the accounting and reporting provisions of APB Opinion No. 30,
REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL
OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL, AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of a
business. SFAS No. 144 will be effective for the Company as of January 1,
2002. The Company does not expect the adoption of SFAS No. 144 will have
a significant impact on its financial condition or results of operations.
10 (Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(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 was 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)
=========
11 (Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001 and 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, 2000. 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
============
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2001 and 2000 were as follows:
USEFUL
LIVES 2001 2000
-------------- -------- --------
Office furniture and equipment 5 years $ 32,198 13,420
Computer software and equipment 3 years 9,160 11,845
-------- --------
41,358 25,265
Less accumulated depreciation and amortization (27,746) (18,909)
-------- --------
$ 13,612 6,356
======== ========
(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.
12 (Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
In October and December 2001, the Company issued notes payable totaling
$300,000 and $150,000 respectively. The notes bear interest at 12% and
are due on the earlier of November 1, 2002 or the date of receipt by the
Company of gross proceeds of at least $600,000 from private placement
offerings. Interest accrues at 12% annually and will be paid in shares of
common stock when the notes are repaid, based on the five-day average
closing price of common stock preceding the date when interest is due.
The notes were issued with detachable warrants to purchase a total of
450,000 shares of common stock through November 2006 at an exercise
price of $4.00 per share through December 31, 2002, and thereafter at
an exercise price that will be fixed at the higher of $2.50 or the
average closing price of the Company's common stock during the 20
trading days prior to December 31, 2002, not to exceed $4.00 per share.
The entire proceeds of $450,000 were allocated to the warrants. The fair
value of the warrants, calculated using the Black-Scholes pricing model,
is greater than the proceeds. The fair value of the notes payable was
not determinable at the dates of issuance. Of the original debt
discount of $450,000, $54,439 was amortized during 2001. The discount is
being amortized to the redemption value of the debt through the stated
due date of the notes payable.
(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 of common stock with a value of $1,000,000 due to M.D.
Anderson upon the enrollment of the first patient in the first FDA
Phase I human trial of any product that utilizes licensed subject
matter.
13 (Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
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, 2001 and 2000. 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 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.
14 (Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001 and 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.
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. 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 October 2001, the Company issued 93,421 shares of common stock valued
at $213,000 to pay dividends on preferred stock through June 30, 2001.
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, 2001.
15 (Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
In February 2001, the Company granted 100,000 shares of common stock to a
consulting firm for financial consulting services to be provided in 2001.
The Company recognized the value of these shares, $375,000, as a noncash
charge to expense during 2001.
In May 2001, the Company repurchased warrants to purchase 50,254 shares
of common stock and sold the same warrants in June 2001. The warrants
have an exercise price of $0.49 per share.
In August 2001, two warrant holders exercised warrants through a cashless
exercise. Warrants to purchase a total of 271,758 shares of common stock
were exchanged for a total of 218,493 shares of common stock.
In December 2001, the Company entered into a consulting agreement with a
third party for financial consulting services. The services are being
paid through the issuance of 273 shares of preferred stock, 12,585 shares
of common stock, and five-year warrants to purchase 34,125 shares of
common stock at an exercise price of $5.00 per share. The compensation
vests 50% in December 2001 and 50% in December 2002. The Company
recognized the value of 50% of these equity instruments, $315,909, as a
noncash charge to expense in 2001. The warrants were valued using the
Black-Scholes pricing model. Common stock was valued using the market
price of common stock as defined in EITF 96-18. Preferred stock was
valued at the liquidation value of $1,000 per share. The Company will
measure the costs at the end of each reporting period, until the second
vesting date in December 2002, to account for changes in the fair value
of the unvested equity instruments.
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.
Nonemployee stock-based compensation that is not valued at the fair value
of consideration received is valued, as of the grant date, using the
Black-Scholes pricing model with the following assumptions for grants in
2001 and 2000: 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.
16 (Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
At December 31, 2001, there were outstanding warrants to purchase a total
of 3,468,094 shares of common stock as follows:
EXERCISE
WARRANTS PRICE EXPIRATION DATE
---------------------- -------------------- -------------------
80,404 $ 0.49 August 2002
100,506 0.49 May 2003
400,000 4.00 August 2003
1,246,513 0.49 December 2003
17,125 4.00 December 2003
620,622 0.49 September 2005
33,333 3.00 April 2006
502,528 0.49 June 2006
450,000 4.00* November 2006
17,063 5.00 December 2006
*Subject to repricing, see note 5.
(9) NOTE RECEIVABLE - RELATED PARTY
In August 2001, the Company loaned $35,000 to a company whose owner is
also the co-founder of Biokeys. The note accrues interest at prime plus
one percent (5.75% at December 31, 2001). The note receivable on the
consolidated balance sheet includes accrued interest.
(10) INCOME TAXES
Significant components of income tax expense for the years ended December
31, 2001 and 2000 are as follows:
2001 2000
--------- ---------
Deferred tax benefit $ 799,623 487,617
Increase in valuation allowance for deferred tax assets (799,623) (487,617)
--------- ---------
Income tax expense $ -- --
========= =========
17 (Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
The tax effects of temporary differences that give rise to deferred tax
assets at December 31, 2001 and 2000 are as follows:
2001 2000
----------- -----------
Net operating loss carryforward $ 3,436,311 2,642,171
Organization costs and license agreement, due to differences in
amortization 44,538 39,055
----------- -----------
Total deferred tax assets 3,480,849 2,681,226
Less valuation allowance (3,480,849) (2,681,226)
----------- -----------
Net deferred tax assets $ -- --
=========== ===========
At December 31, 2001, the Company had an unused net operating loss
carryforward of approximately $10,107,000 for tax reporting purposes,
which expires in 2111 through 2112 and 2118 through 2121. Included in the
2000 carryforward is a net operating loss carryforward acquired from
Biokeys, Inc. of approximately $3,475,000.
(11) NET LOSS PER COMMON SHARE
The computation of basic and diluted net loss per share for the years
ended December 31, 2001 and 2000 is as follows:
2001 2000
------------ ------------
Numerator:
Net loss $(16,335,346) (3,701,084)
Less preferred stock dividends (256,000) (85,000)
------------ ------------
Numerator for basic and diluted loss per share (16,591,346) (3,786,084)
============ ============
Denominator for basic and diluted loss per share - weighted average
shares 14,805,150 8,582,707
============ ============
Loss per common share - basic and diluted $ (1.12) (0.44)
============ ============
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, 2001 and 2000, 3,826,409 and 4,022,331 potentially
dilutive shares, respectively, were not included in the computation
of net loss per common share - diluted, as their effect would have been
antidilutive due to the Company's net loss incurred in 2001 and 2000.
18 (Continued)
BIOKEYS PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(12) 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 $16,335,346 and $3,701,084 for the years ended December 31,
2001 and 2000, 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 2002.
The Company will require additional capital, which it intends to obtain
through equity and debt offerings and/or strategic partnership in order
to continue to operate its business. The Company's ability to meet its
obligations as they become due and to continue as a going concern must be
considered in light of the expenses, difficulties and delays frequently
encountered in operating a new business, particularly since the Company
will focus on research, development and unproven technology which may
require a lengthy period of time and substantial expenditures to
complete. Even if the Company is able to successfully develop new
products or technologies, there can be no assurance that the Company will
generate sufficient revenues from the sale or licensing of such products
and technologies to be profitable. Management believes that the Company's
ability to meet its obligations as they become due and to continue as a
going concern through December 2002 are dependent upon obtaining
additional financing.
(13) 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. A lease
for office space expired in November 2000 and is currently being paid on
a month by month basis. Rent expense was $51,609 and $23,500 during the
years ended December 31, 2001 and 2000, respectively.
In February 2001, the Company leased office facilities in San Diego,
California. The lease has a monthly payment of $2,900 and expires in
January 2004.
19
