As Filed with the Securities and Exchange Commission on June 27, 2008
Registration No. 333-151491
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DCD.C. 20549
Amendment No. 2
to
PRE-EFFECTIVE AMENDMENT NO. 1
FORM S-1
Registration Statement under the Securities Act
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
GEOVAX LABS, INC.
(Exact name of 1933
DAUPHIN TECHNOLOGY, INC.
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(Exact registrant as specified in its charter)
| | | | |
| Illinois | | 2834 | | [87-0455038] |
| (State or other jurisdiction of | | (Primary Standard Industrial | | (I.R.S. Employer |
| incorporation or organization) | | Identification Number) | | Classification Code Number) |
1256 Briarcliff Road NE, Atlanta, Georgia 30306, (404) 727-0971
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
| | |
| Robert T. McNally, Ph.D. | | With a copy to: |
| President & Chief Executive Officer | | T. Clark Fitzgerald III |
| GeoVax Labs, Inc. | | Womble Carlyle Sandridge & Rice, PLLC |
| 1256 Briarcliff Road NE | | 1201 West Peachtree Street, Suite 3500 |
| Atlanta, Georgia 30306 | | Atlanta, Georgia 30309 |
| (404) 727-0971 | | (404) 879-2455 |
(Name,
address, including zip code, and telephone number, including area code, of
Registrant as Specified in Its Charter)
ILLINOIS 3570 87-0455038
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(State or Other Jurisdiction (Primary Standard (I.R.S. Employer Number)
of Incorporation or Organization) Industrial Classification
Identification No.)
800 E. Northwest Hwy., Suite 950, Palatine, IL 60067 847-358-4406
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(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
Andrew J. Kandalepas, President 800 E. Northwest Hwy., Suite 950, Palatine,
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IL 60067 847-358-4406
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(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agentagent for
Service)
service) Approximate date of commencement of proposed sale to the public:From time to time after the effective date of this registration statement as determined by
the selling shareholders.
statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box [X]
box.þ
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]
o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]
o
If this Formform is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]
If deliveryo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and smaller reporting company” in Rule 12b-2 of the prospectusExchange Act.
| | | | | | |
| Large accelerated filero | | Accelerated filerþ | | Non-accelerated filero | | Smaller reporting companyo |
| | | | (Do not check if a smaller reporting company) | | |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.
EXPLANATORY NOTE
This Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1, Registration No. 333-151491 (the “Registration Statement”), is
expected to be madebeing filed pursuant to Rule
434,
please check the following box.[_]
CALCULATION OF REGISTRATION FEE
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Title of Each Class Amount to be Proposed Maximum Proposed Maximum Amount of
of Securities to be Registered Offering Aggregate Offering Registration
Registered (1)(2) Price Per Share (2) Price(2) Fee
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Common Stock
$0.001 Par Value 5,507,636 $0.66 $3,635,040 $897
(1) In the event of a stock split, stock dividend, or similar transaction
involving the Company's common stock, in order to prevent dilution, the
number of shares registered shall automatically be increased to cover the
additional shares in accordance with Rule 416(a)414 under the Securities Act.
(2) In accordance withAct of 1933, as amended (the “Securities Act”) by GeoVax Labs, Inc., a Delaware corporation as the successor to GeoVax Labs, Inc., an Illinois corporation following a merger which was consummated on June 19, 2008. Immediately prior to the merger, the Delaware corporation had no assets or liabilities other than nominal assets or liabilities. Upon consummation of the merger, the Delaware corporation succeeded by operation of law to all of the assets and liabilities of the Illinois corporation. The merger was approved by the stockholders of the Illinois corporation at a meeting held June 17, 2008, and by the sole stockholder of the Delaware corporation. Pursuant to Rule 414(d), the Delaware corporation hereby adopts the Registration Statement as its own registration rights agreement with a shareholder,statement for all purposes of the Company is required to register for resale an aggregate of 4,000,000 shares
of common stock to cover the common stock issuable or to be issued upon
conversion of a Convertible NoteSecurities Act and the exerciseSecurities Exchange Act of 1934, as amended. This amendment also contains updates and other changes to the warrants. initial filing.
SUBJECT TO COMPLETION, DATED JUNE 27, 2008.
The Convertible Noteinformation in this prospectus is convertible into shares of common stock on a formula ofnot complete and may be changed. The selling stockholder may not sell these securities until the lower of (i)110% ofregistration statement filed with the average ofSecurities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any state where the Bid Prices during the ten
Trading Days prior to September 28, 2001 and (ii)the average of the lowest
three consecutive Bid prices during the 22-day period immediately preceding
the conversion date. If converted as of April 23, 2002, such shares would
convert into 4,807,693 of common stock assuming a conversion price of $0.52
per share.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
DAUPHIN TECHNOLOGY,offer or sale is not permitted. PROSPECTUS
GEOVAX LABS, INC.
5,507,636
40,161,020 Shares of Common Stock
$0.66 Bid Price
This prospectus relates to the sale of up to 40,161,020 shares of our common stock, $0.001 par value, by Fusion Capital Fund II, LLC. Fusion Capital is sometimes referred to in this prospectus as of April 23, 2002
THE COMPANY
We design andthe selling stockholder. The prices at which Fusion Capital may sell mobile hand-held, pen-based computers and broadband
set-top boxes, as well as other electronic devices for home and business use and
perform design services, process methodology consulting and intellectual
property development.
Our corporate offices are located at:
800 East Northwest Highway
Suite 950
Palatine, Illinois 60067
(847) 358-4406
Ourthe shares trade on the over-the-counter market electronic bulletin board
operatedwill be determined by the NASD underprevailing market price for the symbol "DNTK.OB".
THE OFFERING
We are registering 5,507,636shares of common stock which may be acquired by
Crescent International Ltd. ("Crescent"shares or "selling shareholder"), an investment
company managed by GreenLight (Switzerland) SA, through the exercise of warrants
or the conversion of Convertible Notes. These shares may be offered and sold
from time to time.in negotiated transactions. We will not receive any of the proceeds from the sale other
than from the possible exercise of warrants to purchase 700,000our shares ofby Fusion Capital.
Our common stock at $1.3064is registered under Section 12(g) of the Securities Exchange Act of 1934 and quoted on the over-the-counter bulletin board under the symbol “GOVX.” On June 26, 2008, the last reported sale price for our common stock as reported on the over-the-counter bulletin board was $0.145 per share.
Had Crescent exercised its warrants and converted
Investing in the Convertible Note on
April 23, 2002, Crescent would have received 4,807,636 shares of our common
stock. As of the same date, the Company would have received an aggregate amount
of $914,480 from Crescent in connection with its exercise of the 700,000
warrants. Under the terms of our securities purchase agreement with Crescent,
the number of shares to be purchased by Crescent or to be obtained upon the
exercise of warrants or conversion of the Convertible Note held by Crescent
cannot exceed the number of shares that, when combined with all other shares of common stock and securities then owned by Crescent, would result in Crescent
owning more than 9.9% of our outstanding common stock at any given point of
time.involves certain risks. See "Recent Developments" on page 6.
Investing in our shares involves a high degree of risk. You should invest
only if you can afford a complete loss of your investment. See "Risk Factors"
------------“Risk Factors” beginning on page 7.
Unless3 for a discussion of these risks.
The selling stockholder is an “underwriter” within the context indicates otherwise, all references to "we", "our",
"us", andmeaning of the "Company" refer to Dauphin Technology, Inc. and its subsidiaries.
Securities Act of 1933, as amended.
Neither the Securities and Exchange Commission ("SEC") nor any state securities commission has approved or disapproved of these securities or determined whetherif this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to
whether anyone should buy these securities. Any representation to the contrary is a criminal offense.
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The
Datedate of this Prospectus is
April 25, 2002
July__, 2008
TABLE OF CONTENTS
4
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC, utilizing a "shelf" registration process. In accordance with a registration
rights agreement with Crescent International Ltd., the Company is required to
initially register for resale an aggregate of 5,507,636 shares of common stock
to cover the common stock to be issued upon conversion of the Convertible Note
and the exercise of the warrants. The Convertible Note is convertible into
shares of common stock by a formula of the lower of (i)$1.1561, which represents
110% of the average of the Bid Prices during the ten Trading Days prior to
September 28, 2001 and (ii)the average of the lowest three consecutive Bid
prices during the 22-day period immediately preceding the conversion date.
Each time we offer shares or warrants we will provide a prospectus
supplement that will contain specific information about that offer.
You should read this prospectus together withrely only on the additional information
described under the heading, "Where You Can Find More Information."
No person has been authorized to give any information or to make any
representations in connection with this offering except those contained in this prospectus. Neither Dauphin nor the selling shareholder hasprospectus and in any accompanying prospectus supplement. We have not authorized anyone
else to provide you with different information.
We have not authorized the selling stockholder to make an offer of these shares of common stock in any jurisdiction where the offer is not permitted.
You should not assume that anythe information contained in this prospectus or prospectus supplement is accurate as of any date other than the date on the front page of this prospectus. Neither Dauphin nor
i
PROSPECTUS SUMMARY
You should rely only on the information contained in this prospectus and in any prospectus supplement. We have not authorized anyone else to provide you with different information, and if you receive any unauthorized information you should not rely on it. We have not authorized the selling shareholder is makingstockholder to make an offer of these shares in any stateplace where the offer is not permitted. InThe information appearing in this prospectus reference to "we", "us"or any prospectus supplement is accurate only as of its date. Our business, financial condition, results of operations and "our" refer to Dauphin
Technology,prospects may have changed since that date.
Business
GeoVax Labs, Inc.
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements, including the notes to the financial
statements, appearing elsewhere in this prospectus.
Our Business
We design and sell mobile hand-held, pen-based computers and broadband
set-top boxes, and other related electronic devices for home and business use.
We also provide private, interactive cable systems to the extended stay
hospitality industry and perform design services, process methodology consulting
and intellectual property development. Orasis(R) is a mobile hand-held,
pen-based computer that incorporates features, which we believe provide greater
powerclinical stage biotechnology company engaged in research and flexibilitydevelopment activities with a mission to address performance requirements in a variety of
industrialdevelop, license and commercial uses. We have produced a limited number of Orasis(R)
units that have been used for marketing and limited sales. We are currently
redesigningcommercialize the Orasis(R) and plan to introduce a new version in 2002. In
addition, the Company introduced a prototype of a Vehicle Mountable Docking
Station (VMDS), which can be used as an accessory product for the Orasis(R)
Toward the end of 1999, we identified set-top boxes as a focus for product
development. The OraLynx(TM) set-top box is an electronic device that converts
digital signals into a user acceptable format via other electronic devices such
as television sets, telephones and computers. It is a routing device that
enables you to access and transmit information to take advantage of services
offered by television, telephone, Internet and other providers of communication,
information or entertainment content or media. For example, you may connect a
set-top box to your television to receive cable television programming and music
broadcasts through your television and home sound system. You may also connect a
set-top box to a computer or various office equipment to serve a variety of
commercial uses. Throughout 2000 and 2001, the Company has successfully
developed multiple versions of its OraLynx(TM) set-top box and is continuing its
further development. The Company has received a contract from the Hellenic
Telecommunications Organization, S.A. (OTE) for the productionmanufacture and sale of set-top boxeshuman vaccines for diseases caused by Human Immunodeficiency Virus (“HIV”) and other infectious agents. We have exclusively licensed from Emory University certain Acquired Immune Deficiency Syndrome (“AIDS”) vaccine technology that was developed in collaboration with the National Institutes of Health and the Centers for Disease Control and Prevention.
Our vaccines, initially developed by Dr. Harriet L. Robinson at Emory University in collaboration with researchers at the National Institutes of Health (NIH), National Institute of Allergy and Infectious Disease (NIAID), and the United States Centers for Disease Control (CDC), are recombinant DNA (deoxyribonucleic acid) and MVA (Modified Vaccinia Ankara) vaccines. Our focus is on developing AIDS vaccines comprising the major HIV-1 subtypes (A, B and C). These vaccines could be used alone or as combinations depending on a local infection. Subtype B is most common in North America, the EU, Japan and Australia and is our first priority.
When properly administered in series, these AIDS vaccines induce strong cellular and humoral immunity (protection) in non human primates against multiple HIV-1 proteins (AIDS virus components). This suggests that our vaccines could provide protection against the development of
the writing of this registration statement has shipped
1,100 set-top boxes to them.
5
In August 2000, the Company acquired the net assets of T & B Design, Inc.
(f/k/a Advanced Digital Designs, Inc.) ("ADD"). ADD performs design services,
process methodology consulting and intellectual property development for a
variety of technology companies. AIDS in HIV-1 virus infected people. The Company's engineers specialize in
telecommunications, especially wireless and cable-based product development, as
well as multimedia development, including digital video decoding and processing.
In July 2001, the Company purchased the net assets of Suncoast Automation,
Inc. ("Suncoast") from ProtoSource Corporation. Suncoast is a provider of
private, interactive cable systems providing bundled services of basic cable TV,
premium programming, video games and high-speed Internet access to the extended
stay hospitality industry. The Company currently has contracts for the
installation of over 3,200 units in the time share resort industry. Completion
of these installations is contingent upon receiving adequate funding for the
purchase of the equipment.
Recent DevelopmentsOffering
On
September 28, 2001, the CompanyMay 8, 2008, we entered into a
Securities Purchase
Agreement with Crescent International Ltd., an institutional investor managed by
GreenLight (Switzerland) SA, that allows us to issue and sell to Crescent and
requires Crescent to purchase, at our sole discretion, equity and debt
securities for consideration of up to $10 million (minus applicable fees and
expenses). Under the Securities Purchase Agreement, we received $2.5 million in
exchange for a Convertible Note and may receive up to $7.5 million in exchange
for additional securities. In addition, the Company issued warrants exercisable
to purchase 700,000 shares of common stock at a price of $1.3064 per share for a
five-year term and the Company may be required to issue additional warrants
under certain circumstances. See "Recently Issued Securities" on page 15.
Our Strategy
Our goals are to capture the opportunity presented by the Orasis(R) and
OraLynx(TM) products and to become a leading provider of niche electronic
products. In addition, we intend to successfully compete for additional
contracts for the installation of private, interactive cable systems. Our
strategy is to develop or acquire a variety of products and services that
complement each other or offer us production and operating economies. In this
way, we seek to minimize the risk presented by reliance upon any given product
that may become obsolete through technological change.
We expect to increase our development, production and marketing
capabilities by increasing staff and coordinating relationships with outside
manufacturers and sales representatives. We will then establish a responsive
level of production and distribution. At the same time, we have begun an
aggressive marketing campaign to seize opportunities in the growing set-top box
and hand-held computer markets.
General
Our principal executive offices are located at 800 East Northwest Highway,
Suite 950, Palatine, Illinois 60074, and our telephone number is (847) 358-4406.
Our website is located at www.dauphintech.com. Information contained on our
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website is not a part of this prospectus.
THE REGISTRATION
Shares to be registered 5,507,636 shares
Total number of shares outstanding
immediately after the registration 70,558,282 shares
Use of proceeds The Company will not
receive any proceeds from
this registration, other
than from the possible
exercise of warrants to
purchase 700,000 shares of
common stock at $1.3064 per
share. Any proceeds
received from the exercise
of warrants will be used
for general corporate
purposes.
6
SUMMARY FINANCIAL INFORMATION
(In thousands, except per share data)
The following table summarizes the consolidated financial data for our
business. You should read the following summary consolidated financial data
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and our Consolidated Financial Statements and
accompanying Notes beginning on page F-1 of this prospectus.
Year ended December 31,
-----------------------
(amounts in thousands, except per share amounts)
INCOME STATEMENT DATA: 1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Revenues $ 2,730 $ 5,368 $ 2,279 $ 860 $ 2,620
Cost of Sales 4,345 5,758 4,834 2,876 2,745
-------- -------- -------- ------- --------
Gross Profit (Loss) (1,615) (390) (2,555) (2,016) (125)
Net (Loss) (3,988) (6,132) (9,306) (7,515) (13,252)
EARNINGS PER COMMON SHARE(1):
Net Income (Loss) (1) (0.13) (0.16) (0.20) (0.13) (0.21)
As of December 31,
------------------
BALANCE SHEET DATA: 1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Total Assets 7,269 6,719 3,372 11,161 3,917
Long Term Debt 430 303 185 102 1,197
Working Capital (Deficit) 4,511 260 (917) 3,015 680
Stockholders Equity 5,676 2,885 552 10,521 2,049
(1) Income (Loss) per common share is calculated based on the weighted average
number of shares for the respective period.
RISK FACTORS
Investment in our shares is risky and should be considered speculative. In
addition to the information contained in this prospectus, you should consider
carefully the following risk factors before investing in shares offered under
this prospectus. We operate in a highly competitive and volatile industry. We
are faced with aggressive pricing by competitors; competition for necessary
parts, components and supplies; continually changing customer demands and rapid
technological developments; and risks that buyers may encounter difficulties in
obtaining governmental licenses or approvals, or in completing installation and
construction of infrastructure, necessary to use our products or to offer them
to end users. The following cautionary statements discuss certain important
factors that could cause actual results to differ materially from the projected
results contained in the forward-looking statements contained in this
prospectus.
7
Risks Related to Our Financial Results and/or Condition
We have an accumulated deficit due to substantial losses incurred over the last
six years.
Since July 1996 we have operated without substantial sales or revenue and have
an accumulated deficit of $59,594,000 as of December 31, 2001. The Company
expects to incur operating losses over the near term. The Company's ability to
achieve profitability will depend on many factors including the Company's
ability to manufacture and market commercially acceptable products, including
its set-top box. There can be no assurance that the Company will ever achieve a
profitable level of operations or if profitability is achieved, that it can be
sustained. Our financial performance may make it difficult for potential sources
of capital to evaluate the viability of our business to date and to assess its
future viability.
None of our products have achieved widespread distribution or customer
acceptance nor are there any assurances that the Company will be able to
profitably sell its products.
The Orasis(R) is a solution oriented, pen-based, mobile computer system, which
has been produced and marketed only on a limited basis. The Company has not
recognized significant sales of the product. A new version of the Orasis(R) is
under development and scheduled for release in 2002/2003.
We began shipping the OraLynx(TM) set-top box late in the fourth quarter of
2001. We believe the OraLynx(TM) set-top box will address a broad market demand.
There can be no assurance that a market demand will exist or the sales of the
OraLynx(TM) will continue after first being introduced. If a market demand
exists, it may be met with alternative products offered by competitors or with
pricing that we cannot match.
Availability of additional funding under our Securities Purchase Agreement
requires the Company to meet certain conditions precedent, which the Company may
be unable to meet.
On September 28, 2001 the Company entered into a $10 million Securities Purchase
Agreement with Crescent International Ltd., an institutional investor. Under the
Securities Purchase Agreement, the Company issued a Convertible Note for $2.5
million. Although the Company had the option to issue further convertible notes
to Crescent subject to certain conditions precedent, such option expired on
February 1, 2002 and no additional notes were issued. In addition, the Company
issued warrants exercisable to purchase 700,000 shares of common stock at a
price of $1.3064 per share for a five-year term. The Stock Purchase Agreement
further permits the Company to sell to Crescent up to $7.5 million in common
stock of the Company over a 24-month period. Additionally, the Company agreed
not to exercise any drawdowns against its then existing common stock purchase agreement with Techrich International Ltd., which expired on January 28,
2002.
The Securities Purchase Agreement permitsFusion Capital Fund II, LLC, an Illinois limited liability company (“Fusion Capital”). Under the Company to sell to Crescent and
requires Crescentpurchase agreement, Fusion Capital is obligated, under certain conditions, to purchase shares from the Company, at the Company's sole
discretion, common stock of the Company for up to $7.5 million over a 24-month
period. Individual sales are limited to $1.5 million, or a higher amount if
agreed to by the Company and Crescent, and each sale is subject to our
satisfaction of the following conditions precedent (none of which are within the
control of Crescent): (1) the Company's representations and warranties must be
true and complete, (2) the Company must have one or more then currently
effective registration statements covering the resale by Crescent of all shares
issuedus in prior sales to Crescent and issuable upon the conversion of the
Convertible Note, (3) there must be no dispute as to the adequacy of disclosures
made in any such registration statement, (4) such registration statements must
not be subject to any stop order, suspension or withdrawal, (5) the Company must
have performed its covenants and obligations under the Securities Purchase
Agreement, (6) no statute, rule, regulation, executive order, decree, ruling or
injunction may have been enacted, entered, promulgated or adopted by any court
of governmental authority that would prohibit the Company's performance under
the Securities Purchase Agreement, (7) the company's common stock must not have
been delisted from its principal trading market and there must be no trading
suspension of its common stock in effect, and (8) the issuance of the designated
number of shares of common stock with respect to the applicable sale must not
violate the shareholder approval requirements of the Company's principal trading
market. Thean aggregate amount of all sale shares and convertible notes issued
cannot exceed $10 million. The amountup to $10.0 million from time to time over a twenty-five (25) month period. Under the terms of the sale is limited to twice the
averagepurchase agreement, Fusion Capital has received a commitment fee consisting of the bid price multiplied by the trading volume during the 22 trading
day period immediately preceding the date of sale. When the total amount of
securities issued to Crescent equals or exceeds $5 million, then the Company
shall issue to Crescent a subsequent incentive warrant exercisable to purchase
400,000 shares of common stock at a price equal to the bid price on the date the
incentive warrant is issued.
8
Even though Crescent has no investment discretion with respect to shares of
common stock that the Company may require it to purchase under the Securities
Purchase Agreement, the Company may not be able to satisfy one or more of these
conditions at any time that it desires to raise funds from Crescent.
The initial funding of $2.5 million combined with the $308,000 cash on hand at
September 30, 2001 will allow the Company to pay the subcontractors for the OTE
order, complete two installations at time-share resorts, complete the opening of
the branch office in Piraeus, Greece and provide working capital for operations.
Risks Relating to Our Shares
Shareholders may suffer dilution from this offering and from the exercise of
existing options, warrants and convertible notes; the terms upon which we will
be able to obtain additional equity capital could be adversely affected.
Our common stock may become diluted if warrants and options to purchase our
common stock are exercised and if Crescent converts our outstanding $2,500,000
Convertible Note into2,480,510 shares of our common stock. The conversion price of
Crescent's Convertible Note is the lower of $1.1561 and a price based on a
formula determined at the time of conversion. We have limited rightsAlso, we will issue to delay
conversion forFusion Capital up to 180 days froman additional 2,480,510 shares as a commitment fee pro rata as we receive the date triggering those rights if the
conversion price determined by the formula is below $0.75 per share. At this
price, conversion by Crescentup to $10.0 million of its Convertible Note would result in the
issuance of 3,333,333 shares. We are required to register for resale shares
issued upon conversion of the Convertible Note to the extent they are not
registered under the registration statement of which this prospectus is a part.future funding. As of April 10, 2002, the conversion price of the Convertible Note was $0.5233,
which would result in the issuance of 4,777,375 shares. Crescent has informed us
that it has no current intent to convert the Convertible Note intoJune 26, 2008, 743,414,888 shares of our common stock and that any decision aswere outstanding (including shares held by non-affiliates) excluding the up to whether to convert in full or in part
will be based on relevant facts, circumstances and market conditions existing at
the time37,480,510 of the decision.
In additionshares offered by Fusion Capital pursuant to the dilution resulting from a conversionthis Prospectus which we have not yet issued to Fusion Capital. If all of such 37,480,510 shares were issued and outstanding as of the Convertible Note,
we could be subject to further dilution upon exercisedate hereof, the 40,161,020 shares offered hereby would represent 4.8% of a Protective Warrant,
if and when issued to Crescent.the total common stock outstanding or 9.2% of the non-affiliate shares outstanding as of the date hereof. The number of shares of our common stock that
can be purchasedultimately offered for sale by Fusion Capital is dependent upon exercise of the protective warrant is equal to the number of shares of our common stock that is determinedpurchased by subtracting the amount paid
by Crescent for its initial purchase of the Company's common stock, i.e.
$500,000, divided byFusion Capital under the purchase price, from an amount which is equal to
$500,000 divided by the price of the common stock for the Company as computed on
the effective date of the Company's registration statement.agreement. Under the terms ofpurchase agreement and the Protective Warrant, ifrelated registration rights agreement we are required to register and have included in the price for the Company's common stock as computed
on the effective date ofoffering pursuant to this Prospectus:
| • | | 2,480,510 shares which were issued as a commitment fee; |
|
| • | | 200,000 shares which we issued to Fusion Capital as an expense reimbursement; |
|
| • | | an additional 2,480,510 shares which we may issue in the future as a commitment fee pro rata as we receive the up to $10.0 million of future funding; and |
1
35.0 million shares which we may sell to Fusion Capital after this registration statement
filed on behalf of Crescent
is
higher than the purchase price for the Company's common stock, as computed on
the date Crescent purchased such shares, the Protective Warrant does not become
exercisable.
Irrespective of whether Crescent exercises its warrants or converts its
Convertible Note, our common stock is subject to further dilution upon the
issuance of shares of our common stock to Crescent that could occur if we
require Crescent to purchase additional shares of our common stock for up to
$7,500,000. These additional shares would be at a discount to the then current
market price. The purchase price, with respect to the sale of common stock by us
to Crescent, is determined by taking the lower of $1.1561 and 92% of the average
of the lowest three consecutive bid prices during the 22 trading day period
immediately preceding the applicable sale date. Dilution resulting from issuance
of said shares will depend on the trading price at the time the common stock is
sold. Illustrations of such effect can be found on page 18. Under the terms of
our securities purchase agreement with Crescent, the number of shares to be
purchased by Crescent or to be obtained upon exercise of warrants or conversion
of the Convertible Note held by Crescent cannot exceed the number of shares
that, when combined with all other shares of common stock and securities then
owned by Crescent, would result in Crescent owning more than 9.9% of our
outstanding common stock at any given point of time. Our agreements with
Crescent obligate us to register any shares of our common stock that we require
Crescent to purchase. Neither Crescent nor any of its affiliates can directly or
indirectly engage in any short sale of the Company's common stock. See "Recently
Issued Securities" on page 15 for a more complete description of our agreements
with Crescent.
Because the amount of securities to be issued to Crescent is based on a formula
that is tied to the market price of our shares, issuance of these securities
could result in significant dilution of the per share amounts of our shares. The
inverse relationship between the price and the amount of securities to be issued
may have the following results:
9
. the lower the average trading price of our shares at the time we request
Crescent to purchase additional shares, the greater the number of
securities that can be issued, and the greater the risk of dilution caused
by these securities;
. the perceived risk of dilution may cause Crescent or other shareholders to
sell their shares, which could contribute to a downward movement in the
stock price of shares; and
. any significant downward pressure on the trading price of our shares could
encourage shareholders to engage in short sales, which could further
contribute to a price decline of our shares.
These shares, as well as the eligibility for additional restricted shares to be
sold in the future, either pursuant to future registrationsdeclared effective under the Securities Act of 1933, as amended (the “Securities Act”). All 40,161,020 shares are being offered pursuant to this Prospectus. Under the Purchase Agreement, we have the right but not the obligation to sell more than the 35.0 million shares to Fusion Capital. As of the date hereof, we do not have any plans or an exemption such as Rule 144intent to sell to Fusion Capital any shares beyond this 35.0 million shares. However, if we elect to sell more than the 35.0 million shares, we must first register under the Securities Act any additional shares we may elect to sell to Fusion Capital before we can sell such additional shares, which could cause substantial dilution to our shareholders.
We do not have the right to commence any sales of 1933,our shares to Fusion Capital until the SEC has declared effective the registration statement of which this Prospectus is a part. After the SEC has declared effective such registration statement, generally we have the right but not the obligation from time to time to sell our shares to Fusion Capital in amounts between $80,000 and $1.0 million depending on certain conditions. We have the right to control the timing and amount of any sales of our shares to Fusion Capital, subject to certain limitations. The purchase price of the shares will be determined pursuant to a formula based upon the market price of our shares without any fixed discount at the time of each sale. Fusion Capital shall not have the right nor the obligation to purchase any shares of our common stock on any business day that the price of our common stock is below $0.05. There are no negative covenants, restrictions on future fundings, penalties or liquidated damages in the purchase agreement or the registration rights agreement. The purchase agreement may be terminated by us at any time at our discretion without any cost to us.
We were an Illinois corporation. On March 11, 2008 our Board of Directors determined that it would be in the best interests of our company and our shareholders to reincorporate in Delaware. In order to accomplish this reincorporation, we formed a corporation in Delaware called GeoVax Labs, Inc.
In conjunction with the reincorporation in Delaware our Board of Directors unanimously adopted and approved an Agreement and Plan of Merger of GeoVax Labs, Inc., an Illinois corporation, and GeoVax Labs, Inc., a Delaware corporation (the “Reincorporation Merger Agreement”). We submitted the reincorporation proposal to our shareholders by means of our definitive proxy statement dated April 25, 2008. The reincorporation was approved by our shareholders at our annual meeting on June 17, 2008. The reincorporation merger was consummated on June 18, 2008.
As used herein, “GeoVax”, “the Company”, “we”, “our” and similar terms include GeoVax Labs, Inc., an Illinois corporation, and its subsidiaries, and after the reincorporation includes GeoVax Labs, Inc., a Delaware corporation, unless the context indicates otherwise.
Our principal executive offices are located at 1256 Briarcliff Road NE, Atlanta, Georgia 30306. Our telephone number is (404) 727-0971. The address of our website iswww.geovax.com. Information on our website is not part of this prospectus.
2
RISK FACTORS
You should carefully consider the risks, uncertainties and other factors described below before you decide whether to buy shares of our common stock. Any of the factors could materially and adversely affect our business, financial condition, operating results and prospects and could negatively impact the market price of our common stock. Also, you should be aware that the risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties, of which we are not yet aware, or that we currently consider to be immaterial, may also impair our business operations. You should also refer to the other information contained in and incorporated by reference into this prospectus, including our financial statements and the related notes.
Risks Related to Our Financial Results and Need for Additional Financing
We have a history of operating losses, and we expect losses to continue for the foreseeable future.
Our ability to generate revenue and achieve profitability depends on our ability to complete successfully the development of our product candidates, conduct preclinical tests and clinical trials, obtain the necessary regulatory approvals and manufacture and market the resulting products. We have had no product revenue to date. We have experienced operating losses since we began operations in 2001. As of March 31, 2008, we had an accumulated deficit of approximately $11.2 million. We expect to incur additional operating losses and expect cumulative losses to increase as amended,our research and development, preclinical, clinical, manufacturing and marketing efforts expand.
Our business will require continued funding. If we do not receive adequate funding, we will not be able to continue our operations.
To date, we have financed our operations principally through the private placement of equity securities and through government grants. We will require substantial additional financing at various intervals for our operations, including for clinical trials, for operating expenses including intellectual property protection and enforcement, for pursuit of regulatory approvals and for establishing or contracting out manufacturing, marketing and sales functions. There is no assurance that such additional funding will be available on terms acceptable to us or at all. If we are not able to secure the significant funding that is required to maintain and continue our operations at current levels or at levels that may be required in the future, we may be required to delay clinical studies, curtail operations or obtain funds through collaborative arrangements that may require us to relinquish rights to some of our products or potential markets.
We only have the right to receive $80,000 every 4 business days under the agreement with Fusion Capital unless the market price of our stock equals or exceeds $0.11, in which case we can sell greater amounts to Fusion Capital as the market price of our common stock increases. Fusion Capital shall not have the right nor the obligation to purchase any shares of our common stock on any business day that the market price of our common stock is less than $0.05. Since we are registering 35.0 million of our shares for sale to Fusion Capital, our sale price of these shares to Fusion Capital will have to average at least $0.286 per share for us to receive the maximum proceeds of $10.0 million. Assuming a sale price of $0.145 per share (the closing sale price of the common stock on June 26, 2008) and the purchase by Fusion Capital of the full 35.0 million shares under the common stock purchase agreement, proceeds to us would only be $5,075,000. unless we choose to register and sell more than 35.0 million shares, which we have the right, but not the obligation, to do. Subject to approval by our Board of Directors, we have the right but not the obligation to sell more than 35.0 million shares to Fusion Capital. In the event we elect to sell more than 35.0 million shares, we will be required to file a new registration statement and have it declared effective by the U.S. Securities & Exchange Commission.
The extent we rely on Fusion Capital as a source of funding will depend on a number of factors including, the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources, such as through the sale of our products. Specifically, Fusion Capital shall not have the right nor the obligation to purchase any shares of our common stock on any business days that the stock sale price of our common stock is less than $0.05. If obtaining sufficient financing from Fusion Capital were to prove unavailable or prohibitively dilutive and if we are unable to commercialize and sell enough of our products, we will need to secure another source of funding in order to satisfy our working capital needs. Even if we are able to access the full $10.0 million under the common stock purchase agreement with Fusion Capital, we may still need additional capital
3
to fully implement our business, operating and development plans. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business, operating results, financial condition and prospects.
Risks Related to Development and Commercialization of Product Candidates and Dependence on Third Parties
Our products are still being developed and are unproven. These products may not be successful.
In order to become profitable, we must generate revenue through sales of our products, however our products are in varying stages of development and testing. Our products have not been proven in human research trials and have not been approved by any government agency for sale. If we cannot successfully develop and prove our products, and if we do not develop other sources of revenue, we will not become profitable and at some point we would discontinue operations.
We have sold no products or generated any product revenues and we do not anticipate any significant revenues to be generated in the foreseeable future.
We have conducted pre-clinical trials and are conducting clinical trials and will continue to do so for several more years before we are able to commercialize our technology. Although we have recognized revenues from government grants, there can be no assurance that we will ever generate significant product revenues.
Whether we are successful will be dependent, in part, upon the leadership provided by our management. If we were to lose the services of any of these individuals, our business and operations may be adversely affected.
Whether our business will be successful will be dependent, in part, upon the leadership provided by our officers, particularly our Chairman, President and Chief Executive Officer, members of our Board of Directors and our primary scientist. The loss of the services of these individuals may have a dilutivean adverse effect on our operations.
Regulatory and legal uncertainties could result in significant costs or otherwise harm our business.
In order to manufacture and sell our products, we must comply with extensive international and domestic regulation. In order to sell our products in the United States, approval from the FDA is required. The FDA approval process is expensive and time-consuming. We cannot predict whether our products will be approved by the FDA. Even if they are approved, we cannot predict the time frame for approval. Foreign regulatory requirements differ from jurisdiction to jurisdiction and may, in some cases, be more stringent or difficult to meet than FDA requirements. As with the FDA, we cannot predict if or when we may obtain these regulatory approvals. If we cannot demonstrate that our products can be used safely and successfully in a broad segment of the patient population on a long-term basis, our products would likely be denied approval by the FDA and the regulatory agencies of foreign governments.
We will face intense competition and rapid technological change that could result in products that are superior to the products we will be commercializing or developing.
The market for vaccines that protect against HIV/AIDS is intensely competitive and is subject to rapid and significant technological change. We will have numerous competitors in the United States and abroad, including, among others, large companies with substantially greater resources than us. These competitors may develop technologies and products that are more effective or less costly than any of our future products or that could render our products obsolete or noncompetitive. We expect most of these competitors to have substantially more resources than us. In addition, the pharmaceutical industry continues to experience consolidation, resulting in an increasing number of larger, more diversified companies than us. Among other things, these companies can spread their research and development costs over much broader revenue bases than we can and can influence customer and distributor buying decisions.
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Our products may not gain market acceptance among physicians, patients, healthcare payors and the medical community. Significant factors in determining whether we will be able to compete successfully include:
| • | | the efficacy and safety of our vaccines; |
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| • | | the time and scope of regulatory approval; |
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| • | | reimbursement coverage from insurance companies and others; |
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| • | | the price and cost-effectiveness of our products; and |
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| • | | patent protection. |
Our product candidates are based on new technology and, consequently, are inherently risky. Concerns about the safety and efficacy of our products could limit our future success.
We are subject to the risks of failure inherent in the development of product candidates based on new technologies. These risks include the possibility that the products we create will not be effective, that our product candidates will be unsafe or otherwise fail to receive the necessary regulatory approvals or that our product candidates will be hard to manufacture on a large scale or will be uneconomical to market.
Many pharmaceutical products cause multiple potential complications and side effects, not all of which can be predicted with accuracy and many of which may vary from patient to patient. Long term follow-up data may reveal additional complications associated with our products. The responses of potential physicians and others to information about complications could materially affect the market acceptance of our products, which in turn would materially harm our business.
Because we cannot predict whether or when we will obtain regulatory approval to commercialize our product candidates, we cannot predict the timing of any future revenue from these product candidates.
We cannot commercialize any of our product candidates until the appropriate regulatory authorities have reviewed and approved the applications for the product candidates. The regulatory agencies may not complete their review processes in a timely manner and we may not obtain regulatory approval for any product candidate we or our collaborators develop. Satisfaction of regulatory requirements typically takes many years, if approval is obtained at all, is dependent upon the type, complexity and novelty of the product and requires the expenditure of substantial resources. Regulatory approval processes outside the United States may include all of the risks associated with the FDA approval process. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. The FDA has substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of a product candidate.
We may experience delays in our clinical trials that could adversely affect our financial results and our commercial prospects.
We do not know whether planned clinical trials will begin on time or whether we will complete any of our clinical trials on schedule or at all. Product development costs will increase if we have delays in testing or approvals or if we need to perform more or larger clinical trials than planned. Significant delays may adversely affect our financial results and the commercial prospects for our products, and delay our ability to become profitable.
We rely heavily on the HIV Vaccine Trials Network (HVTN), independent clinical investigators, and other third party service providers for successful execution of our clinical trials, but do not control many aspects of their activities. We are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, for conducting and recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Third parties may not complete activities on schedule, or may not conduct our
5
clinical trials in accordance with regulatory requirements or our stated protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our product candidates.
Unsuccessful or delayed regulatory approvals required to exploit the commercial potential of our products could increase our future development costs or impair our future sales.
None of our products or technologies have been approved by the FDA for sales in the United States or in foreign countries. To exploit the commercial potential of our technologies, we are conducting and planning to conduct additional pre-clinical studies and clinical trials. This process is expensive and can require a significant amount of time. Failure can occur at any stage of testing, even if the results are favorable. Failure to adequately demonstrate safety and efficacy in clinical trials would prevent regulatory approval and restrict our ability to commercialize our technologies. Any such failure may severely harm our business. In addition, any approvals we obtain may not cover all of the clinical indications for which approval is sought, or may contain significant limitations in the form of narrow indications, warnings, precautions or contraindications with respect to conditions of use, or in the form of onerous risk management plans, restrictions on distribution, or post-approval study requirements.
State pharmaceutical marketing compliance and reporting requirements may expose us to regulatory and legal action by state governments or other government authorities.
In recent years, several states, including California, Vermont, Maine, Minnesota, New Mexico and West Virginia, have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs and file periodic reports on sales, marketing, pricing and other activities. Similar legislation is being considered in other states. Many of these requirements are new and uncertain, and available guidance is limited. Unless we are in full compliance with these laws, we could face enforcement action and fines and other penalties and could receive adverse publicity, all of which could harm our business.
We may be subject to new federal and state legislation to submit information on our open and completed clinical trials to public registries and databases.
In 1997, a public registry of open clinical trials involving drugs intended to treat serious or life-threatening diseases or conditions was established under the Food and Drug Administration Modernization Act, or the FDMA, in order to promote public awareness of and access to these clinical trials. Under the FDMA, pharmaceutical manufacturers and other trial sponsors are required to post the general purpose of these trials, as well as the eligibility criteria, location and contact information of the trials. Since the establishment of this registry, there has been significant public debate focused on broadening the types of trials included in this or other registries, as well as providing for public access to clinical trial results. A voluntary coalition of medical journal editors has adopted a resolution to publish results only from those trials that have been registered with a no-cost, publicly accessible database, such as www.clinicaltrials.gov. Federal legislation was introduced in the fall of 2004 to expand www.clinicaltrials.gov and to require the inclusion of study results in this registry. The Pharmaceutical Research and Manufacturers of America has also issued voluntary principles for its members to make results from certain clinical studies publicly available and has established a website for this purpose. Other groups have adopted or are considering similar proposals for clinical trial registration and the posting of clinical trial results. Failure to comply with any clinical trial posting requirements could expose us to negative publicity, fines and other penalties, all of which could materially harm our business.
We will face uncertainty related to pricing and reimbursement and health care reform.
In both domestic and foreign markets, sales of our products will depend in part on the availability of reimbursement from third-party payors such as government health administration authorities, private health insurers, health maintenance organizations and other health care-related organizations. Reimbursement by such payors is presently undergoing reform and there is significant uncertainty at this time how this will affect sales of certain pharmaceutical products.
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Medicare, Medicaid and other governmental healthcare programs govern drug coverage and reimbursement levels in the United States. Federal law requires all pharmaceutical manufacturers to rebate a percentage of their revenue arising from Medicaid-reimbursed drug sales to individual states. Generic drug manufacturers’ agreements with federal and state governments provide that the manufacturer will remit to each state Medicaid agency, on a quarterly basis, 11% of the average manufacturer price for generic products marketed and sold under abbreviated new drug applications covered by the state’s Medicaid program. For proprietary products, which are marketed and sold under new drug applications, manufacturers are required to rebate the greater of (a) 15.1% of the average manufacturer price or (b) the difference between the average manufacturer price and the lowest manufacturer price for products sold during a specified period.
Both the federal and state governments in the United States and foreign governments continue to propose and pass new legislation, rules and regulations designed to contain or reduce the cost of health care. Existing regulations that affect the price of pharmaceutical and other medical products may also change before any products are approved for marketing. Cost control initiatives could decrease the price that we receive for any product developed in the future. In addition, third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services and litigation has been filed against a number of pharmaceutical companies in relation to these issues. Additionally, some uncertainty may exist as to the reimbursement status of newly approved injectable pharmaceutical products. Our products may not be considered cost effective or adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an adequate return on our investment.
We may not be successful in establishing collaborations for product candidates we may seek to commercialize, which could adversely affect our ability to discover, develop and commercialize products.
We expect to seek collaborations for the development and commercialization of product candidates in the future. The timing and terms of any collaboration will depend on the evaluation by prospective collaborators of the trial results and other aspects of our vaccine’s safety and efficacy profile. If we are unable to reach agreements with suitable collaborators for any product candidate, we would be forced to fund the entire development and commercialization of such product candidates, and we may not have the resources to do so. If resource constraints require us to enter into a collaboration early in the development of a product candidate, we may be forced to accept a more limited share of any revenues this product may eventually generate. We face significant competition in seeking appropriate collaborators. Moreover, these collaboration arrangements are complex and time-consuming to negotiate and document. We may not be successful in our efforts to establish collaborations or other alternative arrangements for any product candidate. Even if we are successful in establishing collaborations, we may not be able to ensure fulfillment by collaborators of their obligations or our expectations.
We do not have sales and marketing experience and our lack of experience may restrict our success in commercializing our product candidates.
We do not have experience in marketing or selling vaccines. We may be unable to establish satisfactory arrangements for marketing, sales and distribution capabilities necessary to commercialize and gain market acceptance for our products. To obtain the expertise necessary to successfully market and sell our vaccines, will require the development of our own commercial infrastructure and/or collaborative commercial arrangements and partnerships. Our ability to make that investment and also execute our current operating plan is dependent on numerous factors, including, the performance of third party collaborators with whom we may contract. Accordingly, we may not have sufficient funds to successfully commercialize our vaccines in the United States or elsewhere.
We may be required to defend lawsuits or pay damages for product liability claims.
Product liability is a major risk in testing and marketing biotechnology and pharmaceutical products. We may face substantial product liability exposure in human clinical trials and for products that we sell after regulatory approval. We carry product liability insurance and we expect to continue such policies. Product liability claims, regardless of their merits, could exceed policy limits, divert management’s attention, and adversely affect our reputation and the demand for our products.
7
Risks Related to Our Intellectual Property
Other parties may claim that we infringe their intellectual property or proprietary rights, which could cause us to incur significant expenses or prevent us from selling products.
Our success will depend in part on our ability to operate without infringing the patents and proprietary rights of third parties. The manufacture, use and sale of new products have been subject to substantial patent rights litigation in the pharmaceutical industry. These lawsuits generally relate to the validity and infringement of patents or proprietary rights of third parties. Infringement litigation is prevalent with respect to generic versions of products for which the patent covering the brand name product is expiring, particularly since many companies which market generic products focus their development efforts on products with expiring patents. Pharmaceutical companies, biotechnology companies, universities, research institutions or other third parties may have filed patent applications or may have been granted patents that cover aspects of our products or our licensors’ products, product candidates or other technologies.
Future or existing patents issued to third parties may contain patent claims that conflict with our products. We expect to be subject to infringement claims from time to time in the ordinary course of business, and third parties could assert infringement claims against us in the future with respect to our current products or with respect to products that we may develop or license. Litigation or interference proceedings could force us to:
| • | | stop or delay selling, manufacturing or using products that incorporate or are made using the challenged intellectual property; |
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| • | | pay damages; or |
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| • | | enter into licensing or royalty agreements that may not be available on acceptable terms, if at all. |
Any litigation or interference proceedings, regardless of their outcome, would likely delay the regulatory approval process, be costly and require significant time and attention of our key management and technical personnel.
Any inability to protect intellectual property rights in the United States and foreign countries could limit our ability to manufacture or sell products.
We will rely on trade secrets, unpatented proprietary know-how, continuing technological innovation and, in some cases, patent protection to preserve a competitive position. Our patents and licensed patent rights may be challenged, invalidated, infringed or circumvented, and the rights granted in those patents may not provide proprietary protection or competitive advantages to us. We and our licensors may not be able to develop patentable products. Even if patent claims are allowed, the claims may not issue, or in the event of issuance, may not be sufficient to protect the technology owned by or licensed to us. If patents containing competitive or conflicting claims are issued to third parties, we may be prevented from commercializing the products covered by such patents, or may be required to obtain or develop alternate technology. In addition, other parties may duplicate, design around or independently develop similar or alternative technologies.
We may not be able to prevent third parties from infringing or using our intellectual property, and the parties from whom we may license intellectual property may not be able to prevent third parties from infringing or using the licensed intellectual property. We generally will attempt to control and limit access to, and the distribution of, our product documentation and other proprietary information. Despite efforts to protect this proprietary information, however, unauthorized parties may obtain and use information that we may regard as proprietary. Other parties may independently develop similar know-how or may even obtain access to these technologies.
The laws of some foreign countries do not protect proprietary information to the same extent as the laws of the United States, and many companies have encountered significant problems and costs in protecting their proprietary information in these foreign countries.
The U.S. Patent and Trademark Office and the courts have not established a consistent policy regarding the breadth of claims allowed in pharmaceutical patents. The allowance of broader claims may increase the incidence
8
and cost of patent interference proceedings and the risk of infringement litigation. On the other hand, the allowance of narrower claims may limit the value of our proprietary rights.
Risks Related to Our Common Stock
The sale of our common stock to Fusion Capital may cause dilution and the sale of the shares of common stock acquired by Fusion Capital could cause the price of our common stock to decline.
In connection with entering into the agreement, we authorized the sale to Fusion Capital of up to 35.0 million shares of our common stock. The number of shares ultimately offered for sale by Fusion Capital under this prospectus is dependent upon the number of shares purchased by Fusion Capital under the agreement. The purchase price for the common stock to be sold to Fusion Capital pursuant to the common stock purchase agreement will fluctuate based on the price of our common stock. The terms upon which weAll 40,161,020 shares registered in this offering are expected to be freely tradable when sold pursuant to this prospectus. It is anticipated that shares registered in this offering will be ablesold over a period of up to obtain additional25 months from the date of this prospectus. The 2,480,510 shares issued as an initial commitment fee may not be sold by Fusion Capital until the earlier of 500 days from May 8, 2008, or the termination of the common stock purchase agreement, subject to certain exceptions. Depending upon market liquidity at the time, a sale of shares under this offering at any given time could cause the trading price of our common stock to decline. Fusion Capital may ultimately acquire all, some or none of the 37,480,510 shares of common stock not yet issued but registered in this offering. After it has acquired such shares, it may sell all, some or none of such shares. Therefore, sales to Fusion Capital by us under the agreement may result in substantial dilution to the interests of other holders of our common stock.
The agreement with Fusion Capital may adversely impact our other fundraising initiatives.
The sale of a substantial number of shares of our common stock under this offering, or anticipation of such sales, could make it more difficult for us to sell equity capital could alsoor equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales. However, we have the right to control the timing and amount of any sales of our shares to Fusion Capital and the agreement may be adversely affected.terminated by us at any time at our discretion without any cost to us.
The market price of our common stock is highly volatile.
The market price of our common stock has been and is expected to continue to be highly volatile. Factors, including announcements of technological innovations by us or other companies, regulatory matters, new or existing products or procedures, concerns about our financial position, operating results, litigation, government regulation, developments or disputes relating to agreements, patents or proprietary rights, may have a significant impact on the market price of our stock. In addition, potential dilutive effects of future sales of shares of common stock by shareholders and by the Company, including Fusion Capital pursuant to this prospectus and subsequent sale of common stock offered by this prospectus, or merely the possibility that these sales
could occur,holders of warrants and options could have an adverse effect on the market price of our shares.
Our common stock.
Itstock is and likely thatwill remain subject to the SEC’s “Penny Stock” rules, which may make our shares will be subjectmore difficult to substantial price and volume
fluctuations due to a number of factors, many of which will be beyond our
control.
The securities markets have recently experienced significant price and volume
fluctuations. The market prices and volume of securities of technology and
development-stage companies have been especially volatile. Market volatility and
other market conditions could reducesell.
Because the
market price for our shares despite
operating performance. In addition, if our operating performance falls below
expectations, the market price of our shares could decrease significantly. You
may be unable to resell shares at or above the registration price. In the past,
companies that have experienced volatility in the market price of their stock
have been the subject of securities class action litigation. If we were the
subject of such litigation we could experience substantial litigation costs and
diversion of management's attention and resources.
We have not paid any dividends and have no expectation of paying dividends in
the foreseeable future.
We have not declared, paid, or distributed any cash dividends on our shares in
the past, nor are any cash dividends contemplated in the foreseeable future.
There is no assurance that our operations will generate any profits from which
to pay cash dividends. Even if profits are generated through operations in the
future, our present intent is to retain any such profits for acquisitions,
product development, production and marketing, and for general working capital
requirements.
Our shares are not widely traded.
There is only a limited market for our shares. If a large portion of the shares
eligible for immediate resale after registration were to be offered for public
resale within a short period of time, the current public market would likely be
unable to absorb such shares. This could result in a significant reduction in
current market prices. There can be no assurance that investors will be able to
resell shares at the price they paid for the shares or at any price.
Our shares are subject to special trading rules relating to "penny stocks" which
restrict trading.
Our shares are covered by an SEC rule that imposes additional sales practice
requirements on broker-dealers who sell "penny stock" to persons other than
certain established customers. For transactions covered by the rule, the
broker-dealer must obtain sufficient information from the customer to make an
appropriate suitability determination, provide the customer with a written
statement setting forth the basis of the determination and obtain a signed copy
of the suitability statement from the customer. The rule may affect the ability
of broker-dealers to sell our shares and also may affect your ability to sell
shares in the secondary market.
Risks Related to Our Strategy
We may be unable to identify or acquire additional technologies or products to
diversify our product offering which could reduce our ability to generate
revenues.
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One of our goals is to become a leading provider of niche electronic products.
We expect to avoid reliance upon any one given product through acquisition
and/or development of additional technologies and products. However, we may be
unable to identify or acquire technologies or products. In that case, we may
have to rely upon our own resources to develop such technologies and products
internally. We may not have sufficient resources to do this. In addition,
acquisitions involve a number of special risks, such as diversion of
management's attention and financing issues, which may have a negative impact on
operations and financial performance. The Company does not have any current
plans or proposals for any acquisitions at this time.
We may not be able to efficiently integrate any acquired technologies, products
or businesses which may require additional time by senior management and disrupt
our current business.
We will actively look to acquire technologies, products and other businesses to
complement our operations. There can be no assurance that we will be able to
integrate the operations of any other business successfully. Acquisitions we do
undertake will subject us to a number of risks, including the following:
. inability to institute the necessary systems and procedures, such as
accounting and financial reporting systems;
. assumption of debt;
. issuance of additional common stock, thereby diluting current shareholders
ownership;
. reallocation of managements time away from its current activities;
. failure to retain key personnel; and
. assumption of unanticipated legal liabilities and other problems.
In addition, we may acquire technologies or products that prove incompatible to
other products following further development.
Even if we successfully integrate acquired technologies, products or businesses,
the additional strain on management and current resources may prevent us from
effectively managing the growth.
We seek to become profitable by expanding sales of Orasis(R), the OraLynx(TM)
set-top box and any new products that we may develop or acquire. To manage
growth, we may be required to:
. improve existing and implement new operational, production and personnel
systems;
. hire, train and manage additional qualified personnel; and
. establish relationships with additional suppliers and strategic partners
while maintaining existing relationships.
The existing purchase orders received from international companies subjects us
to risks associated with international operation, such as collection of accounts
receivable, foreign currency fluctuations and regulatory requirements.
As we begin shipping under the purchase orders and set-top box agreement, we
risk exposure to international risks, including:
. greater difficulty in accounts receivable collection and longer collection
periods;
. unexpected changes in regulatory requirements;
. foreign currency fluctuations;
. reduced protection of intellectual property rights;
. potentially adverse tax consequences; and
. political instability.
At the present time, the Company is only currently operating in one foreign
country, Greece. However, as the Company continues to grow and develop,
expansion may very well occur in other countries, primarily in Europe.
11
Risks Related to Development, Production and Marketing of Our Products
The Company has developed two products in five years and the future of the
Company will be affected by the success of these products.
From June of 1997 through June of 1999, the Company was principally engaged in
research and development activities involving the hand-held computer. Since
then, the Company has been working on new technologies, in particular the design
and development of the set-top boxes. The Company's products have been sold in
limited quantities and there can be no assurance that a significant market will
develop for such products in the future. Therefore, the Company's inability to
develop, manufacture and market its products on a timely basis may have a
material adverse effect on the Company's financial results.
Product development involves substantial expense and resource allocation that
may exceed our capabilities.
We incurred substantial expense in developing the Orasis(R) computer. We expect
to continue to develop enhancements and accessory equipment to meet customer and
market demands. The OraLynx(TM) set-top box is in the final development stage.
Although we anticipate further expense associated with the final stage of
development, it will not be substantial. However, delays in development arising
from insufficient cash or personnel resources will hinder our ability to bring
these products to market before competitors introduce comparable products. In
that case, we will miss the opportunity to capitalize on the technological
advances, which we believe such products may offer.
We depend on outside sources for components and may be harmed by unavailability
of components, excessive prices for components or unexpected delays in component
deliveries.
The Orasis(R) and OraLynx(TM) set-top box use or will use various component
parts, such as PCBs, microchips and fabricated metal parts. We must obtain these
components from manufacturers and third-party vendors. While we do not
anticipate any possible delays or problems in securing parts, our reliance on
those manufacturers and vendors, as well as industry component supply, may
create risks including the following:
. the possibility of a shortage of components;
. increases in component costs;
. variable component quality;
. reduced control over delivery schedules; and
. potential manufacturer/vendor reluctance to extend credit to us.
Additionally, we are currently utilizing the services of a subcontractor for the
manufacture of our OraLynx(TM) set-top box. If this subcontractor is unable to
meet our requests for product, or if there is a shortage of component parts or
if the cost of these parts substantially increases, our operations and our
success in the marketplace could be materially and adversely affected. The
Company has secured alternative subcontractors and vendors, should our current
sources be unavailable. However, similar risks are present with these
alternative sources.
Errors or defects in our products could result in customer refund or product
liability claims causing an impact on market penetration, acceptance of our
products, profitability and on the cash flow of the Company.
Because our products are complex, they could contain errors or bugs that can be
detected at any point in a product's life cycle. While we continually test our
products for errors and will work with customers to identify and correct bugs,
errors may be found in the future. Although many of these errors may prove to be
immaterial, any of these errors could be significant. Detection of any
significant errors may result in:
. loss of or delay in market acceptance and sales of our products;
. diversion of development resources;
. injury to our reputation; or
. increased maintenance and warranty costs.
Errors or defects could harm our business and future operating results. With
defective products, our market share would be negatively impacted and the
Company would lose substantial future revenue. Moreover, because our products
12
will be used in critical computing functions, we may receive significant
liability claims if our products do not work properly. Our agreements with
customers typically do and will contain provisions intended to limit our
exposure to product liability claims. However, these provisions may not preclude
all potential claims. Liability claims could require us to spend significant
time, money and effort in litigation. They also may result in substantial damage
awards. Any such claim, whether or not successful, could materially damage our
reputation, cause a strain on our results of operation with the lack of revenue
and additional expenses, and burden management resources by focusing efforts on
the errors or defects as opposed to product development and growth.
We will be unable to develop, produce and market our products without qualified
professionals and seasoned management.
Our success depends in large part on our ability to recruit and retain
professionals, key management and operating personnel. We need to complete
development of the OraLynx(TM) set-top box, continue to develop and modify the
Orasis(R) and coordinate production of Orasis(R) computers and the OraLynx(TM)
set-top box. We also need to develop marketing channels to increase market
awareness and sales of our products. Qualified professionals, management and
operating personnel are essential for these purposes. Such individuals are in
great demand and are likely to remain a limited resource in the foreseeable
future. Competition for them is intense and turnover is high. If we cannot
attract and retain needed personnel, we will not succeed.
We believe that our future success will depend on our ability to retain the
services of our executive officers. These officers have developed industry
relationships that are critical to our growth and development. They also will be
essential in dealing with the significant challenges that we expect will arise
from anticipated growth in our operations.
We have an ongoing need to expand management personnel and support staff. The
loss of one or more members of management or key employees, or the inability to
hire additional personnel as needed, could have a material adverse effect on our
operations.
Risks Related to Competition within Our Industry
Competition in our industry is intense and we may not be able to compete
successfully due to our limited resources.
Our industry is highly competitive and dominated by competitors with substantial
resources. Continuous improvement in product pricing and performance is the key
to future success. At all levels of competition, pricing has become very
aggressive. We expect pricing pressure to continue to be intense. Many of our
competitors are larger and have significantly greater financial, technical,
marketing and manufacturing resources. They also have broader product lines,
greater brand name recognition and larger existing customer bases. As a result,
our competitors may be better able to finance acquisitions or internal growth or
respond to technological changes or customer needs.
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address customer needs. There can be no assurance that we will
be able to compete successfully in developing, manufacturing or marketing our
products. An inability to do so would adversely affect our business, financial
condition and market price of our shares.
Our industry is subject to rapid technological change and we may not be able to
keep up.
Rapid technological change, frequent new product introductions and enhancements,
uncertain product life cycles and changes in customer demands and evolving
industry standards, characterize the computer industry. Our products could
become obsolete if products based on new technologies are introduced or if new
industry standards emerge.
Computer equipment is inherently complex. As a result, we cannot accurately
estimate the life cycles of our products. New products and product enhancements
can require long development and testing periods, which requires retention of
increasingly scarce technically competent personnel. Significant delays in new
product releases or significant problems in installing or implementing new
products can seriously damage our business. In the past, we have experienced
delays in scheduled product introductions and cannot be certain that we will
avoid similar delays in the future. We must produce products that are
technologically advanced and comparable to and competitive with those made by
others. Otherwise, our products may become obsolete or we will fail to achieve
market acceptance.
13
Our future success depends on our ability to enhance existing products, develop
and introduce new products, satisfy customer requirements and achieve market
acceptance. We cannot be certain that we will successfully identify new product
opportunities and develop and bring new products to market in a timely and
cost-effective manner.
We may sell fewer products if other vendors' products are no longer compatible
with ours or other vendors bundle their products with those of our competitors
and sell them at lower prices.
Our ability to sell our products depends in part on the compatibility of our
products with other vendors' software and hardware products. For example,
Orasis(R) will not sell if it cannot run software, or access resources such as
Internet or telephone services provided by others. The same is true for the
set-top box. Other vendors may change their products so that they will no longer
be compatible with our products. These vendors also may decide to bundle their
products with products of our competitors for promotional purposes and to
discount the sales price of the bundled products. If this were to occur, our
business and future operating results could suffer.
We have limited intellectual property protection and our competitors may be able
to appropriate our technology or assert infringement claims.
Our products are differentiated from those of our competitors by our internally
developed technology that is incorporated into our products. If we fail to
protect our intellectual property, others may appropriate our technology and
sell products with features similar to ours. This could reduce demand for our
products. We rely on a combination of trade secrets, copyright and trademark
laws, non-disclosure and other contractual provisions with employees and third
parties, and technical measures to protect our proprietary rights in our
products. There can be no assurance that these protections will be adequate or
that our competitors will not independently develop technologies that are
substantially equivalent or superior to ours.
We believe that our products do not infringe upon the proprietary rights of
third parties. However, there can be no assurance that third parties will not
assert infringement claims against us in the future or that a license or similar
agreement will be available on reasonable terms in the event of an unfavorable
ruling on any such claim. In addition, any such claim may require us to commit
substantial time and effort, and to incur substantial litigation expenses, and
may subject us to significant liabilities that could have a material adverse
effect on our financial condition and results of operations.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. Any statement that is not a statement of
historical fact constitutes a forward-looking statement. You can identify these
statements by forward-looking words such as "may", "will", "intend", "believe",
"anticipate", "estimate", "expect", "project" and similar words. You should read
statements that contain these words carefully because they discuss our future
expectations, contain projections of our future results of operation and of our
financial condition or state other forward looking information. This prospectus
also includes third party estimates regarding the size and growth of markets and
mobile computer equipment usage in general.
You should not place undue reliance on these forward-looking
statements. The sections captioned "Risk Factors" and "The Company" as well as
any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from our expectations.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We are under no duty to update
any of the forward looking statements after the date of this prospectus or to
conform these statements to actual results or to changes in our expectations,
except with respect to material developments related to previously disclosed
information.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You can read and copy these reports, proxy
statements and other information at the SEC's public reference room at 450 Fifth
Street, N.W., Judiciary Plaza, Washington D.C. Copies of such materials can be
obtained from the public reference
14
room at prescribed rates. You can obtain information regarding operation of the
public reference room by calling the SEC at 1-800-SEC-0330. Such material can
also be inspected and printed from the SEC's Internet site located at
http://www.sec.gov.
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USE OF PROCEEDS
All net proceeds from the sale of the common stock covered by this
prospectus will be received by the selling shareholder. We will not receive any
proceeds from the sale of the common stock by the selling shareholder other than
from the possible exercise of warrants to purchase 700,000 shares of common
stock at $1.3064 per share. Any proceeds received from the exercise of warrants
will be used for general corporate purposes.
RECENTLY ISSUED SECURITIES
On September 28, 2001 the Company entered into a $10 million Securities Purchase
Agreement with Crescent International Ltd., an institutional investor. Under the
Securities Purchase Agreement, the Company issued a Convertible Note for $2.5
million. Although the Company had the option to issue further convertible notes
to Crescent subject to certain conditions precedent, such option expired on
February 1, 2002 and no additional notes were issued. In addition, the Company
issued warrants exercisable to purchase 700,000 shares of common stock at a
price of $1.3064 per share for a five-year term. The Stock Purchase Agreement
further permits the Company to sell to Crescent up to $7.5 million in common
stock of the Company over a 24-month period. Additionally, the Company agreed
not to exercise any drawdowns against its then existing common stock purchase
agreement with Techrich International Ltd., which expired on January 28, 2002.
The Securities Purchase Agreement permits the Company to sell to Crescent and
requires Crescent to purchase from the Company, at the Company's sole
discretion, common stock of the Company for up to $7.5 million over a 24-month
period. Individual sales are limited to $1.5 million, or a higher amount if
agreed to by the Company and Crescent, and each sale is subject to our
satisfaction of the following conditions precedent (none of which are within the
control of Crescent): (1) the Company's representations and warranties must be
true and complete, (2) the Company must have one or more then currently
effective registration statements covering the resale by Crescent of all shares
issued in prior sales to Crescent and issuable upon the conversion of the
Convertible Note, (3) there must be no dispute as to the adequacy of disclosures
made in any such registration statement, (4) such registration statements must
not be subject to any stop order, suspension or withdrawal, (5) the Company must
have performed its covenants and obligations under the Securities Purchase
Agreement, (6) no statute, rule, regulation, executive order, decree, ruling or
injunction may have been enacted, entered, promulgated or adopted by any court
of governmental authority that would prohibit the Company's performance under
the Securities Purchase Agreement, (7) the company's common stock must not have
been delisted from its principal trading market and there must be no trading
suspension of its common stock in effect, and (8) the issuance of the designated
number of shares of common stock with respect to the applicable sale must not
violate the shareholder approval requirements of the Company's principal trading
market. The aggregate amount of all sale shares and convertible notes issued
cannot exceed $10 million. The amount of the sale is limited to twice the
average of the bid price multiplied by the trading volume during the 22 trading
day period immediately preceding the date of sale. When the total amount of
securities issued to Crescent equals or exceeds $5 million, then the Company
shall issue to Crescent a subsequent incentive warrant exercisable to purchase
400,000 shares of common stock at a price equal to the bid price on the date the
incentive warrant is issued.
Convertible Note Issued to Crescent International
On October 2, 2001, in accordance with the Securities Purchase
Agreement, the Company issued a Convertible Note to Crescent in the amount of
$2,500,000, due September 28, 2004. The Company is not required to pay interest
on the Note unless the Company fails for a period of 10 trading days to issue
shares upon conversion or pay the remaining principal of the Note upon maturity
or redemption. If the Company fails to issue shares or pay the remaining
principal upon maturity or redemption, interest shall be payable at a fixed rate
of 8% per annum, payable in quarterly installments, on the outstanding principal
balance immediately prior to the date of conversion, until the Note is fully
converted or redeemed.
15
The Company retains the right to redeem the Convertible Note upon 30 days notice
at a price of 110% during the first year of its issuance, 120% during the second
year and 130% thereafter. Additionally, the Company can require the conversion
of the note into shares of our common stock if we satisfy each of the following
requirements:
. The shares of our common stock issuable upon conversion of the
Convertible Note may be sold by Crescent without registration and
without any time, volume or manner limitations pursuant to Rule 144
(or any similar provision then in effect) under the Securities Act of
1933;
. The bid price for each of the 22 trading days immediately preceding
the date of notice of a required conversion is delivered by the
Company to Crescent is at least $1.881 (190% of Bid Price on
Subscription Date);
. Unless otherwise agreed to in writing by Crescent, the number of
shares of our common stock issuable upon such required conversion of
the Convertible Note is less than twice the average of the daily
trading volume during the 22 trading day period immediately preceding
the date of notice of a required conversion is delivered by the
Company to Crescent;
. At least 22 trading days have elapsed since a conversion date relating
to a prior conversion required by the Company or Crescent; and
. No shares are subject to any shareholder agreements, lock-up
provisions or restrictions on transfer of any kind whatsoever.
The holder of the Note may convert the Note in whole or in part to common stock
of the Company at any time at the lower of $1.1561 or the average of the lowest
three consecutive bid prices during the 22 days preceding the date of
conversion. The conversion price and the number of note conversion shares is
subject to certain standard anti-dilution adjustments including
reclassification, consolidation, merger or mandatory share exchange; subdivision
or combination of shares; stock dividends; and the issuance of additional
capital shares by us at prices less than the conversion price.
We have the right to reject any conversion if the average bid price of our common stock during the seven trading days preceding the delivery date of
Crescent's conversion notice is currently and may remain less than $0.75$5.00 per share. This right expires
120 days aftershare, it is first exercised by us. Based upon this provision,classified as a “penny stock.” The SEC rules regarding penny stocks may have the maximum numbereffect of reducing trading activity in our shares, making it more difficult for investors to sell. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must: | • | | make a special written suitability determination for the purchaser; |
|
| • | | receive the purchaser’s written agreement to a transaction prior to sale; |
9
| • | | provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; |
|
| • | | obtain a signed and dated acknowledgement from the purchaser demonstrating that the purchaser has received the required risk disclosure document before a transaction in a “penny stock” can be completed; and |
|
| • | | give bid and offer quotations and broker and salesperson compensation information to the customer orally or in writing before or with the confirmation. |
These rules make it more difficult for broker-dealers to effectuate customer transactions and trading activity in our securities and may result in a lower trading volume of our common stock that we may be required to issue
upon the conversion of the Convertible Note would be 3,333,333 shares assuming
the conversion price is $0.75 per share.
In furtherance of this transaction, the Company entered into a registration
rights agreement, whereby it is required to file a registration statement, of
which this prospectus is a part, on behalf of Crescent with respect to the note
conversion shares and warrant shares issuable pursuant to the warrants issued to
Crescent. Similar registration statements are to be filed for each subsequentlower trading prices.
The sale of securities to Crescent. The failure of the Company to obtain the
effectiveness of its registration statements as required under the registration
rights agreement may subject it to certain financial penalties.
Securities issuable to Crescent International
Under the Securities Purchase Agreement with Crescent International Ltd., we can
obtain, subject to applicable fees and expenses and the terms and conditions of
the agreement, an additional $7.5 million by selling up to 10,000,000 shares of our common stock to Crescent at various points in time, beginning 22 days after
the registration statement of which this prospectus is a part becomes effective.
Additionally, Crescent had the rightFusion Capital may not be possible when we need it, thus limiting our ability to assign its obligation to purchase sharescontinue our product development and commercialization.
We cannot begin sales of our common stock to
affiliatesFusion Capital until the effectiveness of
Crescent; however, Crescent has informed us
that it has no current or future plans to assign its obligations.
Specifically, with regard to the sale of shares of our common stock to Crescent,
we can from time to time at our option and subject to the limitations described
in this prospectus, issue and sell shares of our common stock with an aggregate
purchase price of up to twice the average daily trading value during the 22
trading day period immediately preceding the date of the notice by us requiring
Crescent to purchase, but no more than $1.5 million at one time. The purchase
price is determined by taking the lower of $1.1561 and 92% of the average of the
lowest three consecutive bid prices during the 22 trading day period immediately
preceding the applicable sale date.
16
Under the agreement we are required to register the shares issuable to Crescent
through the registration statement of which this prospectus is a part, and subsequent registration statements.
Warrants Issued to Crescent International
Incentive Warrantthe common stock purchase agreement may be terminated in the event of a default under the agreement. In further consideration for Crescent entering into the Securities Purchase
Agreement, the Company issued an Incentive Warrant to Crescent exercisableaddition, we may not require Fusion Capital to purchase 700,000 shares of common stock at a price of $1.3064 per share. The
Incentive Warrant is exercisable for a five-year period commencing September 28,
2001, and provides for adjustment in the price and number of warrant shares:
. If the Company, at any time while the Incentive Warrant is unexpired
and not exercised in full, consummates a reclassification,
consolidation, merger or mandatory share exchange, sale, transfer or
lease of substantially all of the assets of the Company;
. If the Company, at any time while the Incentive Warrant is unexpired
and not exercised in full, shall subdivide its common stock, combine
its common stock, pay a dividend in its capital shares, or make any
other distribution of its capital shares; and
. If the Company, at any time while the Incentive Warrant is unexpired
and not exercised in full, makes a distribution of its assets or
evidences of indebtedness to the holders of its capital shares as a
dividend in liquidation or by way of return of capital or other than
as a dividend payable out of earnings or surplus legally available for
dividends under applicable law or any distribution to such holders
made in respect of the sale of all or substantially all of the
Company's assets, or any spin-off of any of the Company's lines of
business, divisions or subsidiaries.
Upon each adjustment of the exercise price, the number of shares of our common stock issuable in connection withif the Incentive Warrant at the option of
Crescent shallpurchase price is less than $0.05 per share. Thus, we may be calculated,unable to the nerarest one hundredth of a whole share,
multiplying the number ofsell shares of our common stock issuable prior to an
adjustmentFusion Capital when we need the funds, and that could severely harm our business and financial condition and our ability to continue to develop and commercialize our products. See “The Fusion Transaction.” 10
FORWARD-LOOKING STATEMENTS
The information contained in this prospectus, including the information incorporated by reference into this prospectus, includes forward-looking statements as defined in the Private Securities Reform Act of 1995. These forward-looking statements are often identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “continue,” “plan” and similar expressions. These statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed for the reasons described in this prospectus. You should not place undue reliance on these forward-looking statements.
You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a fraction:
.number of factors, including:
| • | | We have a history of operating losses, and we expect losses to continue for the foreseeable future; |
|
| • | | Our business will require continued funding. If we do not receive adequate funding, we will not be able to continue our operations; |
|
| • | | Our products are still being developed and are unproven. These products may not be successful; |
|
| • | | We have sold no products or generated any product revenues and we do not anticipate any significant revenues to be generated in the foreseeable future; |
|
| • | | Whether we are successful will be dependent, in part, upon the leadership provided by our management. If we were to lose the services of any of these individuals, our business and operations may be adversely affected; |
|
| • | | Regulatory and legal uncertainties could result in significant costs or otherwise harm our business; |
|
| • | | We will face intense competition and rapid technological change that could result in products that are superior to the products we will be commercializing or developing; |
|
| • | | Our product candidates are based on new technology and, consequently, are inherently risky. Concerns about the safety and efficacy of our products could limit our future success; |
|
| • | | Because we cannot predict whether or when we will obtain regulatory approval to commercialize our product candidates, we cannot predict the timing of any future revenue from these product candidates; |
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| • | | We may experience delays in our clinical trials that could adversely affect our financial results and our commercial prospects; |
|
| • | | Unsuccessful or delayed regulatory approvals required to exploit the commercial potential of our products could increase our future development costs or impair our future sales; |
|
| • | | We may be subject to new federal and state legislation to submit information on our open and completed clinical trials to public registries and databases; |
|
| • | | We will face uncertainty related to pricing and reimbursement and health care reform; |
|
| • | | We do not have sales and marketing experience and our lack of experience may restrict our success in commercializing our product candidates; |
|
| • | | We may be required to defend lawsuits or pay damages for product liability claims; |
|
| • | | Other parties may claim that we infringe their intellectual property or proprietary rights, which could cause us to incur significant expenses or prevent us from selling products; |
11
| • | | The sale of our common stock to Fusion Capital may cause dilution and the sale of the shares of common stock acquired by Fusion Capital could cause the price of our common stock to decline; and |
|
| • | | Our common stock is and may remain subject to the SEC’s “Penny Stock” rules, which may make our shares more difficult to sell. |
You should also consider carefully the statements under “Risk Factors” and other sections of this prospectus, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements and could materially and adversely affect our business, operating results and financial condition. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements.
The numeratorforward-looking statements speak only as of the date on which shall bethey are made, and, except to the exercise price beforeextent required by federal securities laws, we undertake no obligation to update any adjustment; and
. The denominatorforward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of which shall be the exercise price after such
adjustment.unanticipated events. In addition, Crescentwe cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may not exercisecause actual results to differ materially from those contained in any forward-looking statements.
12
BUSINESS
GeoVax is a clinical stage biotechnology company engaged in research and development activities with a mission to develop, license and commercialize the manufacture and sale of human vaccines for diseases caused by Human Immunodeficiency Virus (“HIV”) and other infectious agents. We have exclusively licensed from Emory University certain Acquired Immune Deficiency Syndrome (“AIDS”) vaccine technology that was developed in collaboration with the National Institutes of Health and the Centers for Disease Control and Prevention.
GeoVax was originally incorporated under the name of Dauphin Technology, Inc. (“Dauphin”). Until December 2003, Dauphin marketed mobile hand-held, pen-based computers and broadband set-top boxes and provided private, interactive cable systems to the extended stay hospitality industry. Dauphin was unsuccessful and its warrant if, atoperations were terminated in December 2003. On September 28, 2006, Dauphin completed a merger (the “Merger”) with GeoVax, Inc. Pursuant to the timeAgreement and Plan of exercise,
the numberMerger, GeoVax, Inc. merged with and into GeoVax Acquisition Corp., a wholly-owned subsidiary of shares that it would receive, together with all other sharesDauphin. As a result of the Company's common stock which it beneficially owns, would result in Crescent
owning more than 9.9%Merger, the shareholders of the Company's common stock as would be outstanding on
the exercise date.
Protective Warrant
In further consideration for Crescent entering into the Securities Purchase
Agreement, if the Company elects to exercise its right with respect to any
subsequent sale to require Crescent to purchaseGeoVax, Inc. exchanged their shares of our common stock that
have not been previously registered and are not covered by an effective
registration statement, then on each closing date related to each subsequent
sale, the Company shall issue to Crescent a Protective Warrant with an exercise
price of $0.01 per share of common stock for Dauphin common stock and GeoVax, Inc. became a wholly-owned subsidiary of Dauphin. In connection with the purchaseMerger, Dauphin changed its name to GeoVax Labs, Inc., replaced most of suchits officers and directors with those of GeoVax, Inc. and moved its offices to Atlanta, Georgia. On June 18, 2008, we consummated a reincorporation merger pursuant to which we became a Delaware corporation. GeoVax, Inc. remains in existence as our wholly-owned subsidiary and conducts most of our business. We currently do not plan to conduct any business other than GeoVax, Inc.’s business of developing new products for the treatment or prevention of human diseases.
Overview of HIV/AIDS
What is HIV?
HIV (human immunodeficiency virus) is a retrovirus that carries its genetic code in the form of RNA (ribonucleic acid). Retroviruses use RNA and the reverse transcriptase enzyme to create DNA (deoxyribonucleic acid) from the RNA template. The HIV virus invades a human cell and produces its viral DNA which is subsequently inserted into the genetic material (chromosomes) of the cell. This infection converts helper T-cells (a type of white blood cell) from immunity producing cells into cells that produce and release HIV virus particles into the blood stream destroying the immune defense system of the individual.
There are several AIDS-causing HIV-1 virus subtypes, or “clades”, that are found in different regions of the world. These subtypes are identified as subtype A, subtype B on through C, D, E, F, etc. The predominant subtype found in Europe, North America, South America, Japan and Australia is B whereas the predominant subtypes in Africa are A and C. In India the predominant subtype is C. Each subtype is at least 20% different in its genetic sequence from other subtypes. These differences may mean that vaccines against one subtype may only be partially effective against other subtypes.
HIV-1, even within subtypes, has a high rate of variation or mutation. In drug treatment programs, virus mutation can result in virus escape, thereby rendering drug therapy ineffective. Hence, multi-drug therapy is very important. If several drugs are active against virus replication, the virus must undergo multiple simultaneous mutations to escape which is very unlikely. The same is true for immune responses. HIV-1 can escape single target immune responses. However, if an immune response is directed against multiple targets (epitopes), virus escape is much less frequent. Vaccination against more than one of the proteins found in HIV-1 maximizes the number of sharestargets for the immune response and increases the chance that HIV will not escape the vaccine-stimulated immune response, thus resulting in protection against clinical AIDS.
What is AIDS?
AIDS is the final, life-threatening stage of infection with the virus known as HIV-1. Infection with HIV-1 severely damages the immune system, the body’s defense against disease. HIV-1 infects and gradually destroys T-cells and macrophages, white blood cells that play key roles in protecting humans against infectious disease caused by viruses, bacteria, fungi and other micro-organisms.
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Opportunistic infections by organisms, normally posing no problem for control by a healthy immune system, can ravage persons with immune systems damaged by HIV-1 infections. Destruction of the immune system occurs over years; the average onset of the clinical disease recognized as AIDS occurs after 3-10 years of HIV-1 infection but can be earlier or later.
AIDS in humans was first identified in the US in 1981, but researchers believe that it was present in Central Africa as early as 1959. AIDS is most often transmitted sexually from one person to another but it is also transmitted by blood in shared needles (drug users) and through pregnancy and childbirth. Heterosexual activity is the most frequent route of transmission worldwide.
Viral load is the best indicator of the speed with which shallan individual will progress to AIDS, as well as the frequency with which an individual will spread infection. An estimated 1% or fewer of those infected have low enough levels of the virus to preclude progression to disease and to not transmit the infection (they are called “long-term non-progressors”).
AIDS is considered by many in the scientific and medical community to be determined by subtracting (x) the investment amount with
respectmost lethal infectious disease in the world. According to the applicable subsequent sale divided2007 Report on the Global AIDS Epidemic published by UNAIDS (the Joint United Nations Programme on HIV/AIDS), the total number of people living with HIV is 33.2 million globally with approximately 2.5 million infected in 2007 alone, the most recent year reported. Approximately 25 million people infected with HIV have died since the start of the HIV pandemic in 1981. According to International AIDS Vaccine Research Institute (IAVI) in a model developed with Advanced Marketing Commitment (AMC) dated June 2005, the global market for a safe and effective AIDS vaccine is estimated at approximately $4 billion.
The standard approach to treating HIV infection has been to lower viral loads by using drugs, reverse transcriptase inhibitors (“RTIs”) and protease inhibitors (“PIs”), or a combination of these drugs, to inhibit two of the viral enzymes that are necessary for the virus to reproduce. However, HIV is prone to genetic changes that can produce strains of HIV that are resistant to currently approved RTIs and PIs. HIV that is resistant to one drug within a class can become resistant to the entire class, meaning that it may be impossible to re-establish suppression of a genetically altered strain by substituting different RTI and PI combinations. Furthermore, these treatments continue to have significant limitations, such as viral resistance, toxicity and patient non-adherence to the treatment regimens. As a result, over time, many patients develop intolerance to these medications or simply give up taking the medications due to the side effects.
According to the International AIDS Vaccine Initiative, the cost and complexity of new treatment advances for AIDS puts them out of reach for most people in the countries where treatment is needed the most and as noted above, in industrialized nations, where drugs are more readily available, side effects and increased rates of viral resistance have raised concerns about their long term use. AIDS vaccines, therefore, are seen by many as the most promising way to end the HIV/AIDS pandemic. It is expected that vaccines for HIV/AIDS, once developed, will be used internationally by any organization that provides health care services, including hospitals, medical clinics, the military, prisons and schools.
AIDS Vaccines Being Developed by the purchase priceCompany
Our vaccines, initially developed by Dr. Harriet Robinson at Emory University in collaboration with researchers at the United States National Institutes of Health (NIH) National Institute of Allergy and Infectious Disease (NIAID), and the United States Centers for Disease Control (CDC), are recombinant DNA (deoxyribonucleic acid) and MVA (Modified Vaccinia Ankara) vaccines. Our focus is on developing AIDS vaccines comprising the major HIV-1 subtypes (A, B and C). These vaccines could be used alone or as combinations depending on a local infection. Subtype B is most common in North America, the EU, Japan and Australia and is our first priority.
When properly administered in series, these AIDS vaccines induce strong cellular and humoral immunity against the two major HIV-1 proteins, Gag and Env. In non human primate models vaccinations have been done in non-infected macaque monkeys to prevent the development of disease should they become infected (Preventative Vaccination) as well as in already infected macaque monkeys who are on drugs to allow control of virus in the absence of drugs (Therapeutic Vaccination). Both applications have met with success. The preventative
14
immunizations have controlled both SHIV (chimeras of SIV and HIV virus) and SIV infections. The therapeutic vaccine, which has only been tested with SIV infections, is most effective when the vaccination regimen is initiated before the destruction of the immune system by the infection.
Because of the difficulty raising antibodies that are capable of totally blocking natural HIV-1 infections, the GeoVax vaccine approach has focused on raising cellular immune responses in addition to antibodies, which together better control HIV-1 infections (prevent AIDS) than either alone. Vaccine induced cellular immune responses are mediated by white blood cells in the body called T-cells that recognize and respond to the presence of foreign proteins presented by an infection such as the HIV-1 virus. CD8 T-cells directly combat these infections by destroying HIV infected cells, while CD4 T-cells provide growth factors that support activation and maintenance of CD8 T-cell responses. Proteins produced in the cells of a person are the best substrates for raising CD8 T-cell responses. GeoVax vaccines are expressed in cells of the vaccinated person by genetically engineered DNA vaccines and live viral vector MVA vaccines.
Our method of stimulating high T-cell frequencies and antibodies in the vaccinated person is to combine DNA vaccine priming with a recombinant live virus MVA vaccine boost. This prime/boost combination elicits protective immune responses in preclinical monkey models and holds high promise for eliciting responses that will protect humans against the development of HIV/AIDS.
DNA as the Priming Vaccine
Proteins that are produced in host cells of the body are the best substrates for raising CD8 T-cell responses. The GeoVax vaccine achieves this cellular stimulation by using DNA vaccines and/or live viral vectors (MVA) as a system to stimulate T-cells to destroy HIV-1 viruses when they appear in the body. An effective method for stimulating high frequencies of T-cells in conjunction with antibodies is to combine DNA priming of the immune response with a recombinant live virus vectored booster (rMVA) of the immune response.
Priming with GeoVax’s HIV-1/DNA vaccine focuses the immune response on the sale date from (y) the investment amount with respect to the applicable
subsequent sale dividedHIV-1 components (proteins) expressed by the purchase priceDNA The proteins expressed by the DNA pose no known risk for infection because they comprise only part of the AIDS virus. The DNA prime is followed by injection of GeoVax’s HIV-1/MVA live virus vector booster which enhances the primed response in two ways – by expressing larger amounts of antigen than can be achieved with DNA alone, and by the infection stimulating pro-inflammatory response that enhances immunity in the individual.
MVA Booster Vaccine
MVA was chosen as the poxvirus vector to boost immunity induced by GeoVax DNA priming vaccination because of its safety features and because of the excellent protective responses that it has stimulated in preclinical (non-human primate) models.
MVA was originally developed as a safe smallpox vaccine for use in immuno-compromised humans by further attenuating the standard smallpox vaccine. During this attenuation (loss of disease causing ability), MVA also lost essentially all of its ability to replicate in human cells. The attenuation was accomplished by making over 500 passages of the virus in chicken embryos or chick embryo fibroblasts (CEF). During passage, the virus underwent 6 large genomic deletions. These deletions affected the ability of MVA to replicate and cause safety problems in humans, but did not compromise the ability of MVA to grow on the effective date applicable
to the sale date.
Liquidated Damages
Pursuant to our registration rights agreement with Crescent, weavian cells that are required to
pay Crescent liquidated damages if we fail to obtainfor manufacturing the virus.
The effectiveness of any
registration statement, including any future registration statement, required
under our registration rights agreement, or to maintainMVA as a vaccine vector is also accounted for by its effectiveness forloss of immune evasion genes during its passages in CEF cells. During the period required under our registration rights agreement. If we fail to
obtain the effectiveness of any registration statement for which effectiveness
is required under our registration rights agreement, we are required under the
registration rights agreement to pay to Crescent an amount equal to 2%years of the aggregate purchase price paid by Crescent for securities that are registered for
resale, or requireddreaded human smallpox epidemics these immune evasion genes assisted the spread of smallpox infections, even in the presence of human immune responses.
MVA was safely administered to
be registered for resale, by Crescent as describedover 120,000 people in
this prospectus, for each calendar month and for each
17
portionthe 1970’s to protect them against smallpox. With the advent of a calendar month, pro rata, during the period from the effective datebioterrorism, our choice of the applicable registration statement to the effective dateMVA vector becomes even more important, because of its potential for immunization for smallpox. GeoVax HIV vaccines may serve as both an HIV and a smallpox vaccine. 15
GeoVax’s DNA and MVA vaccines express over 66% of the applicable
deficit shares registration statement.AIDS virus (HIV-1) protein components in order to stimulate a broad anti-HIV immune response. The vaccines cannot cause AIDS because they do not include complete virus. We will also be liable for liquidated damages similarly computed if we fail to
keep any required registration statement effectivebelieve that the vaccines provide multi-target protection against the AIDS virus, thus largely limiting virus escape, large scale viral replication and the onset of clinical signs of AIDS in the vaccinated individual.
Preclinical Studies
Our vaccines underwent efficacy trials in non-human primates for a period of time ending
180 daysover 42 months. The GeoVax prototype DNA and MVA AIDS vaccines successfully protected rhesus macaque monkeys against AIDS when a highly virulent AIDS inducing virus (SHIV, a hybrid of simian and human immunodeficiency virus) was administered to the monkeys seven months after vaccination. In these pre-clinical trials the terminationvaccines caused no significant side effects and 22 out of Crescent's obligation23 monkeys were protected against AIDS while 5 out of 6 non-vaccinated control animals died of clinical AIDS. This level of control is comparable to purchase sharesthe intrinsic viral control exhibited by the approximately 1% of the human population that become infected with the HIV virus, but who do not develop clinical signs of AIDS (long-term non-progressors). Over 66% of the AIDS virus proteins are expressed by our DNA and MVA vaccines in vaccinated individuals. This broad coverage of HIV components is anticipated to stimulate broad protective responses in the vaccinated individual thus preventing clinical disease.
Following these animal trials, our vaccines were approved for Phase I trials in humans by the U.S. Food and Drug Administration (“FDA”). This preclinical work enabling development of the clinical evaluation of our common stock, plus one dayDNA and MVA vaccines was funded and supported by the NIAID. (See “Government Regulation” below for an explanation of how clinical trials are conducted.)
Phase I Human Clinical Trials
A Phase I clinical study in humans, evaluating our DNA-AIDS vaccine for safety began in January 2003 and was satisfactorily concluded in June 2004. This trial was conducted by the HIV Vaccine Trials Network (HVTN), consortium of trial sites supported by the United States National Institutes of Health.
The start of a series of four additional human trials evaluating our AIDS vaccines at four locations in the United States began in April 2006. These Phase Ia/Ib human trials are designed to determine if our vaccines are safe and will stimulate the level of immune responses (T-cell and antibody) that may protect against the development of clinical signs of AIDS. These trials are intended to provide human data that indicates our vaccine is safe and that it has the potential to protect vaccinated individuals against the development of AIDS.
The first of these four trials evaluated a low dose (1/10th of the vaccine dose) vaccination program. Results from this trial demonstrated excellent vaccine safety and positive anti-HIV-1 immune responses to the vaccine in 7 of 9 participants who received the vaccine. All trial participants were normal, healthy individuals.
The second of four trials, initiated in September 2006, was designed to evaluate results from full dose administration of our HIV/AIDS vaccines. The results indicate excellent safety in this full dose trial with positive immune response data in 88% of the 26 vaccine recipients who completed the trial. This trial protocol included vaccination with two full-doses of GeoVax’s DNA vaccine to prime the immune response followed by two full-doses of GeoVax’s MVA vaccine to boost the immune response. From data collected from the 26 participants who completed this trial, the following positive conclusions were observed:
| • | | GeoVax HIV/AIDS vaccines, both DNA and MVA, continue to demonstrate that they are quite safe and immunogenic; |
|
| • | | The full-dose regimen of GeoVax vaccines continues to be well tolerated without any type of reaction, mild or systemic, in the majority of participants; |
|
| • | | CD4 T-cell responses are high in both the low and full-dose regimens, 84% and 78% of participants; |
|
| • | | CD8 T-cell responses are present in 42% of the full-dose recipients and 33% of the 1/10th dose recipients; |
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| • | | Antibody responses to the envelope glycoprotein (Env) increased following the fourth vaccination, and were present in 88% of the full-dose participants; and |
|
| • | | Delivery of the fourth vaccination increased the frequency and magnitude of the CD8 T-cell and antibody responses. |
In July 2007, we began the third and fourth of this series of Phase I human clinical trials. The third trial is designed to evaluate a single dose DNA prime followed by two MVA boosts, while the fourth trial will utilize only GeoVax’s MVA vaccine in a three dose regimen. These trials are continuing with excellent safety results thus far; immunogenicity results are anticipated later in 2008.
All of our Phase I human clinical trials have been conducted by the HIV Vaccine Trials Network (HVTN). The HVTN, funded and supported by the NIH, is the largest worldwide clinical trials program devoted to the development and testing of HIV/AIDS vaccines.
Phase II Human Clinical Trials
Due to the promising positive human vaccine response data from our Phase I trials, the HVTN, together with GeoVax, have accelerated their plans to conduct Phase II human trials on our AIDS vaccines. We expect the Phase II trials to commence during the third quarter of 2008. Plans are for a 225-person trial (150 vaccine recipients and 75 placebo recipients) in low risk individuals at several sites in the United States, evaluating our DNA and MVA vaccines in a four-dose regimen similar to the regimen in our most recent trials.
Support from the NIH
All of our human clinical trials to date have been conducted by, and at the expense of, the HIV Vaccine Trials Network (HVTN), a division of the National Institutes of Health-National Institute of Allergy & Infectious Disease (NIH-NIAID). Our responsibility for these trials has been to provide sufficient supplies of vaccine materials and technical expertise when necessary. The HVTN is also planning to conduct our planned Phase II human clinical trials.
In September 2007, we were the recipient of a $15.0 million Integrated Preclinical/Clinical AIDS Vaccine Development (IPCAVD) Grant to support our HIV/AIDS vaccine program. This large grant was awarded by the NIH-NIAID. The grant funding period is over a five year period commencing October 2007. Only meritorious HIV/AIDS prevention vaccine candidates are considered to receive an IPCAVD award. Candidate companies are highly scrutinized and must supply substantial positive AIDS vaccine data to support their application. IPCAVD grants are awarded on a competitive basis and are designed to support later stage vaccine research, development and human trials. We are utilizing this funding to further our HIV/AIDS vaccine development, optimization, production and human clinical trial testing.
Government Regulation
Regulation by governmental authorities in the United States and other countries is a significant factor in our ongoing research and development activities and in the manufacture of our products under development. Complying with these regulations involves a considerable amount of time and expense.
In the United States, drugs are subject to rigorous federal and state regulation. The Federal Food, Drug and Cosmetic Act, as amended (the “FDC Act”), and the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of medications and medical devices. Product development and approval within this regulatory framework is difficult to predict, takes a number of years and involves great expense.
The steps required before a pharmaceutical agent may be marketed in the United States include:
pre-clinical laboratory tests, in vivo pre-clinical studies and formulation studies;
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| • | | the submission to the FDA of an Investigational New Drug Application (IND) for human clinical testing which must become effective before human clinical trials can commence; |
|
| • | | adequate and well-controlled human clinical trials to establish the safety and efficacy of the product; |
|
| • | | the submission of a New Drug Application to the FDA; and |
|
| • | | FDA approval of the New Drug Application prior to any commercial sale or shipment of the product. |
Each of these steps is described further below.
In addition to obtaining FDA approval for each dayproduct, each domestic manufacturing establishment must be registered with, and approved by, the FDA. Domestic manufacturing establishments are subject to biennial inspections by the FDA and must comply with the FDA’s Good Manufacturing Practices for products, drugs and devices.
Pre-clinical Trials
Pre-clinical testing includes laboratory evaluation of chemistry and formulation, as well as cell culture and animal studies to assess the potential safety and efficacy of the product. Pre-clinical safety tests must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practices. The results of pre-clinical testing are submitted to the FDA as part of the IND application and are reviewed by the FDA prior to the commencement of human clinical trials. Unless the FDA objects to an IND, the IND becomes effective 30 days following its receipt by the FDA.
Clinical Trials
Clinical trials involve the administration of the AIDS vaccines to healthy volunteers or to patients under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with the FDA’s Good Clinical Practices standard under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each clinical study must be conducted under the auspices of an independent institutional review board at the institution where the study will be conducted. The institutional review board will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution.
Clinical trials are typically conducted in three sequential phases, but the phases may overlap. In Phase I, the initial introduction of the product into healthy human subjects, the vaccine is tested for safety (adverse side effects) and dosage tolerance. Phase II is the proof of principal stage and involves studies in a limited patient population in order to determine the efficacy of the product for specific, targeted indications, determine dosage tolerance and optimal dosage and identify possible adverse side effects and safety risks. When there is evidence that the product may be effective and has an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further evaluate clinical efficacy and to test for safety within an expanded patient population at geographically dispersed multi-center clinical study sites. The manufacturer or the FDA may suspend clinical trials at any time if either believes that the individuals participating in the trials are being exposed to unacceptable health risks.
New Drug Application and FDA Approval Process
The results and details of the pre-clinical studies and clinical studies are submitted to the FDA in the form of a New Drug Application. If the New Drug Application is approved, the manufacturer may market the product in the United States.
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International Approval
Whether or not the FDA has approved the drug, approval of a product by regulatory authorities in foreign countries must be obtained prior to the commencement of commercial sales of the drug in such countries. The requirements governing the conduct of clinical trials and drug approvals vary widely from country to country, and the time required for approval may be longer or shorter than that required for FDA approval.
Other Regulations
In addition to FDA regulations, our business activities may also be regulated by the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. Violations of regulatory requirements at any stage may result in various adverse consequences, including regulatory delay in approving or refusal to approve a product, enforcement actions, including withdrawal of approval, labeling restrictions, seizure of products, fines, injunctions and/or civil or criminal penalties. Any product that we develop must receive all relevant regulatory approvals or clearances before it may be marketed.
Competition
There currently is no FDA licensed and commercialized AIDS vaccine or competitive vaccine available in the world market.
There are several small and large biopharmaceutical companies pursuing AIDS vaccine research and development, including Merck, Novartis, Wyeth, Sanofi-Aventis, Glaxo-Smith Kline and the United States National Institutes of Health (NIH) Vaccine Research Center (VRC). Other AIDS vaccines are in varying stages of research, testing and clinical trials including those supported by the International AIDS Vaccine Initiative (IAVI), the European Vaccine Initiative (EuroVac), and the South African AIDS Vaccine Initiative (SAAVI), as well as others. Following the reported failure of the Merck vaccine in September 2007, the Merck vaccine program and the NIH VRC vaccine program, which also uses Ad5 vectors, were placed on hold. To our knowledge none of our competitors’ products have, failedto date, demonstrated the level of protection and duration of protection for a SHIV challenge elicited by GeoVax’s vaccines in large scale non-human primate trials. Furthermore, many competitor vaccine development programs require vaccine compositions which are much more complicated than ours. For these reasons, we believe that it may be possible for our vaccine to compete successfully in the marketplace if it is approved for sale.
Overall, the biopharmaceutical industry is competitive and subject to rapid and substantial technological change. Developments by others may render our proposed vaccination technologies noncompetitive or obsolete, or we may be unable to keep pace with technological developments or other market factors. Technological competition in the industry from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase. Many of the pharmaceutical companies that compete with us have significantly greater research and development capabilities than we have, as well as substantially more marketing, manufacturing, and financial resources. In addition, acquisitions of, or investments in, small pharmaceutical or biotechnology companies by such large corporations could increase their research, financial, marketing, manufacturing and other resources. Competitor technologies may ultimately prove to be safer, more effective or less costly than any vaccine that we develop.
FDA and other regulatory approvals of our vaccines have not yet been obtained and we have not yet generated any revenues from product sales. Our future competitive position depends on our ability to obtain FDA and other regulatory approvals of our vaccines and to license or maintain effectiveness ofsell the registration statement.
Right of First Refusal
Crescent has been granted a right of first refusalvaccines to third parties on favorable terms.
Intellectual Property
We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are described by valid and enforceable patents or are effectively maintained as trade secrets. Accordingly, we are pursuing and will continue to pursue patent protection for anyour proprietary technologies
19
developed through our collaboration between Emory University, the NIH, and the CDC, or all shares in a
proposed saledeveloped by us alone. Patent applications have been filed with the United States Patent and Trademark Office and in specific international markets (countries). Patent applications include provisions to cover our DNA and MVA based AIDS vaccines, their genetic inserts expressing multiple HIV protein components, composition, structure, claim of immunization against multiple subtypes of HIV, routes of administration, safety and other related factors. Patent claims filed for our vaccines include provisions for protection against two diseases: HIV/AIDS and smallpox.
We are the exclusive, worldwide licensee of a number of patents and patent applications (the “Emory Technology”) owned, licensed or otherwise controlled by Emory University (“Emory”) for HIV and smallpox vaccines pursuant to a License Agreement originally entered into on August 23, 2002 and restated on June 23, 2004 (the “Emory License”). Through the Emory License we are also a non-exclusive licensee of patents owned by the NIH related to the ability of our securitiesMVA vector vaccine as a vehicle to deliver HIV virus antigens, and also to induce an immune response in a private placement transaction exempt
from registration underhumans. Currently, there are 4 issued patents and 6 pending patent applications in the Securities Act of 1933,United States subject to the Emory License, as amended, until 60 days
afterwell as 2 issued patents and 26 pending patent applications in other countries. The Emory License expires on the date the Securities Purchase Agreement between Crescent and us is
terminated. Such right of first refusal shall be held open to Crescent for five
trading days from theexpiration date of the proposedlast to expire of the patents licensed thereunder; we will therefore not know the final termination date of the Emory License until such patents are issued.
We may not use the Emory Technology for any purpose other than the purposes permitted by the Emory License. Emory also reserved the right to use the Emory Technology for research, educational and non-commercial clinical purposes. Due to the use of federal funds in the development of the Emory Technology, the United States Government has the irrevocable, royalty-free, paid-up right to practice and have practiced certain patents throughout the world, should it choose to exercise such rights.
We are also the exclusive licensee of five patents from MFD, Inc. (the “MFD Patents”) pursuant to a license agreement dated December 26, 2004 (the “MFD License Agreement”), related to certain manufacturing processes used in the production of our vaccines. Pursuant to the MFD License Agreement, we obtained a fully paid, worldwide, irrevocable, exclusive license in and to the MFD Patents to use, market, offer for sale, sell, lease and import for any AIDS and smallpox vaccine made with GeoVax technology and non-exclusive rights for other products. The term of the MFD License Agreement ends on the expiration date of the last to sellexpire of the securities.
10% Limitation With RespectMFD Patents. These patents expire in 2017 through 2019.
In addition to Crescentpatent protection, we also attempt to protect our proprietary products, processes and other information by relying on trade secrets and non-disclosure agreements with our employees, consultants and certain other persons who have access to such products, processes and information. Under the termsagreements, all inventions conceived by employees are our exclusive property. Nevertheless, there can be no assurance that these agreements will afford significant protection against misappropriation or unauthorized disclosure of our Securities Purchase Agreement with Crescent,trade secrets and confidential information.
We cannot be certain that any of the number
of sharescurrent pending patent applications we have licensed, or any new patent applications we may file or license, will ever be issued in the United States or any other country. Even if issued, there can be no assurance that those patents will be sufficiently broad to prevent others from using our products or processes. Furthermore, our patents, as well as those we have licensed or may license in the future, may be purchasedheld invalid or unenforceable by Crescenta court, or third parties could obtain patents that we would need to either license or to design around, which we may be obtained upon exerciseunable to do. Current and future competitors may have licensed or filed patent applications or received patents, and may acquire additional patents and proprietary rights relating to products or processes competitive with ours.
We are not a party to any litigation, opposition, interference, or other potentially adverse proceeding with regard to our patent positions. However, if we become involved in litigation, interference proceedings, oppositions or other intellectual property proceedings, for example as a result of warrantsan alleged infringement, or conversiona third-party alleging an earlier date of invention, we may have to spend significant amounts of money and time and, in the event of an adverse ruling, we could be subject to liability for damages, invalidation of our intellectual property and injunctive relief that could prevent us from using technologies or developing products, any of which could have a significant adverse effect on our business financial condition and results of operation. In addition, any claims relating to the infringement of third-party proprietary rights, or earlier date of invention, even if not meritorious,
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could result in costly litigation, lengthy governmental proceedings, divert management’s attention and resources and require us to enter royalty or license agreements which are not advantageous if available at all.
Manufacturing
We do not have the facilities or expertise to manufacture any of the Convertible Note heldclinical or commercial supplies of any of our products. To be successful, our products must be manufactured in commercial quantities in compliance with regulatory requirements and at an acceptable cost. To date, we have not commercialized any products, nor have we demonstrated that we can manufacture commercial quantities of our product candidates in accordance with regulatory requirements. If we cannot manufacture products in suitable quantities and in accordance with regulatory standards, either on our own or through contracts with third parties, it may delay clinical trials, regulatory approvals and marketing efforts for such products. Such delays could adversely affect our competitive position and our chances of achieving profitability. We cannot be sure that we can manufacture, either on our own or through contracts with third parties, such products at a cost or in quantities which are commercially viable.
We currently rely and intend to continue to rely on third-party contract manufacturers to produce vaccines needed for research and clinical trials. We have entered into arrangements with two third party manufacturers for the supply of our DNA and MVA vaccines for use in our planned clinical trials. These suppliers operate under current Good Manufacturing Practice and guidelines established by Crescent cannot exceed
the numberFDA and the European Medicines Agency. We anticipate that these suppliers will be able to provide sufficient vaccine supplies to complete our currently planned clinical trials. Various contractors are generally available in the United States and Europe for manufacture of sharesvaccines for clinical trial evaluation, however, it may be difficult to replace existing contractors for certain manufacturing and testing activities and costs for contracted services may increase substantially if we switch to other contractors.
Research and Development
Our expenditures for research and development activities were approximately $1,757,000, $666,000 and $1,641,000 during the years ended December 31, 2007, 2006 and 2005, respectively. As our vaccines continue to go through the process to obtain regulatory approval, we expect our research and development costs to continue to increase significantly as even larger human trials proceed in the United States and foreign countries. We have not yet formulated any plans for marketing and sales of any vaccine candidate we may successfully develop. Compliance with environmental protection laws and regulations have not had a material effect on our capital expenditures, earnings or competitive position.
Properties
We lease office and laboratory space located at 1256 Briarcliff Road, Emtech Bio Suite 500, Atlanta, Georgia under a month-to-month lease agreement with Emtech Biotechnology Development, Inc., a related party associated with Emory University. We also share the lease expense for office space in the Chicago area for one of our officers and directors, but we are not obligated under the lease.
Legal Proceedings
We are not currently a party to any material legal proceedings. We may from time to time become involved in various legal proceedings arising in the ordinary course of business.
Employees
As of June 26, 2008, we had eleven employees. None our employees are covered by collective bargaining agreements and we believe that when combined with all other shares ofour employee relations are good.
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MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock
and securities then owned by Crescent, would result in Crescent owning more than
9.9% of our outstanding common stock at any given point of time.is currently traded on the over-the-counter bulletin board market under the symbol “GOVX”. The following table
is for illustrative purposes only and sets forth the
number
of shares of our common stock issuable to Crescent assuming Crescent were to
purchase the maximum amount of securities allowable under the Securities
Purchase Agreement at the prices stated below. Such number of shares is,
however, subject to the 9.9% limitation whereby Crescent may not own more than
9.9% of the Company's common stock as would be outstanding on any given date.
Purchase Number %
Price of Shares of shares (e)
---------- ---------- -------------
$0.660 (a) 15,151,515 18.9%
0.495 (b) 20,202,020 23.7%
0.330 (c) 30,303,030 31.8%
0.165 (d) 60,606,060 48.2%
(a) Represents bid price at close of business on April 23, 2002.
(b) Represents a 25% decrease from the bid price at close of business on
April 23, 2002.
(c) Represents a 50% decrease from the bid price at close of business on
April 23, 2002.
(d) Represents a 75% decrease from the bid price at close of business on
April 23, 2002.
(e) Securities purchase agreement limits Crescent's ownership to 9.9% of
outstanding shares.
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MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY
Our shares trade on the over-the-counter electronic bulletin board
operated by the NASD. The following table shows the range of representativehigh and low bid prices for our shares.common stock for the periods indicated. The prices represent quotations between dealers and do not include retail mark-up, markdown, or commission, and do not necessarily represent actual transactions.transactions: | | | | | | | | | | | | | |
| | | | | | | High | | Low |
| | 2008 | | | | | | | | | | | |
| | | | | First Quarter | | $ | 0.19 | | | $ | 0.11 | |
| | 2007 | | | | | | | | | | | |
| | | | | Fourth Quarter | | $ | 0.36 | | | $ | 0.16 | |
| | | | | Third Quarter | | | 0.42 | | | | 0.25 | |
| | | | | Second Quarter | | | 0.38 | | | | 0.22 | |
| | | | | First Quarter | | | 0.66 | | | | 0.18 | |
| | 2006 | | | | | | | | | | | |
| | | | | Fourth Quarter | | | 0.68 | | | | 0.18 | |
| | | | | Third Quarter | | | 0.73 | | | | 0.44 | |
| | | | | Second Quarter | | | 0.85 | | | | 0.35 | |
| | | | | First Quarter | | | 1.23 | | | | 0.08 | |
On June 26, 2008, the last reported sale price of our common stock on the over-the-counter bulletin board was $0.145 per share.
Holders
On June 26, 2008, there were approximately 1,500 holders of record of our common stock. The number of
stockholders on record
asholders does not reflect the number of
April
23, 2002 is approximately 20,000. Somebeneficial owners of
the stockholders on recordour common stock for whom shares are
held by brokerage firms
that hold shares in the "street name". Therefore, we believe the
total number of stockholders may be greater than 20,000.
1998 1999 2000 2001
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
First Quarter $1.625 $1.016 $1.219 $0.453 $12.375 $0.266 $2.812 $1.062
Second Quarter 1.391 0.875 0.938 0.391 6.219 2.750 1.990 1.125
Third Quarter 2.031 0.875 0.750 0.266 6.562 3.234 1.970 0.900
Fourth Quarter 0.906 0.500 0.703 0.219 4.312 0.781 1.550 0.660
The closing bid price of a share on April 23, 2002 was $0.66.and other institutions. Dividends
We have nevernot paid any dividends since our inception and do not anticipatecontemplate paying any dividends in the foreseeable future. We currently intend to retain earnings, if any, for product
development, production and marketing, strategic acquisitions and for general
working capital requirements.
22
SELECTED FINANCIAL INFORMATION
(In thousands, except per share data)DATA
The following
table summarizes theselected financial data are derived from our audited consolidated financial
datastatements and interim unaudited consolidated financial statements for
our
business.the periods and at the dates indicated below. The historical results presented below are not necessarily indicative of the results to be expected for any future period. You should read the
following summary consolidated financial data
togetherinformation set forth below in conjunction with
"Management'sthe information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,
"” and our
Consolidated Financial Statementsconsolidated financial statements and
accompanying Notesthe related notes, beginning on page F-1 of this prospectus.
Year Ended December 31,
-----------------------
(amounts in thousands, except per share amounts)
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Revenues $ 2,730 $ 5,368 $ 2,279 $ 860 $ 2,620
Cost of Sales 4,345 5,758 4,834 2,876 2,745
-------- -------- -------- --------- ---------
Gross Profit (Loss) (1,615) (390) (2,555) (2,016) (125)
Net Income (Loss) (3,988) (6,132) (9,306) (7,515) (13,252)
EARNINGS PER COMMON SHARE:
Net Income (Loss) (0.13) (0.16) (0.20) (0.13) (0.21)
As of December 31,
------------------
(amounts in thousands)
BALANCE SHEET DATA: 1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Total Assets 7,269 6,719 3,372 11,161 3,917
Long Term Debt 430 303 185 102 1,197
Working Capital (Deficit) 4,511 260 (917) 3,015 680
Stockholders Equity 5,676 2,885 552 10,521 2,049
(1) Income (Loss) per common share is calculated based on the weighted average
number of shares for the respective period.
19
MANAGEMENT'S| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | |
| | | March 31, | | | Year Ended December 31, | |
| | | 2008 | | | 2007 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | |
| Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total revenues (grant income) | | $ | 599,991 | | | $ | — | | | $ | 237,004 | | | $ | 852,905 | | | $ | 670,467 | | | $ | 714,852 | | | $ | 992,720 | |
| Net loss | | | (682,510 | ) | | | (587,281 | ) | | | (4,241,796 | ) | | | (584,166 | ) | | | (1,611,086 | ) | | | (2,351,828 | ) | | | (947,804 | ) |
| Basic and diluted net loss per common share | | | (0.00 | ) | | | (0.00 | ) | | | (0.01 | ) | | | (0.00 | ) | | | (0.01 | ) | | | (0.01 | ) | | | (0.00 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 2,527,370 | | | | 3,246,404 | | | | 3,246,404 | | | | 2,396,330 | | | | 1,685,218 | | | | 1,870,089 | | | | 2,316,623 | |
| Redeemable convertible preferred stock | | | — | | | | — | | | | — | | | | — | | | | 1,016,555 | | | | 938,475 | | | | 866,391 | |
| Total stockholders’ equity (deficit) | | | 2,392,702 | | | | 2,647,866 | | | | 2,647,866 | | | | 2,203,216 | | | | (500,583 | ) | | | (389,497 | ) | | | 872,406 | |
23
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results
The following discussion and analysis of Operations 2001 Comparedour financial condition and results of operations should be read together with the discussion under “Selected Financial Data” and our consolidated financial statements included in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties because they are based on current expectations and relate to 2000
Revenuefuture events and our future financial performance. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under “Risk Factors,” “Forward Looking Statements,” and elsewhere in this prospectus.
Overview
GeoVax is a clinical stage biotechnology company focused on developing human vaccines for diseases caused by Human Immunodeficiency Virus and other infectious agents. We have exclusively licensed from Emory University certain AIDS vaccine technology that was developed in collaboration with the National Institutes of Health and the Centers for Disease Control and Prevention.
Our AIDS vaccine candidates have successfully completed preclinical efficacy testing in non-human primates and Phase I clinical testing trials in humans. The human trial was conducted by the HIV Vaccine Trials Network (HVTN), a division of the National Institute of Allergy and Infectious Disease (NIAID) of the National Institutes of Health (NIH) and was satisfactorily concluded in June 2004. A series of four additional human trials (conducted by the HVTN) evaluating our AIDS vaccines at several locations in the United States began in April 2006. One trial began in April 2006, a second trial began in September 2006, and the third and fourth trials began in July 2007.
We anticipate beginning a Phase II human clinical trial for our preventative AIDS vaccine candidate in the third quarter of 2008. The costs of conducting our human clinical trials to date have been borne by HVTN, with GeoVax incurring costs associated with manufacturing the clinical vaccine supplies and other study support. We expect that HVTN will also bear the cost of conducting our Phase II human clinical study planned for 2008, but we can not predict the level of support we will receive from HVTN for any additional clinical studies. Our operations are also partially supported by an Integrated Preclinical/Clinical AIDS Vaccine Development (IPCAVD) Grant from the NIH. This grant will provide approximately $15.0 million to us over a five year period that began in October 2007. As we progress to the later stages of our vaccine development activities, government financial support may be more difficult to obtain, or may not be available at all. It will, therefore, be necessary for us to look to other sources of funding in order to finance our development activities.
We anticipate incurring additional losses for several years as we expand our drug development and clinical programs and proceed into higher cost human clinical trials. Conducting clinical trials for our vaccine candidates in development is a lengthy, time-consuming and expensive process. We do not expect to generate product sales from our development efforts for several years. If we are unable to successfully develop and market pharmaceutical products over the next several years, our business, financial condition and results of operations would be adversely impacted.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates and adjusts the estimates as necessary. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
24
Our significant accounting policies are summarized in Note 2 to our consolidated financial statements. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Other Assets
Other assets consist principally of license agreements for the Company increaseduse of technology obtained through the issuance of the Company’s common stock. These license agreements are amortized on a straight line basis over ten years.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows expected to be generated by such assets. 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 discounted expected future net cash flows from the assets.
Revenue Recognition
We recognize revenue in accordance with the SEC’s Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements,as amended by Staff Accounting Bulletin No. 104,Revenue Recognition,(“SAB No. 104”). SAB No. 104 provides guidance in applying U.S. generally accepted accounting principles to revenue recognition issues, and specifically addresses revenue recognition for upfront, nonrefundable fees received in connection with research collaboration agreements. During 2007, our revenue consisted of government grant revenue received directly from the National Institutes of Health; in prior years our revenue consisted of grant revenue subcontracted to us from Emory University pursuant to collaborative arrangements. Revenue from these arrangements is recorded as income as the related costs are incurred.
Stock-Based Compensation
Effective January 1, 2006, we adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payments(“SFAS No. 123R”), which requires the measurement and recognition of compensation expense for all share-based payments made to employees and directors based on estimated fair values on the grant date. SFAS No. 123R replaces SFAS No. 123,Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees.
We adopted SFAS No. 123R using the prospective application method which requires us to apply the provisions of SFAS No. 123R prospectively to new awards and to awards modified, repurchased or cancelled after December 31, 2005. Awards granted after December 31, 2005 are valued at fair value in accordance with the provisions of SFAS No. 123R and recognized on a straight line basis over the service periods of each award.
Prior to January 1, 2006, we accounted for stock-based compensation using the intrinsic value method in accordance with APB Opinion No. 25 and applied the disclosure provisions of SFAS No. 123, as amended by Statement of Financial Accounting Standards No. 148,Accounting for Stock-Based Compensation and Disclosure.
Liquidity and Capital Resources
At March 31, 2008, we had cash and cash equivalents of $2,120,597, as compared to $1,990,356 and $2,088,149 at December 31, 2007 and December 31, 2006, respectively. Working capital totaled $2,187,562 at March 31, 2008, compared to $2,432,276 and $1,933,165 at December 31, 2007 and December 31, 2006, respectively.
25
We are a development-stage company and have no products approved for commercial sale. Due to our significant research and development expenditures, we have not been profitable and have generated operating losses since our inception. Our primary sources of cash are from sales of our equity securities and from government grant funding.
In September 2007, the National Institutes of Health (NIH) awarded us an Integrated Preclinical/Clinical AIDS Vaccine Development (IPCAVD) grant to support our HIV/AIDS vaccine program. The project period for the grant covers a five year period commencing October 2007, with an award of approximately $860,000$3.0 million per year, or $15.0 million in 2000the aggregate. We are utilizing this funding to $2,621,000further our HIV/AIDS vaccine development, optimization, production and human clinical trial testing including Phase 2 human clinical trials planned for 2008.
In May 2008, we signed a common stock purchase agreement with Fusion Capital which provides for the sale of up to $10.0 million of shares of our common stock. Once the SEC has declared effective the registration statement related to the transaction, we will have the right over a 25-month period to sell our shares of common stock to Fusion Capital from time to time in 2001. Revenuesamounts between $80,000 and $1.0 million, depending on certain conditions as set forth in the agreement. See “The Fusion Transaction.”
From November 2007 to May 2008, we received proceeds of $3,977,950 from the sale of products increased from $64,000our common stock and warrants to individual accredited investors in 2000 to $1,274,000 in 2001. The significant increase isa series of privately negotiated transactions. Upon the resultexecution of the Company beginning shipmentagreement with Fusion Capital, we have discontinued any further such transactions. We believe that our current working capital, combined with the proceeds from the IPCAVD grant from the NIH, will be sufficient to support our planned level of its set-top box duringoperations into the fourth quarter of 2001.
Additionally,2008, and that future proceeds we may receive under our agreement with Fusion will help support our operations beyond that time. The availability of funding under the Fusion agreement is dependent upon the SEC declaring effective the registration statement related to the transaction and the market price of our common stock. The extent to which we rely on the Fusion agreement as a source of funding will depend on a number of factors including the prevailing market price of our common stock and the extent to which we can secure working capital from other sources if we choose to seek such other sources. While we believe that we will be successful in obtaining the necessary financing to fund our operations through the agreement with Fusion or through other sources, there can be no assurances that such additional funding will be available to us on reasonable terms or at all.
Our capital requirements, particularly as they relate to product research and development, have been and will continue to be significant. We intend to seek FDA approval of our products, which may take several years. We will not generate revenues from the sale of our products for at least several years, if at all. We will be dependent on obtaining financing from third parties in order to maintain our operations, including our clinical program. If we fail to obtain additional funding when needed, we would be forced to scale back, or terminate, our operations, or to seek to merge with or to be acquired by another company.
We have no off-balance sheet arrangements that are likely or reasonably likely to have a material effect on our financial condition or results of operations.
Contractual Obligations
Contractual Obligations and Commitments
We have entered into manufacturing contracts with third party suppliers for the production of vaccine to be used in our Phase II human clinical trials planned for 2008. At March 31, 2008, there is approximately $846,000 of unrecorded contractual commitments associated with these arrangements, for services expected to be rendered to us during the remainder of 2008. We have no other significant purchase commitments, lease obligations, long-term debt obligations or other long-term liabilities.
Net Operating Loss Carryforward
At December 31, 2007, we had consolidated net operating loss carryforwards for income tax purposes of $68.3 million, which will expire in 2010 through 2027 if not utilized. Approximately $59.7 million of our net
26
operating loss carryforwards relate to the operations of the Company recognized approximately $135,000(Dauphin Technology, Inc.) prior to the Merger. We also have research and development tax credits of revenues from its
interactive cable provider subsidiary, Suncoast Automation Inc. ("Suncoast").
These revenues are only for six months, since the Company acquired the$254,000 available to reduce income taxes, if any, which will expire in 2022 through 2026 if not utilized. The amount of net assetsoperating loss carryforwards and research tax credits available to reduce income taxes in any particular year may be limited in certain circumstances. Based on an assessment of Suncoast on July 1, 2001. Design service revenue increased from
$796,000all available evidence including, but not limited to, our limited operating history in 2000 to $1,346,000 in 2001, an increaseour core business and lack of 69%. Design service
revenues in 2000 were for four and one-half months, since the date of
acquisition of Advanced Digital Designs, Inc. ("ADD") on August 18, 2000. Design
service revenues began declining during the second half of 2001, as customers
began canceling projects and not beginning new ones. Cost of sales decreased
from $2,376,000 in 2000 to $1,680,000 in 2001. Cost of sales in 2000 included a
write down of obsolete inventory of $1,440,000 and a write down of inventory to
its net realizable value of $510,000. Cost of sales for 2001 includes the costsprofitability, uncertainties of the set-top boxes sold, as wellcommercial viability of our technology, the impact of government regulation and healthcare reform initiatives, and other risks normally associated with biotechnology companies, we have concluded that it is more likely than not that these net operating loss carryforwards and credits will not be realized and, as a write downresult, a 100% deferred tax valuation allowance has been recorded against these assets.
Results of obsolete inventoryOperations for the Three Months ended March 31, 2008 and 2007
Net Loss
We recorded net losses of $490,000. Cost$682,510 and $587,281 for the three months ended March 31, 2008 and 2007, respectively. Our operating results typically fluctuate due to the timing of services increased from $500,000 in 2000 to $1,137,000 in
2001. Cost of services for 2000 are included only from the date of acquisition
of ADD, representing four and one-half months. Cost of services consist
primarily of payrollactivities and related employee benefitscosts associated with our vaccine research and development activities. Until such time as we are successful in obtaining regulatory approval for the sale of any of our vaccine candidates and begin sales, we anticipate that we will continue to incur operating losses.
Grant Revenue
During the engineers performing
the services. Gross profit for design services decreased from 37% in 2000 to 16%
in 2001. The decline in gross profit is a resultthree months ended March 31, 2008 we recorded grant revenue of the decline in revenues
while cost of services remained at annualized levels did not decrease in
proportion to the revenues.
Selling, general and administrative expenses increased to approximately
$4,742,000 for 2001$599,991, as compared to $3,630,000$0.00 recorded during the three months ended March 31, 2007. In September 2007, the National Institutes of Health (NIH) awarded to GeoVax an Integrated Preclinical/Clinical AIDS Vaccine Development (IPCAVD) grant to support our HIV/AIDS vaccine program. The project period for 2000. Selling, generalthis grant covers a five year period which commenced in October 2007, with an award of approximately $3.0 million per year, or $15.0 million in the aggregate. We are utilizing this funding to further our HIV/AIDS vaccine development, optimization, production and administrativehuman clinical trial testing including Phase 2 human clinical trials planned to commence in mid-2008. The revenue associated with this grant is recorded as the related costs and expenses for 2000 consisted of professional feesare incurred. We will seek additional government grant funding if and financial
service expenses relatedwhen available, but there can be no assurance that any such funding will be available to us as we progress to the private placement, salarieslater stages of our vaccine development activities.
Research and Development
During the three months ended March 31, 2008, we incurred $603,478 of research and development expense as compared to $212,608 during the three months ended March 31, 2007. These amounts include non-cash stock compensation expense of $37,917 and $7,813, respectively (see discussion below). Research and development expenses vary considerably on a period-to-period basis, primarily depending on our need for administrative
personnel, expensesvaccine manufacturing and testing of manufactured vaccine by third parties. The increase in research and development expense from the 2007 period to the 2008 period is due primarily to costs associated with our vaccine manufacturing activities in preparation for the common stock purchase agreement, administrativecommencement of Phase 2 clinical testing later this year, and also due to higher personnel costs associated with the design services subsidiary, ADDaddition of new personnel. We expect that our research and development costs associated
with exercisingwill increase as we enter Phase II clinical trials and will continue to increase as we progress through the drawdown. Forhuman clinical trial process leading up to possible product approval by the year 2001, these selling,FDA. Research and development costs will also increase as a direct result of our receipt of the NIH grant discussed above, since a significant portion of the grant funds are intended to be spent on new projects requiring external resources and new personnel.
General and Administrative Expense
During the three months ended March 31, 2008 and 2007, our general and administrative costs were partially offset by primarily expensesexpense was $705,642 and $399,114, respectively. These amounts include non-cash stock compensation expense of $308,409 and $37,942, respectively (see discussion below). General and administrative expense for the 2008 period also includes non-cash charges of $52,270 associated with the issuance of stock and stock purchase warrants to a third party consultant for investor relations and financial consulting services. General and administrative costs include
27
officers’ salaries, legal and accounting costs, patent costs, amortization expense associated with intangible assets, and other general corporate expenses. We expect that our general and administrative costs will increase in the future in support of expanded research and development activities and other general corporate activities.
Stock-Based Compensation Expense
During the three months ended March 31, 2008, we recorded total stock-based compensation expense of $346,326, which was allocated to research and development expense ($37,917), or general and administrative expense ($308,409) according to the classification of cash compensation paid to the employee, consultant or director to which the stock compensation was granted. During the three months ended March 31, 2007, we recorded total stock-based compensation expense of $45,755, of which $7,813 was allocated to research and development expense, and $37,942 to general and administrative expense. During the three months ended March 31, 2008, we also recorded $18,250 of expense associated with the issuance of our common stock and $34,020 associated with the issuance of stock purchase warrants, to a third party consultant for reimbursementinvestor relations and financial advisory services. Stock-based compensation expense is calculated and recorded in accordance with the provisions of SFAS 123R. We adopted SFAS 123R using the prospective application method which requires us to apply its provisions prospectively to new awards and to awards modified, repurchased or cancelled after December 31, 2005. Awards granted after December 31, 2005 are valued at fair value in accordance with the provisions of SFAS 123R and recognized on a straight line basis over the service periods of each award.
Other Income & Expense
Interest income for the three months ended March 31, 2008 and 2007 was $26,619 and $24,441, respectively. Variances between periods are primarily attributable to the incremental cash balances available for investment during each respective period.
Results of Operations for the Three Years Ended December 31, 2007
Net Loss
GeoVax recorded net losses of $4,241,796, $584,166 and $1,611,086 for the years ended December 31, 2007, 2006 and 2005, respectively. Our operating results will typically fluctuate due to the timing of activities and related costs associated with our vaccine research and development activities. The $1,026,920 decrease in our net loss from 2005 to 2006 is attributable to a reduction in our vaccine research and development activities as we focused our attention on completing the Merger and reduced our product development activities in order to conserve cash resources, coupled with an increase of $182,438 in our revenue recorded from government grants. The increase in our net loss from 2006 to 2007 is primarily attributable to (a) lower grant revenues during 2007, (b) increased research and development expenditures, (c) overall higher general and administrative costs and (d) stock-based compensation expense, all of which are described in more detail below.
Grant Revenue
We recorded grant revenues of $237,004 in 2007, $852,905 in 2006 and $670,467 in 2005. Grant revenue reported during 2006 and 2005 relates to projects covered by grants from the National Institutes of Health issued to Emory University and subcontracted to us pursuant to collaborative arrangements with Emory University. The activities associated with these grants were completed during 2006 and we received no additional grant funding during the first nine months of 2007. The project period for the NIH IAPCD grant we were awarded in September 2007 covers a personal guarantee,
salariesfive year period commencing October 2007, with an award of approximately $3.0 million per year, or $15.0 million in the aggregate. We will utilize this funding to further our HIV/AIDS vaccine development, optimization, production and human clinical trial testing including Phase 2 human clinical trials planned for administrative2008. Grant funding from federal agencies is primarily allocated to basic research projects; therefore, we expect the availability of federal grant funding to us may decline in the future as our product development of formulated AIDS vaccines progresses to later stages.
28
Research and marketing personnel,Development
Our research and development expenses were $1,757,125 in establishing2007, $665,863 in 2006 and $1,640,814 in 2005. Research and development expenses vary considerably on a period-to-period basis, primarily depending on our need for vaccine manufacturing and testing of manufactured vaccine by third parties. Research and development expense declined from 2005 to 2006 as we focused our attention on completing the operationsMerger and reduced our product development activities in order to conserve cash resources, but rose again during 2007 as we initiated two new Phase I clinical trials and began planning for a Phase II clinical trial in 2008. Research and development expense for 2007 also includes stock-based compensation expense of the Greek branch office$284,113 (see discussion below).
General and expenses pertaining to the
Suncoast subsidiary. Included in selling,Administrative Expense
Our general and administrative expenses were $2,784,182 in 2007, $843,335 in 2006 and $655,199 in 2005. General and administrative expense for 2001 are the operations2007 includes stock-based compensation expense of the branch office in Greece, amounting to
approximately $300,000. Also included in 2001 are six months of selling,$1,234,383 (see discussion below). Excluding stock-based compensation expense, general and administrative expensesexpense for 2007 was $1,549,799. General and administrative costs have substantially increased during the three year period ending December 31, 2007 primarily as a result of Suncoast,the Company becoming a publicly-traded entity subsequent to the merger of GeoVax Labs, Inc and GeoVax, Inc. in September 2006. These higher costs include, among other things, the costs of an expanded management team (including the engagement of our Chief Financial Officer in October 2006 and our Senior Vice President in January 2007), a newly instituted investor relations program, costs associated with an expanded Board of Directors, costs associated with our efforts to comply with the Sarbanes-Oxley Act of 2002, and increased legal and accounting fees associated with compliance with securities laws. Also contributing to the increase during 2007 were higher patent costs, including the one-time payment of $137,392 to Emory University to complete our obligation to Emory for the reimbursement of pre-2002 patent costs.
Stock-Based Compensation Expense
During 2007, we recorded total stock-based compensation expense of $1,518,496, which was allocated to research and development expense ($284,113), or general and administrative expense ($1,234,380) according to the classification of cash compensation paid to the employee, consultant or director to which the stock compensation was granted. No stock-based compensation expense was recorded during 2006 or 2005. Stock-based compensation expense is calculated and recorded in accordance with the provisions of SFAS 123R. We adopted SFAS 123R using the prospective application method which requires us to apply its provisions prospectively to new awards and to awards modified, repurchased or cancelled after December 31, 2005. Awards granted after December 31, 2005 are valued at fair value in accordance with the provisions of SFAS 123R and recognized on a straight line basis over the service periods of each award. We did not grant or modify any share-based compensation during 2006, thus no expense was recorded during for that year.
Other Income & Expense
Interest income was $62,507 in 2007, as compared to $72,127 in 2006 and $16,073 in 2005. The variances between years are primarily attributable to the cash available for investment, which totaled $1,990,356 at December 31, 2007, $2,088,149 at December 31, 2006 and $1,272,707 at December 31, 2005.
During 2005 we recorded $1,613 of interest expense related to short-term borrowings which were repaid during the year. We had no outstanding debt at December 31, 2007, 2006 or 2005.
Impact of Inflation
For the three year period ending December 31, 2007, and the first three months of 2008, we do not believe that inflation and changing prices had a material impact on our operations or on our financial results.
Off-Balance Sheet Arrangements
We have not entered into off-balance sheet financing arrangements, other than operating leases.
29
Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in the general level of United States interest rates, particularly because a significant portion of our investments are in short-term debt securities issued by the U.S. government and institutional money market funds. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income received without significantly increasing risk. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure. We do not have any derivative financial instruments or foreign currency instruments.
30
DIRECTORS AND EXECUTIVE OFFICERS
The following table contains information regarding the current members of the Board of Directors and our executive officers:
| | | | | | |
| Name | | Age | | Current Position |
| Donald G. Hildebrand | | | 67 | | | Chairman of the Board of Directors |
| Andrew J. Kandalepas | | | 56 | | | Senior Vice President and Director |
| Dean G. Kollintzas | | | 35 | | | Director |
| Robert T. McNally, Ph.D. | | | 60 | | | President and Chief Executive Officer, Director |
| Mark W. Reynolds | | | 46 | | | Chief Financial Officer and Corporate Secretary |
| Harriet L. Robinson, Ph.D. | | | 70 | | | Senior Vice President, Research & Development, Director |
| John N. Spencer, Jr. | | | 67 | | | Director |
Donald G. Hildebrand. Mr. Hildebrand joined the Board of Directors as Chairman and became our President and Chief Executive Officer upon consummation of the merger with GeoVax, Inc. in September 2006. Effective April 1, 2008, upon the appointment of Dr. Robert McNally as our President and Chief Executive Officer, Mr. Hildebrand executed a consulting agreement with the Company and remains as Chairman of the Board. Mr. Hildebrand is a founder of GeoVax, Inc., our wholly-owned subsidiary, and has served as a member of its Board of Directors since June 2001. Prior to founding GeoVax, Inc., Mr. Hildebrand was employed as North American President and Chief Executive Officer of Rhone Merieux, Inc., a subsidiary of Rhone Merieux, S.A., a world leader in the biopharmaceutical and animal health industries. Under Mr. Hildebrand’s leadership, which began in 1984 and ended in 1997, Rhone Merieux, Inc. grew its annual sales from $0 to over $200 million per year. In 1997, Mr. Hildebrand became Global Vice President of Merial Limited, a position that he held until 2000. Merial Limited, a joint venture formed by Rhone Merieux, S.A. and Merck AgVet, is the largest animal health company in the world, with annual sales exceeding $1.8 billion. Prior to joining Rhone Merieux, Inc., Mr. Hildebrand founded Biocraft Ltd., which he sold to Solvay & Cie of Brussels, Belgium in 1981. Subsequent to that transaction, Mr. Hildebrand was appointed Director of Global Biological Operations/Research/Development and Manufacturing for Salsbury/Solvay. Mr. Hildebrand received his BS in microbiology from the University of Wisconsin.
Andrew J. Kandalepas. Mr. Kandalepas was Chairman of the Board, President and Chief Executive Officer of Dauphin Technology from 1995 until the merger with GeoVax, Inc. in September 2006, at which time he assumed the position of Senior Vice President and remained a director of the Company. As an operating company, Dauphin Technology developed and marketed several high tech products including miniature hand held computers and set top boxes. Dauphin Technology ceased these operations in 2003. During his 11 year tenure at Dauphin, Mr. Kandalepas raised in excess of $60 million in private and public capital and expanded Dauphin’s shareholder base from 400 shareholders in 1995 to approximately 11,000 immediately prior to the merger with GeoVax Inc. Mr. Kandalepas has a varied 30-plus year career as an entrepreneur and executive manager. After 12 successful years with GTE and Motorola, he founded Cadserv Corporation, a privately owned engineering and circuit board solutions boutique service provider to major electronic OEM’s. Mr. Kandalepas is an active participant in the local Greek community and founder of the St. Athanasios, Greek Orthodox Seminary in Woodstock, Illinois. He earned his Electronics Engineering Degree in 1974, from DeVry Institute of Technology.
Dean G. Kollintzas. Mr. Kollintzas joined the Board of Directors upon consummation of the merger with GeoVax, Inc. in September 2006. Since 2001 Mr. Kollintzas has been an Intellectual Property Attorney specializing in biotechnology and pharmaceutical licensing, FDA regulation, and corporate/international transactions. He has worked in Israel as a U.S. consultant to the firm of Baratz, Gilat, Bar-Natan with biotechnology companies such a Clal Biotechnology Industries Limited and D-Pharm. As an associate with the firm LaFollette, Godfrey & Kahn in Madison, Wisconsin, Mr. Kollintzas worked with the Wisconsin Alumni Research Foundation on various FDA and intellectual property engagements. Mr. Kollintzas received a Microbiology degree from the University of Illinois and a J.D. from Franklin Pierce Law Center. He is a member of the Wisconsin and American Bar Associations.
Robert T. McNally, Ph. D. Dr. McNally joined the Board of Directors in December 2006 and was appointed as our President and Chief Executive Officer effective April 1, 2008. Dr. McNally graduated with a Ph.D. in Biomedical Engineering from the University of Pennsylvania and has over 28 years of experience in academic and corporate clinical investigations, management, research, business, quality and regulatory affairs. From 2000 to
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March 2008, Dr. McNally served as Chief Executive Officer of Cell Dynamics LLC, a company which he co-founded. Cell Dynamics is a cGMP laboratory which contracts with organ and tissue procurement organizations for the recovery of human tissue and processes these tissues into cellular components necessary for research and development, pharmaceuticals and cell therapy. Previously, Dr. McNally was co-founder and Senior Vice President of Clinical Research for CryoLife, Inc., a pioneering company in transplantable human tissues. Dr. McNally is a Fellow of the American Institute for Medical and Biological Engineering, serves on the advisory boards of the Petit Institute for Bioengineering and Dupree College of Management at the Georgia Institute of Technology, and is a past Chairman of Georgia Bio, a trade association. Dr. McNally received Georgia Bio’s 2004 Biomedical Industry Growth Award for the State of Georgia.
Mark W. Reynolds, CPA. Mr. Reynolds joined the Company in October 2006 as Chief Financial Officer and Corporate Secretary. Mr. Reynolds has over 20 years of experience with both private and publicly-held companies. From 2002 to the present, Mr. Reynolds has been a financial consultant to companies in the biotechnology and consumer healthcare fields, serving as a part-time Chief Financial Officer. From 2003 to 2006, before being named Chief Financial Officer of GeoVax Labs, Inc., Mr. Reynolds provided financial and accounting services to GeoVax, Inc. as an independent contractor. From 2004 to the present, Mr. Reynolds has served as Chief Financial Officer for HealthWatchSystems, Inc. a privately-held company in the consumer healthcare industry, a position which he continues to hold. From 2004 to 2006 he served as Chief Financial Officer for Duska Therapeutics, Inc., a publicly-held biotechnology company. From 1988 to 2002 Mr. Reynolds was first Controller and later Chief Financial Officer and Corporate Secretary for CytRx Corporation, a publicly-held biopharmaceutical company. Mr. Reynolds began his career as an auditor with Arthur Andersen & Co. from 1985 to 1988. He is a licensed CPA and member of the American Society of CPAs and the Georgia Society of CPAs.
Harriet Latham Robinson, Ph.D. Dr. Robinson is a co-founder of GeoVax, Inc. and has served as Chief of its Scientific Advisory Board since formation of that company in 2001. She joined the Company as Senior Vice President, Research and Development on a part-time basis in November 2007 and on a full-time basis in February 2008. She was first elected as a Director at the annual meeting of shareholders held June 17, 2008. Dr. Robinson is recognized as one of the world’s leading AIDS vaccine researchers. She has devoted over 15 years toward developing effective and safe AIDS vaccines designed to prevent clinical AIDS. Over the past several years Dr. Robinson has received over $23 million in Federal grants directly and indirectly supporting our AIDS vaccine development program. From 1999 to February 2008, Dr. Robinson served as the Asa Griggs Candler Professor of Microbiology and Immunology at Emory University in Atlanta, Georgia, and from 1998 to February 2008 as Chief, Division of Microbiology and Immunology, Yerkes National Primate Center and Professor at the Emory University School of Medicine. She was Professor, Dept. of Microbiology & Immunology at the University of Massachusetts Medical Center from 1988 to 1997 and Staff, then Senior, then Principal Scientist at the University of Massachusetts Worcester Foundation for Experimental Biology from 1977 to 1987. She was also a National Science Foundation Postdoctoral Fellow at the Stanford School of Medicine in Berkeley, California from 1965 to 1967. Over the past several years she has received numerous honors and awards as guest lecturer and/or member of the National Foundation for Infectious Diseases, World Health Organization, American Academy of Science, National Institutes of Health, Rockefeller Foundation, Gates Foundation, American Society for Microbiology and several others. She additionally has over 200 scientific publications. Dr. Robinson has a B.A. degree from Swarthmore College and M.S. and Ph.D. degrees from the Massachusetts Institute of Technology.
John N. (Jack) Spencer, Jr., CPA. Mr. Spencer joined the Board of Directors upon consummation of the merger with GeoVax, Inc. in September 2006. Mr. Spencer is a certified public accountant and was a partner of Ernst & Young where he spent more than 38 years until he retired in 2000. During his career with Ernst & Young, he coordinated that firm’s services to both public and private companies primarily in the manufacturing, distribution and medical and information technology industries. Mr. Spencer has been active in Georgia’s technology community, where he served as president and a director of the Business & Technology Alliance and was co-founder and is the treasurer of the Atlanta Venture Forum. In 2002, Mr. Spencer was awarded the Georgia Biomedical Partnership’s first annual award for being a principal architect of the biomedical community in Georgia. He also served as president of the Georgia Biomedical Partnership in 2003 and 2004. Mr. Spencer serves as a director of a number of companies, including Firstwave Technologies, Inc., where he is also chair of the audit committee. Mr. Spencer received a BS degree from Syracuse University, and he earned an MBA degree from Babson College. He also attended the Harvard Business School Advance Management Program.
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Family Relationships
There are no family relationships among any of our directors, director nominees, or executive officers.
Director Independence
Dean G. Kollintzas and John N. Spencer, Jr. are the members of the Board of Directors who are “independent”, as that term is defined by Section 301(3)(B) of the Sarbanes-Oxley Act of 2002. As independent directors, Mr. Kollintzas and Mr. Spencer both serve as the sole members of our Audit and Compensation Committees. Prior to his appointment as our President and Chief Executive Officer in April 2008, Dr. McNally was also an independent director and served as a member of our Audit and Compensation Committees.
COMPENSATION DISCUSSION AND ANALYSIS
In the paragraphs that follow, we will give an overview and analysis of our compensation program and policies, the material compensation decisions we have made under those programs and policies with respect to our executive officers, and the material factors that we considered in making those decisions.
Named Executive Officers for 2007
The Compensation Committee reviews, analyzes and approves the compensation of our senior executive officers, including the “Named Executive Officers” listed in the tables set forth following this compensation discussion and analysis. The Named Executive Officers for 2007 include our chief executive officer, our chief financial officer, and one other executive officer whose total compensation for 2007 exceeded $100,000, calculated in accordance with the rules and regulations of the SEC. Our Named Executive Officers for 2007 are:
| • | | Donald Hildebrand, President and Chief Executive Officer |
|
| • | | Andrew Kandalepas, Senior Vice-President |
|
| • | | Mark Reynolds, Chief Financial Officer |
The tables that follow this Compensation Discussion and Analysis contain specific data about the compensation earned or paid in 2007 to the Named Executive Officers. The discussion below is intended to help you understand the detailed information provided in those tables and put that information into context within our overall compensation program.
Objectives of Our Compensation Program
In general, we operate in a marketplace where competition for talented executives is significant. The biopharmaceutical industry is highly competitive and includes companies with far greater resources than ours. We are engaged in the long-term development of drug candidates, without the benefit of significant current revenues, and therefore our operations involve a high degree of risk and uncertainty. Continuity of personnel across multi-disciplinary functions is a critical success factor to our business.
The objectives of our compensation program for our executive officers and other employees is to provide competitive cash compensation, health, and retirement benefits as well as long-term equity incentives that offer significant reward potential for the risks assumed and for each individual’s contribution to our long-term performance. Individual performance is measured against overall corporate goals, scientific innovation, regulatory compliance, new business development, employee development, and other values designed to build a culture of high performance. These policies and practices are based on the principle that total compensation should serve to attract and retain those executives and employees critical to our overall success and are designed to reward executives for their contributions toward business performance that enhances shareholder value.
Role of the Compensation Committee
Our Compensation Committee assists the Board of Directors in discharging its responsibilities relating to compensation of our executive officers. As such, the Compensation Committee has responsibility over matters
33
relating to the fair and competitive compensation of our executives, employees and non-employee directors as well as matters relating to all other benefit plans. Each of the members of our Compensation Committee is independent in accordance with the criteria of independence set forth in Section 301(3)(B) of the Sarbanes-Oxley Act of 2002. We believe that their independence from management allows the Compensation Committee members to provide unbiased consideration of various elements that could be included sincein an executive compensation program and apply independent judgment about which elements and designs best achieve our compensation objectives. With regard to executive compensation, the Compensation Committee is charged specifically with annually reviewing and determining the compensation of our Chief Executive Officer. With regard to our other executive officers, the Compensation Committee reviews recommendations from our Chief Executive Officer and provides input on his recommendations as appropriate. The Compensation Committee also approves a pool of stock options to be granted as recommended by the Chief Executive Officer to our employees (including other executive officers) and the Board of Directors approves the grant of such options.
Elements of Compensation
To achieve the objectives described above, the three primary compensation elements used for executive officers are base salary, cash bonus, and stock option awards. We believe that these three elements are the most effective combination in motivating and retaining the executive officers at this stage in our development.
Base Salary
Our philosophy is to maintain executive base salary at a competitive level sufficient to recruit and retain individuals possessing the skills and capabilities necessary to achieve our goals over the long term. Each individual’s base salary is determined after considering a variety of factors including prospective value to us, the knowledge, experience, and accomplishments of the individual, the individual’s level of responsibility, and the typical compensation levels for individuals with similar credentials.
Cash Bonus
The purpose of the cash bonus program for executive officers is to motivate and reward the achievement of corporate goals, along with the achievement of individual performance goals.
Stock Option Awards
Stock option awards are a fundamental element in our executive compensation program because they emphasize our long-term performance, as measured by creation of shareholder value, and align the interests of our shareholders and management. In addition, they are crucial to a competitive compensation program for executive officers, and they act as a powerful retention tool. In our current pre-commercial state, we view the Company as still facing a significant level of risk, but with the potential for a high upside, and therefore we believe that stock incentive awards are appropriate for executive officers. These awards are provided through initial grants at or near the date of acquisition.
These approximated $490,000.
Researchhire and Development costs increasedthrough subsequent periodic grants. The initial grant is designed for the level of the job that the executive holds and is designed to approximately $2,434,000 for 2001 as
comparedmotivate the officer to $1,472,000 for 2000. Approximately 84%make the kind of Researchdecisions and Developmentimplement strategies and programs that will contribute to an increase in 2001 consistedour stock price over time. Periodic additional stock option awards may be granted to reflect the executives’ ongoing contributions to the Company, to create an incentive to remain at the Company, and to provide a long-term incentive to achieve or exceed our financial goals.
Timing of costs associatedAnnual Awards
In order to assess the performance of a full calendar year, annual awards are generally determined in December of the each year. We do not currently have any program, plan or practice in place to time stock option grants to our executives or other employees in coordination with the developmentrelease of material non-public information.
Tax Considerations
Section 162(m) of the OraLynx(TM)
set-top box,Internal Revenue Code of 1986, as amended, limits tax deductions of public companies on compensation paid to certain executive officers in excess of $1.0 million. The Compensation
34
Committee considers the impact of Section 162(m) on its compensation decisions, but has no formal policy to structure executive compensation so that it complies with approximately 16%the requirements of Section 162(m). In general, stock options granted under the Company’s 2006 Stock Option Plan are intended to qualify under and comply with the “performance based compensation” exemption provided under Section 162(m) thus excluding from the Section 162(m) compensation limitation any income recognized by executives at the time of exercise of such stock options.
Setting Executive Compensation
Historically, we have not used a quantitative method or mathematical formulas exclusively in setting any element of executive compensation. We use discretion, guided in large part by the concept of pay for performance, and we consider all elements of an executive’s compensation package when setting each portion of compensation. There is no pre-established policy or target for the developmentallocation between cash and equity incentive compensation.
When determining compensation for a new executive officer, factors taken into consideration are the individual’s skills, background and experience, the individual’s potential impact on our short-and long-term success, and competitive information from peer companies, industry-specific sources, and possibly from other prospective candidates interviewed during the recruitment process. We will generally make a grant of stock options when an executive officer joins us. Options are granted at no less than 100% of the new versionfair market value on the date of grant. In determining the size of a stock option grant to an executive officer, we consider company performance, competitive data, and the individual’s scope of responsibility and continuing performance. Most importantly, since the stock option grant is meant to be a retention tool, we consider the importance to shareholders of that person’s continued service. Stock option grants to executives will generally vest over a period of three to four years.
In order to further achieve the objectives described above, the Compensation Committee recommended, and the Board of Directors approved, an extension of the Orasis(R). Researchcurrent five-year expiration date of our stock option grants to ten years and Development costs in 2000 wereto amend certain outstanding options accordingly.
The Compensation Committee annually reviews and determines the compensation for our Chief Executive Officer. Each year recommendations for the developmentcompensation for other executive officers (other than himself) are prepared by the Chief Executive Officer and are reviewed with the Committee and modified where appropriate.
Donald G. Hildebrand.Mr. Hildebrand became our President and Chief Executive Officer immediately upon the consummation of our merger with GeoVax, Inc. on September 28, 2006. Effective on that date, we assumed responsibility for Mr. Hildebrand’s prior employment agreement with GeoVax, Inc., dated December 20, 2002. Mr. Hildebrand is a founder of GeoVax, Inc. Mr. Hildebrand’s base salary for 2007 was $250,000 annually. At its meeting in December 2007, the Compensation Committee reviewed Mr. Hildebrand’s compensation and considered a variety of factors, including his performance and level of responsibility within our company. Based upon this review, the Compensation Committee awarded Mr. Hildebrand a salary increase, effective December 3, 2007, to $270,000 annually. On July 31, 2007, the expiration date of a stock option grant previously issued to Mr. Hildebrand was extended by five years from December 20, 2007 to December 20, 2012. No cash bonus or additional stock option awards were granted to Mr. Hildebrand for 2007.
On March 20, 2008, we entered into an Employment Agreement with Robert T. McNally, Ph.D. to become our new President and Chief Executive Officer effective April 1, 2008. In order to assist with the transition of certain duties to Dr. McNally, Mr. Hildebrand entered into a Consulting Agreement with us on March 20, 2008. Dr. McNally’s initial compensation was determined, in part, by consideration of the OraLynx(TM) set-top box.
Amortizationfact that Mr. Hildebrand will continue to provide substantial support through his consulting arrangement. Mr. Hildebrand will also remain as Chairman of goodwill associatedthe Board. As the Company’s need for Mr. Hildebrand’s services under his consulting arrangement diminishes, we expect that Dr. McNally’s compensation will be adjusted accordingly. See “Certain Relationships and Related Party Transactions” for a discussion of these agreements.
Andrew J. Kandalepas.Mr. Kandalepas served as our President and Chief Executive Officer during 2006 until our merger with GeoVax, Inc., at which time he assumed the role of Senior Vice President. Effective with the acquisitionmerger with GeoVax, Inc., all prior compensation arrangements with Mr. Kandalepas were terminated and he received no pay for the period from September 30, 2006 to December 31, 2006, although he continued to provide services to us as our Senior Vice President. In February 2007, the Compensation Committee reviewed, and provided
35
input on, a recommendation from Mr. Hildebrand for a compensation arrangement with Mr. Kandalepas. We executed an employment agreement with Mr. Kandalepas effective February 1, 2007 pursuant to which Mr. Kandalepas received an annual salary of ADD amounted to
$1,100,000, whereas in 2000, only four and one-half months$210,000. Mr. Kandalepas was also awarded retroactive pay of amortization are
included, which amounted to $412,500.
Asset impairment and other losses$40,000 for 2001 consisted of the write off of the
remaining goodwill associated with the acquisition of ADD of $3,987,500 and
$290,000 of an investment in non-marketable securities. During the fourth quarter of 20012006 and $17,500 for the month of January 2007. Additionally, at its meeting on March 14, 2007, upon recommendation from the Compensation Committee, the Board of Directors awarded Mr. Kandalepas a stock option contract for 1,800,000 shares at an exercise price of $0.355 per share. At its meeting in December 2007, the Compensation Committee reviewed Mr. Kandalepas’ compensation and considered a variety of factors, including his performance and level of responsibility within our company. Based upon this review and input provided to the CEO, the Company determinedawarded Mr. Kandalepas a salary increase, effective December 3, 2007, to $225,000 annually, and granted Mr. Kandalepas a cash bonus of $10,000 for 2007. No additional stock option awards were granted to Mr. Kandalepas for 2007.
Mark W. Reynolds.During 2007, Mr. Reynolds was engaged as our Chief Financial Officer effective October 1, 2006, under an arrangement whereby he provides services to the Company on a part-time basis and is paid based on a monthly retainer of $750 plus a fee of $145 per hour. At its meeting on March 14, 2007, upon recommendation from the Compensation Committee, the Board of Directors awarded Mr. Reynolds an initial stock option contract for 1,800,000 shares at an exercise price of $0.355 per share. At its meeting in December 2007, the Compensation Committee reviewed Mr. Reynolds’ compensation and considered a variety of factors, including his performance and level of responsibility within our company. Based upon this review, the Committee deferred to the recommendation of Mr. Hildebrand to keep Mr. Reynolds’ salary as per his current contractual agreement. Upon the discretion of the CEO, and with approval of the Committee, Mr. Reynolds was also granted as $10,000 bonus for 2007 and a stock option contract for 500,000 shares at an exercise price of $0.161 per share.
Benefits Provided to Executive Officers
We provide our executive officers with certain benefits that the set-top box design was completedCompensation Committee believes are reasonable and consistent with our overall compensation program. The Compensation Committee will periodically review the design services business with outside customers was declining, therefore
an impairmentlevels of benefits provided to our executive officers. In 2007, Mr. Hildebrand received reimbursement of periodic commuting expenses and temporary living expenses for travel between our offices in Atlanta, Georgia and Mr. Hildebrand’s home in Athens, Georgia. Mr. Hildebrand is reimbursed for medical and dental insurance costs per his contractual agreement and is eligible for standard GeoVax 401(k) benefits. Mr. Kandalepas is eligible for health insurance and 401(k) benefits at the goodwill associatedsame level as provided to all other employees. Pursuant to his contractual agreement with the acquisition of ADD occurred.Company, Mr. Reynolds received no health insurance or 401(k) benefits during 2007. The Company revised its projections and determined thatamounts shown in the projected results
would not fully supportSummary Compensation Table under the future amortization carryingheading “Other Compensation” represent the value of the goodwill
balance. In addition,Company’s matching contributions to the executive officers’ 401(k) accounts. Executive officers did not receive any other perquisites or other personal benefits or property from the Company determinedor any other source.
Summary Compensation Table
The following table sets forth information concerning the compensation earned during the fiscal years ended December 31, 2007 and 2006 by our Named Executive Officers. Dr. McNally became our President and Chief Executive Officer effective April 1, 2008, but did not serve in that capacity, or receive any compensation for services as an executive officer during 2007, and is not included in the carryingtable below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | All Other | | |
| | | | | | | | | | | | | | | Stock | | Option | | Compen- | | |
| Name and Principal | | | | | | Salary | | Bonus | | Awards | | Awards | | sation | | Total |
| Position | | Year | | ($) | | ($) | | ($)(3) | | ($)(4) | | ($)(5) | | ($) |
| Donald G. Hildebrand(1) | | | 2007 | | | | 252,577 | | | | — | | | | — | | | | — | | | | 3,375 | | | | 255,952 | |
| President & Chief | | | 2006 | | | | 57,500 | | | | 50,000 | | | | — | | | | — | | | | 574 | | | | 108,074 | |
| Executive Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Andrew J. Kandalepas | | | 2007 | | | | 205,288 | | | | 10,000 | | | | — | | | | 188,380 | | | | — | | | | 403,668 | |
| Senior Vice President, | | | 2006 | | | | 173,467 | | | | — | | | | 2,400,000 | | | | — | | | | — | | | | 2,573,467 | |
| Former President & Chief | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Executive Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | All Other | | |
| | | | | | | | | | | | | | | Stock | | Option | | Compen- | | |
| Name and Principal | | | | | | Salary | | Bonus | | Awards | | Awards | | sation | | Total |
| Position | | Year | | ($) | | ($) | | ($)(3) | | ($)(4) | | ($)(5) | | ($) |
| Mark W. Reynolds(2) | | | 2007 | | | | 92,102 | | | | 10,000 | | | | — | | | | 190,324 | | | | — | | | | 292,426 | |
| Chief Financial Officer | | | 2006 | | | | 13,192 | | | | 2,000 | | | | — | | | | — | | | | — | | | | 15,192 | |
| | |
| (1) | | Mr. Hildebrand became our President and Chief Executive Officer effective September 28, 2006. All compensation amounts above reflect amounts paid to, or earned by, Mr. Hildebrand from that date through December 31, 2007. |
|
| (2) | | Mr. Reynolds became our Chief Financial Officer effective October 1, 2006. All compensation amounts above reflect amounts paid to, or earned by, Mr. Reynolds from that date through December 31, 2007. |
|
| (3) | | The amount shown in the “Stock Awards” column for Mr. Kandalepas reflects the value assigned by the Company to 20 million restricted shares issued to Mr. Kandalepas for services rendered prior to the consummation of our merger with GeoVax, Inc. Due to the accounting treatment accorded to the merger, our historical financials have been substituted by those of GeoVax, Inc. prior to the merger date; accordingly, this amount is not reflected in our financial statements included herein. |
|
| (4) | | Amounts shown in the “Option Awards” columns represent the dollar amount recognized for financial statement reporting purposes in 2007 for awards and grants made in the current and previous fiscal years, calculated pursuant to the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment.” For a discussion of the various assumptions made and methods used for determining such amounts, see footnotes 2 and 7 to our 2007 consolidated financial statements contained herein. |
|
| (5) | | Amounts shown in the “All Other Compensation” column represent employer contributions to the Company’s 401(k) retirement plan. |
Grants of its
investment in non-marketable securities had been impaired sincePlan-Based Awards
The following table sets forth the
investment
had discontinued paying dividends in 2001 and dueoption awards granted to the
overall poor financial
condition of the issuing company.
Interest expense increased to approximately $274,000Named Executive Officers for the year ended December 31,
2001 from $68,000 for the year ended December 31, 2000. Included in interest
expense in 2001 is three months amortization of the debt discount
20
associated2007. | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | All Other | | | | |
| | | | | | | All Other Stock | | Option Awards: | | | | |
| | | | | | | Awards: | | Number of | | | | |
| | | | | | | Number of | | Securities | | Exercise or | | Grant Date Fair |
| | | | | | | Shares of Stock | | Under- lying | | Base Price of | | Value of Option |
| | | | | | | or Units | | Options | | Option Awards | | Awards |
| | | Grant Date | | (#) | | (#) | | ($/Sh)(1) | | ($)(2)(3) |
| Donald Hildebrand | �� | | — | | | | — | | | | — | | | | — | | | | 242,113 | |
| | | | | | | | | | | | | | | | | | | | | |
| Andrew Kandalepas | | | 03/14/07 | | | | — | | | | 1,800,000 | | | | 0.355 | | | | 604,800 | |
| | | | | | | | | | | | | | | | | | | | | |
| Mark Reynolds | | | 03/14/07 | | | | — | | | | 1,800,000 | | | | 0.355 | | | | 604,800 | |
| | | | 12/05/07 | | | | — | | | | 500,000 | | | | 0.161 | | | | 70,000 | |
| | |
| (1) | | The exercise price for options is the closing trading price of the common shares of the Company on the on the day of the grant. The grant date is determined by the Compensation Committee. |
|
| (2) | | Compensation expense is recognized for all share-based payments based on the grant date fair value estimated for financial reporting purposes. For a discussion of the various assumptions made and methods used for determining such amounts, see footnotes 2 and 7 to our 2007 consolidated financial statements contained herein. |
|
| (3) | | On July 31, 2007, the expiration date of a stock option grant previously issued to Mr. Hildebrand was extended by five years from December 20, 2007 to December 20, 2012. The amount shown in the table above is the incremental fair value of the award, calculated in accordance with the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment.” |
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Outstanding Equity Awards At Fiscal Year-End
The following table sets forth certain information with
the Convertible Note, amountingrespect to
$252,000. The remaining
interest is relatedunexercised options previously awarded to
capital equipment leases and other borrowings. Interest
expense in 2000 was a result of the capital equipment leases and other
borrowings. Interest on these leases and other borrowings decreased from $68,000
to $22,000 because the outstanding balances on the capital leases and borrowings
have decreased.
Fourth-Quarter 2001 Compared with Fourth-Quarter 2000
Net sales for the fourth-quarter 2001 were approximately $1,195,000 as compared
to fourth-quarter net sales in 2000 of approximately $30,000. The Company began
shipping set-top boxes in the fourth quarter to OTE, the Hellenic
Telecommunications Organization S.A. with which the Company has a sales and
marketing agreement. Also included in the fourth quarter are revenues from the
Suncoast operations, amounting to approximately $70,000. The net assets of
Suncoast were acquired on July 1, 2001. Design services revenue in the
fourth-quarter amounted to $176,000 as compared to $469,000 in the
fourth-quarter of 2000. The decrease in revenue of 62% is a result of the
reduction in engineering projects available in the marketplace. Customers for
our
type of services have experienced layoffs and cutbacks within their own
industries, and outside consulting is another area where companies reduced their
costs. Cost of sales in the fourth-quarter of 2001 includes the write-off of the
remaining inventory associated with the Orasis(R). Cost of sales in the
fourth-quarter of 2000 includes $1,950,000 of write down of inventory and
adjustment to the net realizable carrying value. Because of the above, gross
loss decreased from $1,936,000 in the fourth-quarter of 2000 to $359,000 for the
fourth-quarter of 2001.
Selling, general and administrative expenses for fourth-quarter of 2001 include
the operations of the Suncoast subsidiary as well as the operations of the
branch office in Greece, whereas neither of these two operations existed in
2000. Selling, general and administrative expenses for the fourth- quarter of
2000 include expenses associated with the Comdex2000 trade show, advertising,
expenses associated with exploring foreign markets and the charges to increase
the reserve for bad debts. All other selling, general and administrative
expenses are comparable between the fourth quarter of 2001 and 2000. Research
and Development costs decreased by approximately $325,000 from approximately
$999,000 in the fourth-quarter 2000 to approximately $674,000 in the
fourth-quarter 2001. This is attributable to the completion of the development
of the OraLynx(TM) set-top box in 2001.
Interest expense increased from $4,000 in the fourth-quarter 2000 to
approximately $258,000 in the fourth-quarter of 2001. This increase is
attributable to the amortization of the beneficial conversion feature associated
with the Convertible Note in 2001.
Results of Operations 2000 Compared to 1999
Revenue for the Company decreased from approximately $2,279,000 in 1999 to
$860,000 in 2000. The revenue decreased as a result of the Company's decision to
eliminate contract manufacturing and focusing its efforts on the development of
the set-top box. The Company determined that contract manufacturing was no
longer profitable and did not fit in to the overall business plan of the
Company. Contract manufacturing revenues approximated $2,000,000 in 1999.
Revenue for 2000 was also aided by the design services and consulting of the
Company's subsidiary, ADD. Gross revenue from ADD from the date of acquisition
of August 18, 2000, amount to approximately $985,000. Gross profit margins are
not comparable for the period due to the fluctuations in revenue. The gross
profit margin for both years were effected by the write down of obsolete
inventory. For the year ended December 31, 2000 the write down of obsolete
inventory and the reserve for potential obsolete Orasis(R) inventory amounted to
$1,950,000 as compared to the write-off of obsolete inventory in the year ended
December 31, 1999 of $1,793,000.
Selling, general and administrative expenses decreased to approximately
$4,043,000 for 2000 as compared to $4,173,000 for 1999. The increase in
professional fees and financial service expenses related to the private
placement, common stock purchase agreement and cost associated with exercising
the drawdown, amounting to approximately $985,000, were offset by staff
reductions and other cost cutting measures implemented by management
approximating $1,115,000. The Company decided to eliminate contract
manufacturing in the third-quarter. The employee count at RMS was reduced from
185 employees during the beginning of 1999 to six employees at December 31,
2000. In addition, certain related expenses were also reduced, such as health
insurance, telephone, travel and entertainment, utilities, office supplies and
other administrative expenses.
Research and Development costs increased to approximately $1,472,000 for 2000 as
compared to $510,000 for 1999.
21
Research and Development in 2000 consisted of costs associated with the
development of the OraLynx(TM) set-top box, whereas in 1999, these costs were
for the continued development of the Orasis(R).
Interest expense decreased to approximately $68,000 for the year ended December
31, 2000 from $2,099,000 for the year ended December 31, 1999. Interest expense
in 1999 was mainly a result of the financing activities associated with the
conversion of debt to common stock as well as the issuance of warrants
associated with the debt.
Liquidity and Capital Resources
The Company has incurred a net operating loss in each year since its founding
andnamed executive officers as of December 31, 2001, has an accumulated deficit2007. | | | | | | | | | | | | | | | | | |
| | | Number of Securities | | Number of Securities | | | | |
| | | Underlying | | Underlying | | | | |
| | | Unexercised Options | | Unexercised Options | | Option Exercise Price | | Option Expiration |
| Name | | (#) Exercisable | | (#) Unexercisable | | ($) | | Date |
| Donald Hildebrand | | | 8,895,630 | (1) | | | — | | | | 0.0445 | | | | 12/20/12 | |
| | | | 8,895,630 | | | | — | | | | 0.0445 | | | | 02/05/09 | |
| | | | | | | | | | | | | | | | | |
| Andrew Kandalepas | | | 600,000 | (2) | | | 1,200,000 | (2) | | | 0.3550 | | | | 03/14/17 | |
| | | | | | | | | | | | | | | | | |
| Mark Reynolds | | | 600,000 | (2) | | | 1,200,000 | (2) | | | 0.3550 | | | | 03/14/17 | |
| | | | | | | | 500,000 | (3) | | | 0.1610 | | | | 12/05/17 | |
| | |
| (1) | | On July 31, 2007, the expiration date of this stock option award to Mr. Hildebrand was extended by five years from December 20, 2007 to December 20, 2012. |
|
| (2) | | These stock options were granted on March 14, 2007 and vest in three equal installments on September 30, 2007, 2008 and 2009. |
|
| (3) | | These stock options were granted on December 5, 2007 and vest in three equal installments on each anniversary of the grant date. |
Potential Payments Upon Termination Or Change Of Control
Mr. Hildebrand’s employment agreement contained provisions such that, if we terminated Mr. Hildebrand’s employment without cause, we were required to provide Mr. Hildebrand thirty days notice of approximately
$59,342,000.such termination and Mr. Hildebrand would have been entitled to continue to receive his base salary for a period of nine months from the effective date of termination. Upon the execution of Mr. Hildebrand’s Consulting Agreement, effective April 1, 2008, such provisions from his employment agreement are no longer applicable. Mr. Hildebrand’s Consulting Agreement contains provisions such that, if we terminate the Consulting Agreement without cause, we must give Mr. Hildebrand at least 30 days notice and we will be required to pay him, as a severance payment, three months compensation. Likewise, if the Consulting Agreement is terminated due to the death of Mr. Hildebrand, we will be required to pay his estate three months compensation. If Mr. Hildebrand wishes to terminate the Consulting Agreement, he must provide us with 30 days notice.
Pursuant to our employment agreements with Mr. Kandalepas, Mr. Reynolds and Mr. McNally, if we terminate any of their employment agreements without cause, we are required to provide the person whose employment was terminated with thirty days notice of such termination and he is entitled to continue to receive his base salary for a period of one week for each year of service.
Director Compensation
The Company expectsfollowing table sets forth information concerning the compensation earned during the last fiscal year by each individual who served as a director at any time during the most recent fiscal year:
| | | | | | | | | | | | | | | | | |
| | | Fees Earned or Paid | | | | | | All Other | | |
| | | in Cash | | Option Awards | | Compensation | | Total |
| Name | | ($) | | ($)(2) | | ($) | | ($) |
| Donald Hildebrand(1) | | | — | | | | — | | | | — | | | | — | |
| Andrew Kandalepas(1) | | | — | | | | — | | | | — | | | | — | |
| Dean Kollintzas | | | 10,750 | | | | 140,090 | | | | — | | | | 150,840 | |
| Robert McNally | | | 21,950 | | | | 131,588 | | | | — | | | | 153,538 | |
38
| | | | | | | | | | | | | | | | | |
| | | Fees Earned or Paid | | | | | | All Other | | |
| | | in Cash | | Option Awards | | Compensation | | Total |
| Name | | ($) | | ($)(2) | | ($) | | ($) |
| John Spencer | | | 25,000 | | | | 140,090 | | | | — | | | | 165,090 | |
| | |
| (1) | | Mr. Hildebrand and Mr. Kandalepas, who were employees of the Company during 2007, received no compensation for their service as directors. |
|
| (2) | | Consists of awards of stock options to each of Mr. Kollintzas, Dr. McNally and Mr. Spencer to purchase 1,820,000 shares with a grant date fair values of $513,520. As of December 31, 2007, these directors had aggregate awards of options to purchase 5,460,000 shares. Amounts shown in the table represent the dollar amount recognized for financial statement reporting purposes in 2007 for awards and grants made in the current and previous fiscal years, calculated pursuant to the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment.” For a discussion of the various assumptions made and methods used for determining such amounts, see footnotes 2 and 7 to our 2007 consolidated financial statements contained herein. |
Director Compensation Plan
In March 2007, the Board of Directors approved a recommendation from the Compensation Committee for director compensation (the “Director Compensation Plan”). The Director Compensation Plan applies only to incur operating losses over the near term.
The Company's ability to achieve profitability will depend on many factors
including the Company's ability to manufacture and market commercially
acceptable products including its set-top box. There can be no assurance thatnon-employee directors. Directors who are employees of the Company receive no compensation for their service as directors or as members of committees. Non-employee directors receive an annual retainer of $2,000 (paid quarterly) for service as a member of the Audit Committee and $1,250 for service as a member of the Compensation Committee. The Chairman of the Audit Committee receives an annual retainer of $9,000, and the Chairman of the Compensation Committee receives an annual retainer of $6,000 which retainers are also paid quarterly. Non-employee directors also receive fees for each Board or Committee meeting attended as follows: $1,500 per Board meeting, $1,000 per Committee meeting chaired, and $500 per Committee meeting attended as a non-Chair member. Meetings attended telephonically are paid at lower rates ($750, $750 and $400, respectively). In March 2008, the Board of Directors approved a recommendation from the Compensation Committee to modify the Director Compensation Plan to provide for compensation for a non-employee Chairman of the Board. A non-employee Chairman of the Board will ever achievereceive an annual retainer of $25,000 (paid quarterly) and will not be entitled to additional fees for meetings attended. Non-employee directors receive an automatic grant of options to purchase 1,320,000 shares of common stock on the date that such non-employee director is first elected or appointed. The Director Compensation Plan currently does not provide a profitable levelformula for stock option grants to directors upon their re-election to the Board, or otherwise, but the compensation plan may be modified in the future; such option grants are currently determined by Board, upon recommendation by the Compensation Committee based on the Compensation Committee’s annual deliberations and review of operationsthe director compensation structure of similar companies. At its meeting in December 2007, the Board determined an annual stock option grant of 500,000 shares to each of its non- employee members. All directors are reimbursed for expenses incurred in connection with attending meetings of the Board of Directors and committees.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Procedures for Approval of Related Person Transactions
It is the responsibility of our Audit Committee to review all transactions or arrangements between our company and any of our directors, officers, principal shareholders or any of their respective affiliates, associates or related parties.
Employment Agreement with Robert McNally
On March 20, 2008, GeoVax entered into an Employment Agreement with Robert T. McNally, Ph.D. to become our President and Chief Executive Officer effective April 1, 2008. The Employment Agreement has no specified term. Pursuant to the Employment Agreement, we will pay Dr. McNally an annual salary of $200,000. The Board of Directors may also recommend the payment of a discretionary bonus annually. Dr. McNally is eligible for grants of awards from the GeoVax Labs, Inc. 2006 Equity Incentive Plan and is entitled to participate in any and all
39
benefits in effect from time-to-time for executive officers generally. We may terminate the Employment Agreement, with or without cause. If we terminate the Employment Agreement without cause, we will be required to give Dr. McNally at least 60 days prior notice of the termination. In the event of termination not for cause, Dr. McNally will be entitled to one week of severance pay for each full year of service as President and Chief Executive Officer. Dr. McNally may terminate the Employment Agreement at any time by giving us 60 days notice. On June 17, 2008, Dr. McNally received an option to acquire up to 2,400,000 shares of the Company’s common stock at an exercise price of $0.17 per share. The option vests in equal annual installments over three years beginning June 17, 2009 and has a ten year term.
Consulting Agreement with Donald Hildebrand
In order to assist with the transition of certain duties to Dr. McNally, Donald G. Hildebrand, our then current President and Chief Executive Officer, entered into a Consulting Agreement with us on March 20, 2008. Aside from his duties as a consultant, Mr. Hildebrand will also continue to serve as Chairman of our Board of Directors. The term of the Consulting Agreement began on April 1, 2008 and will end on December 31, 2009. During the month of April 2008, Mr. Hildebrand received $22,500 as compensation for his services (equivalent to his salary as President and Chief Executive Officer). Beginning on May 1, 2008 and continuing through December 31, 2008, Mr. Hildebrand will provide us with at least 32 hours of service per month and will be paid at the rate of $250 per hour. Beginning on January 1, 2009 and continuing through December 31, 2009, Mr. Hildebrand will provide us with at least 16 hours of service per month and will be paid at the rate of $300 per hour. The Board of Directors may, in its discretion, recommend the payment of an annual bonus. We will also pay Mr. Hildebrand’s medical and dental coverage through the term of the Consulting Agreement. We may terminate the Consulting Agreement, with or without cause. If we terminate the Consulting Agreement without cause, we must give Mr. Hildebrand at least 30 days notice and we will be required to pay him, as a severance payment, three months compensation. Likewise, if profitabilitythe Consulting Agreement is achieved, that it canterminated due to the death of Mr. Hildebrand, we will be sustained.
Forrequired to pay his estate three months compensation. If Mr. Hildebrand wishes to terminate the Consulting Agreement, he must provide us with at least 30 days notice.
Transactions with Emory University
Emory University (“Emory”) is a significant shareholder of the Company, and our primary product candidates are based on technology rights subject to a license agreement with Emory (the “Emory License”). The Emory License, among other contractual obligations, requires payments based on milestone achievements, royalties on sales by the Company or on payments to the Company by our sublicensees, and payment of maintenance fees in the event certain milestones are not met within the time periods specified in the contract. Additionally, prior patent costs are payable to Emory, one half of which is due when capital raised subsequent to the date of the Emory License is equal to $5.0 million and the remainder is due when cumulative capital raised equals $12.5 million. GeoVax, Inc. reached the first threshold of $5.0 million and fulfilled the first half of this payment obligation to Emory in 2006. We became obligated to pay the second half of our payment obligation ($137,392) upon reaching the five year anniversary of the Emory License during 2007. We made this payment in January 2008. We may terminate the Emory License on three months’ written notice. In any event, the Emory License expires on the date of the latest expiration date of the underlying patents. We are also obligated to reimburse Emory University for certain ongoing costs in connection with the filing, prosecution and maintenance of patent applications subject to the Emory License. Such reimbursements to Emory amounted to $106,261 and $98,842 for the years ended December 31, 20012007 and 2006, respectively.
40
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS, DIRECTORS AND OFFICERS
Based solely upon information made available to us, the Company used $4,213,000following table sets forth information with respect to the beneficial ownership of cash in
operating activities, used $661,000 in investing activitiesour common stock as of June 26, 2008 by:
|
| • | | each director; |
|
|
| • | | each of our executive officers; |
|
| • | | all executive officers and directors as a group; and |
|
| • | | each additional person who is known by us to beneficially own more than 5% of our common stock. |
Except as otherwise indicated, the holders listed below have sole voting and generated
$2,916,000 of cash from financing activities that produced a decrease in cash of
$1,958,000 for the year. The net loss of $13,252,000 was partially offset by the
non-cash items of depreciation and amortization of $1,630,000, the asset
impairment loss of $4,277,000, write off of assets not used in the business of
$526,000, write off of inventory of $490,000 and the issuanceinvestment power with respect to all shares of common stock for reimbursement pursuant to a personal guarantee for $1,242,000. Investing
activities consisted of the purchase of equipment, which is primarily leasehold
improvements in the establishment of the Company's sales and marketing branch
office in Greece amounting to approximately $316,000 and additions of equipment
at Suncoast. Investing activities consisted primarily of the issuance of
convertible debentures and warrants for $2,500,000, the drawdown against the
equity line of $300,000 and the exercise of warrants and stock options for
$206,000. As of December 31, 2001 the Company had a current asset to current
liabilities ratio of 2.0 as compared to a ratio of 6.6 at December 31, 2000. The
Consolidated Statements of Cash Flows, included in this report, detail the other
sources and uses of cash and cash equivalents.
In the second quarter of 2000, the Companybeneficially owned by them.
| | | | | | | | | |
| | | Number of Shares | | Percentage of |
| Name and Address of Beneficial Owner:(1) | | Beneficially Owned | | Class(2) |
Directors and Executive Officers: | | | | | | | | |
| Donald G. Hildebrand (3) | | | 75,522,107 | | | | 9.9 | % |
| Andrew J. Kandalepas (4) | | | 21,890,065 | | | | 2.9 | % |
| Dean G. Kollintzas (5) | | | 440,000 | | | | * | |
| Robert T. McNally (6) | | | 1,057,757 | | | | * | |
| Mark W. Reynolds (7) | | | 630,000 | | | | * | |
| Harriet L. Robinson (8) | | | 68,696,151 | | | | 9.1 | % |
| John N. Spencer, Jr. (9) | | | 570,000 | | | | * | |
| | | | | | | | | |
| All executive officers and directors as a group (7 persons) (10) | | | 168,806,080 | | | | 21.8 | % |
| | | | | | | | | |
Other 5% Shareholders: | | | | | | | | |
| Emory University | | | | | | | | |
| Administration Building 101 | | | | | | | | |
| 201 Dowman Drive | | | | | | | | |
| Atlanta, Georgia 30322 | | | 233,905,253 | | | | 31.5 | % |
| | |
| * | | Less than 1% |
|
| (1) | | Except as otherwise indicated, the business address of each director and executive officer listed is c/o GeoVax Labs, Inc., 1256 Briarcliff Road, Suite 500, Atlanta, Georgia 30306. |
|
|
| (2) | | This table is based upon information supplied by officers and directors, and with respect to principal shareholders, Schedules 13D and 13G filed with the SEC. Beneficial ownership is determined in accordance with the rules of the SEC. Applicable percentage ownership is based on 743,414,885 shares of common stock outstanding as of June 26, 2008. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options currently exercisable, or exercisable within 60 days of June 26, 2008, are deemed outstanding. |
|
|
|
| (3) | | Includes options to purchase 17,791,260 shares of common stock exercisable within 60 days of June 26, 2008. |
|
|
|
| (4) | | Includes options to purchase 600,000 shares of common stock exercisable within 60 days of June 26, 2008. |
|
|
|
| (5) | | Includes options to purchase 440,000 shares of common stock exercisable within 60 days of June 26, 2008. |
|
|
|
| (6) | | Includes options to purchase 440,000 shares of common stock exercisable within 60 days of June 26, 2008. |
|
|
|
| (7) | | Includes options to purchase 600,000 shares of common stock exercisable within 60 days of June 26, 2008. |
|
|
|
| (8) | | Includes options to purchase 8,895,630 shares of common stock exercisable within 60 days of June 26, 2008 |
|
|
|
| (9) | | Includes options to purchase 440,000 shares of common stock exercisable within 60 days of June 26, 2008. |
|
|
|
| (10) | | Includes options to purchase 29,206,890 shares of common stock exercisable within 60 days of June 26, 2008. |
|
41
THE FUSION TRANSACTION
General
On May 8, 2008, we entered into a common stock purchase agreement escrowwith Fusion Capital. Under the purchase agreement, and registration rightsFusion Capital is obligated, under certain conditions, to purchase shares from us in an aggregate amount of up to $10.0 million from time to time over a twenty-five (25) month period. Under the terms of the purchase agreement, with Techrich
International Ltd., ("Techrich"). These agreements providedFusion Capital has received a $100,000,000
equity linecommitment fee consisting of credit for use by the Company at its discretion. During the third
and fourth quarters2,480,510 shares of 2000, the Company received $7,000,000 from the equity
line in exchange for the issuance of 2,136,616 ofour common stock. In the third
quarter of 2001, the Company receivedAlso, we will issue to Fusion Capital up to an additional $300,000 from2,480,510 shares as a commitment fee pro rata as we receive the equity
lineup to $10.0 million of future funding. As of June 26, 2008, there were 743,414,885 shares outstanding (including shares held by non-affiliates) excluding up to 37,480,510 shares offered by Fusion Capital pursuant to this prospectus which we have not yet issued to Fusion Capital. If all of such 37,480,510 shares were issued and outstanding as of the date hereof, the 40,161,020 shares would represent 4.8% of the total common stock outstanding or 9.2% of the non-affiliate shares outstanding as of the date hereof. The number of shares ultimately offered for sale by Fusion Capital is dependent upon the number of shares purchased by Fusion Capital under the Purchase Agreement.
Under the Purchase Agreement and the Registration Rights Agreement we are required to register and have included in exchange for 258,968the offering pursuant to this prospectus:
| • | | 2,480,510 shares which were issued as a commitment fee, which, subject to certain exceptions, may not be sold by Fusion Capital until the earlier of 500 days from May 8, 2008, or the termination of the common stock purchase agreement; |
|
| • | | 200,000 shares which we issued to Fusion Capital as an expense reimbursement; |
|
| • | | an additional 2,480,510 shares which we may issue in the future as a commitment fee pro rata as we receive the up to $10.0 million of future funding; and |
|
| • | | 35.0 million shares which we may sell to Fusion Capital after this registration statement is declared effective under the Securities Act. |
All 40,161,020 shares are being offered pursuant to this Prospectus. Under the Purchase Agreement, we have the right but not the obligation to sell more than the 35.0 million shares to Fusion Capital. As of common stock. Thethe date hereof, we do not have any plans or intent to sell to Fusion Capital any shares underlyingbeyond this 35.0 million shares. However, if we elect to sell more than the equity line of credit with Techrich were registered with35.0 million shares (which we have the right but not the obligation to do), we must first register under the Securities Act any additional shares we may elect to sell to Fusion Capital before we can sell such additional shares, which could cause substantial dilution to our shareholders.
We do not have the right to commence any sales of our shares to Fusion Capital until the SEC has declared effective the registration statement of which this Prospectus is a part. After the SEC has declared effective such registration statement, generally we have the right but not the obligation from time to time to sell our shares to Fusion Capital in amounts between $80,000 and Exchange Commission with an S-1 filing, File No. 333-35808, dated July 20, 2000$1.0 million depending on certain conditions. We have the right to control the timing and effective on July 28, 2000.
On September 28, 2001 the Company entered into a $10 million Securities Purchase
Agreement with Crescent International Ltd., ("Crescent") an institutional
investor. Under the Securities Purchase Agreement, the Company issued a
Convertible Note for $2.5 million. Although the Company had the optionamount of any sales of our shares to issue
further convertible notes to CrescentFusion Capital subject to certain conditions precedent,
such option expired on February 1, 2002 and no additional notes were issued. In
addition,limitations. The purchase price of the Company issued warrants exercisableshares will be determined pursuant to a formula based upon the market price of our shares without any fixed discount at the time of each sale. Fusion Capital shall not have the right nor the obligation to purchase 700,000any shares of our common stock at aon any business day that the price of $1.3064 per share for a five-year term.our common stock is below $0.05. There are no negative covenants, restrictions on future fundings, penalties or liquidated damages in the Purchase Agreement or the Registration Rights Agreement. The Purchase Agreement may be terminated by us at any time at our discretion without any cost to us.
Purchase Of Shares Under The Common Stock Purchase Agreement further permits
Under the Company to sell to Crescent up to $7.5
million in common stock of the Company over a 24-month period. Additionally, the
Company agreed not to exercise any drawdowns against its then existing common stock purchase agreement, with Techrich International Ltd., which expired on
January 28, 2002.
The Securities Purchase Agreement permits the Company to sell to Crescent and
requires Crescentwe may direct Fusion Capital to purchase from the Company, at the Company's sole
discretion,up to $80,000 of our common stock ofby giving notice (so long as it has been at least four business days since the Companylast purchase). The purchase price per share is equal to the lesser of:
42
| • | | the lowest sale price of our common stock on the purchase date; or |
|
| • | | the average of the three (3) lowest closing sale prices of our common stock during the twelve (12) consecutive business days prior to the date of a purchase by Fusion Capital. |
The purchase price will be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the business days used to compute the purchase price. We may direct Fusion Capital to make multiple purchases from time to time in our sole discretion; no sooner then every four business days.
Our Right To Increase the Amount to be Purchased
In addition to purchases of up to $7.5$80,000, we may elect to require Fusion Capital to purchase our shares in an amount up to $100,000 on a single business day provided that our share price is not below $0.11 during the two business days prior to and on the purchase date. We may increase this amount to up to $250,000 if our share price is not below $0.20 during the two business days prior to and on the purchase date. This amount may also be increased to up to $500,000 if our share price is not below $0.40 during the two business days prior to and on the purchase date. This amount may be increased to up to $1.0 million over a 24-month
period. Individual sales are limitedif our share price is not below $0.80 during the two business days prior to $1.5 million, or a higher amount if
agreedand on the purchase date. We may direct Fusion Capital to by the Company and Crescent, and each sale is subjectmake multiple large purchases from time to time in our satisfaction of the following conditions precedent (none of which are within the
control of Crescent): (1) the Company's representations and warranties must be
true and complete, (2) the Companysole discretion; however, at least three business days must have one or more currently effective
registration statements coveringpassed since the resale by Crescentmost recent large purchase was completed. The price at which our common stock would be purchased in this type of all shares issuedlarger purchases will be the lesser of (i) the lowest sale price of our common stock on the purchase date and (ii) the lowest purchase price (as described in prior sales to Crescent and issuable upon the conversion ofbullet points above) during the Convertible
Note, (3) there must be no dispute asprevious ten business days prior to the adequacy of disclosures made in any
such registration statement, (4) such registration statements must not be
subject to any stop order, suspension or withdrawal, (5)purchase date.
Minimum Purchase Price
Under the
Company must have
performed its covenants
22
and obligations under the Securities Purchase Agreement, (6) no statute, rule,
regulation, executive order, decree, ruling or injunction may have been enacted,
entered, promulgated or adopted by any court of governmental authority that
would prohibit the Company's performance under the Securities Purchase
Agreement, (7) the company's common stock mustpurchase agreement, we have set a minimum purchase price (“floor price”) of $0.05. However, Fusion Capital shall not have been delisted from its
principal trading market and there must be no trading suspensionthe right nor the obligation to purchase any shares of itsour common stock in effect, and (8) the issuance ofevent that the designated number ofpurchase price would be less than the floor price. Specifically, Fusion Capital shall not have the right or the obligation to purchase shares of our common stock with respect to the applicable sale must not violate the
shareholder approval requirements of the Company's principal trading market. The
aggregate amount of all sale shares and convertible notes issued cannot exceed
$10 million. The amount of the sale is limited to twice the average of the bid
price multiplied by the trading volume during the 22 tradingon any business day period
immediately preceding the date of sale. When the total amount of securities
issued to Crescent equals or exceeds $5 million, the Company shall issue to
Crescent a subsequent incentive warrant exercisable to purchase 400,000 shares
of common stock at a price equal to the bid price on the date the incentive
warrant is issued. If the Company, for the purposes of obtaining any additional
financing, wishes to sell shares to a party other than Crescent, the Company
shall first offer to Crescent the right to purchase such shares at the bona fide
price offered by the other party.
The Company elected to pursue the above financing arrangements with Crescent
because the Company's previous financing arrangements with Techrich contained
certain limitations as it related tothat the market price of our common stock is below $0.05. Events of Default
Generally, Fusion Capital may terminate the average volumecommon stock purchase agreement without any liability or payment to the Company upon the occurrence of any of the following events of default:
| • | | the effectiveness of the registration statement of which this prospectus is a part of lapses for any reason (including, without limitation, the issuance of a stop order) or is unavailable to Fusion Capital for sale of our common stock offered hereby and such lapse or unavailability continues for a period of ten consecutive business days or for more than an aggregate of thirty business days in any 365-day period; |
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| • | | suspension by our principal market (the over-the-counter bulletin board) of our common stock from trading for a period of three consecutive business days; |
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| • | | the de-listing of our common stock from our principal market provided our common stock is not immediately thereafter trading on the Nasdaq Global Market, the Nasdaq Capital Market, the New York Stock Exchange or the American Stock Exchange; |
|
| • | | the transfer agent’s failure for five business days to issue to Fusion Capital shares of our common stock which Fusion Capital is entitled to under the common stock purchase agreement; |
43
| • | | any material breach of the representations or warranties or covenants contained in the common stock purchase agreement or any related agreements which has or which could have a material adverse effect on us subject to a cure period of five business days; or |
|
| • | | any participation or threatened participation in insolvency or bankruptcy proceedings by or against us. |
Our Termination Rights
We have the unconditional right at any time for any reason to give notice to Fusion Capital terminating the common stock purchase agreement without any cost to us.
No Short-Selling or Hedging by Fusion Capital
Fusion Capital has agreed that neither it nor any of its affiliates shall engage in any direct or indirect short-selling or hedging of our common stock during any time prior to the termination of the common stock purchase agreement.
Effect of Performance of the Common Stock Purchase Agreement on Our Shareholders
All 40,161,020 shares registered in this offering are expected to be freely tradable when sold pursuant to this prospectus. It is anticipated that shares registered in this offering will be sold over a period of up to 25 months from the date of this prospectus. The sale by Fusion Capital of a significant amount of shares traded on a daily basis and other such factors which
would not generate the greatest benefit to the Company's shareholders. In
addition, the financing arrangement with Techrich expiredregistered in this offering at the end of January
2002. Because of the changes in circumstances and the current economic
conditions of the Company, management decided to explore alternative financing
arrangements. Several alternatives were reviewed, including private placement
transactions, various long-term debt arrangements with different investment
bankers and other equity line arrangements similar to the one with Techrich.
Management felt that the arrangement with Crescent was the best alternative and
was in the best interest of the Company and its shareholders.
The Company expects to rely on the above financing arrangements in order to
continue its development of products and to continue its ongoing operations in
the short-term. The long-term cash needs of the Company will be dependent on the
successful development of the Company's products and their success inany given time could cause the market place. At the current rate, the Company is not able to internally generate
sufficient funds for operations and will be required to rely on outside sources
for continued funding until such time as the Company's operations generate a
profit and cash is generated from operations. The Company has historically
issued and may continue, if the circumstances warrant, to issueprice of our common stock to vendorsdecline and suppliersto be highly volatile. Fusion Capital may ultimately acquire all, some or none of 37,480,510 million shares of common stock not yet issued but registered in lieuthis offering. After it has acquired such shares, it may sell all, some or none of cash for products and services providedsuch shares. Therefore, sales to Fusion Capital by us under the agreement may result in substantial dilution to the Company.
BUSINESS
Overview
Dauphin Technology, Inc. ("Dauphin" orinterests of other holders of our common stock. However, we have the "Company")right to control the timing and its subsidiaries
design and market mobile hand-held, pen-based computers and set-top boxes. The
Company is also a provideramount of private, interactive cable systemsany sales of our shares to the extended
stay hospitality industry. One of the Company's subsidiaries has performed
design services, specializing in hardware and software development, to customers
in the communications, computer, video and automotive industries.
The Company, an Illinois corporation, was formed on June 6, 1988 and became a
public entity in 1991. As of December 31, 2001, the Company employed
approximately 50 people consisting of engineering, sales and marketing,
administrative, and other personnel. Because of the reduction in orders for
design servicesFusion Capital and the decisionagreement may be terminated by us at any time at our discretion without any cost to terminate its operations atus.
In connection with entering into the
facilities
in McHenry, duringagreement, we authorized the
first quartersale to Fusion Capital of
2002, the Company laid off 24 full-time
employees and currently has 26 full-time employees. The Company's executive
offices are at 800 E. Northwest Highway, Palatine, Illinois and it has two other
facilities in northern Illinois, one in central Florida and a branch office in
Piraeus, Greece.
The Company's stock is traded on the over-the-counter market electronic bulletin
board operated by NASD, under the symbol DNTK.
In 1993 and 1994 the Company encountered severe financial problems. On January
3, 1995, the Company filed a petition for relief under Chapter 11 of the Federal
Bankruptcy Code in the United States Court for the Northern District of
Illinois, Eastern Division. The Company operated under Chapter 11 until July 23,
1996, when it was discharged as Debtor-in-Possession and bankruptcy proceedings
were closed.
23
Strategic Plan
Before the Company emerged from bankruptcy, the Board of Directors was
reconstituted and a new management team was recruited. Individuals with strong
engineering and manufacturing backgrounds as well as finance, accounting, sales
and marketing skills were hired. The new management formulated a strategic
business planup to diversify the Company's operations to eliminate dependence on a
single product line or industry.
The plan incorporated an initial focus on the hand-held mobile computer market.
In particular, it focused on development of miniaturized mobile computers that
would be incorporated in electronic solutions for vertical markets. In addition
to mobile computing markets, management is focused on producing and marketing
other electronic devices, namely set top boxes, coupled with targeted
acquisitions in the technology sector.
As part of management's plan, on June 6, 1997 the Company acquired all of the
outstanding35.0 million shares of our common stock in R.M. Schultz & Associates, Inc. ("RMS"), an
electronic contract-manufacturing firm located in McHenry, Illinois. In 1999,
the Company terminated the operationsThe number of RMS because the entity was not
profitable and used, rather than provided, cash in its operations.
On August 28, 2000 the Company, through a newly formed subsidiary named ADD
Acquisition Corp., acquired all of the assets of T & B Design, Inc. (f/k/a
Advanced Digital Designs, Inc.), Advanced Technologies, Inc., and 937 Plum Grove
Road Partnership pursuant to an Asset Purchase Agreement. The subsidiary then
changed its name to Advanced Digital Designs, Inc. ("ADD"). ADD specializes in
design services in the telecommunications industry, especially wireless and
cable-based product development, as well as multimedia development, including
digital video decoding and processing.
To assist the Company in the further development and marketing of its set-top
box products, on July 1, 2001 the Company acquired substantially all of the net
assets of Suncoast Automation, Inc. ("Suncoast"). Suncoastshares ultimately offered for sale by Fusion Capital under this prospectus is a provider of
private, interactive cable systems to the extended stay hospitality industry
utilizing the Company's set-top boxes.
In August 2001, the Company signed a sales and marketing agreement with the
Hellenic Telecommunications Organization S.A. (OTE) to sell set-top boxes
through their more than 400 retail shops, as well as to participate in several
vertical projects, meaning with other businesses or governmental agencies, that
OTE is managing. This relationship marks the Company's entry into the consumer
marketplace with its products. As a result of the agreement with OTE and other
similar marketing agreements reached with Orbit Plan and the Dialogue Group of
Companies, we established a European branch office consisting of twelve sales,
marketing, customer service and technical support personnel located in Piraeus,
Greece.
The Company plans to market and distribute for consumer use, complementary
peripheral devices manufactured by other vendors in conjunction with its set-top
boxes. A portfolio of complimentary peripheral devices would include video
telephones, displays, home cinema equipment, wireless local area network (LAN)
devices and various conferencing accessories. Specific consumer markets include
retail chains, Internet Service Providers (ISP), and satellite programming
providers.
As a result of the agreements noted above, the Company has become involved in
vertical projects to develop communications solutions for law enforcement,
defense, surveillance and Olympic security utilizing Terrestrial Trunked Radio
(TETRA) technology. As a part of this solution, the Company has begun
development of a next generation Orasis(R) by exploring alternative mobile
hand-held computer products through original equipment manufacturers.
Products and Services
Orasis(R) is a hand-held computer developed by the Company with features to meet
the expressed desires of many potential customers. The unit was developed with
the multi-sector mobile user in mind. As such, it incorporated an upgradable
processor, user upgradable memory and hard disc, various modules and mobile
devices to satisfy the needs of various industries. The Company has not
recognized significant sales of the product to date due to the lack of adequate
marketing and the development of new technologies within the industry. Because
of these new technologies, in 2001 the Company began developing a new version of
the Orasis(R). The new Orasis(R) will have most of the same features as the
original design, but will incorporate new technologies. The scheduled release of
the next generation
24
Orasis(R) is currently planned for 2002-2003.
A set-top box is an electronic device that converts digital signals into a user
acceptable format via other electronic devices such as television sets,
telephones and computers. The OraLynx set-top box processes high-speed video,
provides storage and works with coaxial cable, ADSL and fiber. The OraLynx(TM)
set-top box offers considerable advantages for service providers and end users.
For service providers, the OraLynx(TM) set-top box enables integration of data,
voice, and video over one unified network using one termination device. For end
users, the OraLynx(TM) set-top box serves as a simple yet sophisticated gateway
and access device that can be controlled with a remote control, keyboard or
other mobile handheld device. The OraLynx(TM) set-top box can be networked to
PC's, Internet appliances, and more. The OraLynx(TM) can provide direct access
to interactive TV, video-on-demand and ATM or IP voiceover phone service. Basic
unit features are as follows:
. High quality/high speed user interface (2D graphics)
. Seamless Video-on-Demand Service
. Instant Telephone Access
. IP or ATM voiceover
.
. Supports standard Internet protocols and various Internet connections
(xDSL, SONET, ATM25, Ethernet)
. Networking and Smart Appliance Interface
. Provides wireless or conventional networking
The Company also designs, constructs, installs and maintains private interactive
entertainment systems, focusing primarily in the extended stay hospitality
industry, utilizing the Company's set-top boxes. The Company provides all
service and maintenance on the entire system. In addition to basic cable TV, the
Company's system offers high speed internet connectivity, tiered programming,
pay-per-view, games, room messaging, folio view, express check-out and community
channels.
During 2001 and 2000, the Company performed design services, specializing in
hardware and software development. In addition, the Company's engineers
consulted with and assisted customers in the development of intellectual
property. The Company's engineers specialize in telecommunications, especially
wireless and cable-based product development, as well as multimedia development,
including digital video decoding and processing. The design services part of the
business has decreased significantly, and in the first quarter of 2002, the
Company laid off the majority of its design engineering staff. As existing
contracts with customers expire and are completed, the Company will not pursue
additional orders.
Markets
Based on the latest statistics, the mobile computing devices market is
approximately $110 billion in annual revenue. Sales of laptop and notebook
computers represent a large portion of this market. However, the growth rate of
hand-held pen-based devices exceeds that of laptops and notebooks. Based on the
latest Frost and Sullivan studies, the total pen-tablets market, in which
Orasis(R) competes, is several billion dollars and is growing at approximately
twenty five percent per year.
The set-top box market is a relatively new phenomenon. According to the research
firm, Strategy Analytics, the worldwide installed base of set-top boxes was a
mere 2.2 million in 1998 and was 27.4 million boxes in the year 2000, and is
expected to grow by 35% in 2002. Currently with the market in the early
developing stages, the "set-top box" has not been perfected. Existing designs do
not offer the flexibility or future capacity that Dauphin's customers seek.
Our focus on the timeshare market is baseddependent upon current statistics indicating
annual timeshare global sales topping $6 billion and timeshare growth between
16% and 18% a year for the past seven years. Timesharing is the fastest-growing
segment of the global travel and tourism industry. According to the January 1999
issue of Bear, Stearns & Co. Inc.'s Leisure Almanac, "the confluence of rapidly
growing population of income-qualified households and increased utilization
should result in collective revenues of $200 billion between 1995 and 2009." In
1998, the United States accounted for $3.06 billion--approximately half--of the
world's timeshare sales revenue, according to a survey sponsored by the American
Resort Development Association. In 2000, U.S. sales were about $4.1 billion,
according to Ragatz Associates. The United States also leads in the number of resorts (more than 1,600) and owners (nearly 3
25
million). According to Ragatz Associates, in 1998 there were 4.25 million
timeshare owners living in more than 200 countries and over 5,000 timeshare
resorts in more than 90 countries.
Sales and Marketing
Duringshares purchased by Fusion Capital under the year 2001, the Company focused its marketing efforts in Greece, as it
established a strong relationship with the Hellenic Telecommunications
Organization S.A. (OTE). The Company has a sales and marketing agreement with
OTE, whereby the Company's products are marketed through the OTE Commercial
Network throughout Europe and the Middle East. OTE is a multi-billion dollar
company comprised of well known subsidiaries including CosmOte, OTEnet, OTESAT,
CosmoOne, OTEGlobe, OTEestate, HELLASCOM and other affiliated companies based in
Bulgaria, Yugoslavia, Romania, Armenia, Albania and Jordan. OTE is a public
company and trades on the Athens Exchange and the New York Stock Exchange. OTE
is a reseller of our products in Greece and other European countries. OTE will
work directly with our Greek based branch marketing and sales office. The branch
office was opened in August 2001. The office is staffed with approximately
twelve sales and marketing personnel. In addition, the Company has developed a
relationship marketing arrangement with Orbit Plan S.A., a strategic planning
and business development firm having a presence in more than ten countries, for
assistance in marketing the Company's products into many regions of Europe,
Russia, the Commonwealth of Independent States, China and the Far East. The
Company has also entered into a marketing arrangement with the Dialogue Group of
Companies which establishes the framework for joint development of a
communications infrastructure for law enforcement and local public safety
authorities, as well as development of certain related software applications.
The agreement calls for bilateral representation of each respective company's
products. The Dialogue Group of Companies is a Russian/American joint venture
and is among the largest private commercial enterprises in the former Soviet
Union, employing more than 3,500 people with clients that include the Ministry
of Internal Affairs in Russia, the Moscow Police Department and the Federal Tax
Police.
The Company's interactive cable systems are marketed primarily to the extended
stay hospitality industry through advertising and direct contact with the
customer.
Competition
Many competitors exist in the market segments where Dauphin competes. In the
hand held computer market, companies such as Epson, Fujitsu, IBM, and Mitsubishi
are market segment leaders. The companies manufacturing set-top boxes are
equally as impressive, including Motorola and Scientific Atlanta. However,
Dauphin management believes some advantages exist over the competition including
flexibility, adaptability and unique solutions driven designs. Most of the
Company's competitors are large corporations or conglomerates, which may have
greater resources to withstand downturns in the hand-held computer and set-top
box markets, invest in new technology and capitalize on growth opportunities.
These competitors, like the Company, aggressively seek to improve their yields
by way of increased market share and cost reduction.
The Company's interactive cable system competes with cable television companies,
pay-per-view outlets such as On Command and others. Primary competitive factors
in our markets include selection, convenience, accessibility, customer service
and reliability.
We believe we can compete favorably in all of our markets. Most of our
competitors are larger than us and have much greater financial resources. No
assurance can be given that such increased competition will not have an adverse
effect on our business.
Customer Dependence
While the Company continues to market to a variety of companies in many
different industries, two customers accounted for approximately 87% of total
revenues for 2001. Motorola, Inc. accounted for approximately 45% of total
revenue for the year 2001 and approximately 53% of total revenues for the year
2000. This customer has itself suffered a reduction in revenue and as a result
has not been issuing new purchase orders for design services. Because of the
loss of future orders, in the first quarter of 2002, the Company laid off the
majority of its engineering staff. Another customer, Hellenic Telecommunications
Organization S.A. (OTE), accounted for approximately 42% of total revenues in
2001, as a result of fourth quarter sales of set-top boxes.
26
Research and Development
Substantially all of the Company's research and development efforts relate to
the development of handheld computers and set-top boxes. To compete in the
highly competitive hardware markets, the Company must continue to develop
technologically advanced products. The Company's total research and development
expenditures were approximately $2,434,000, $1,427,000and $510,000 in 2001, 2000
and 1999, respectively. The Company has retained all rights and intellectual
property acquired during the development of their handheld products and
peripheral devices, and anticipates protecting all intellectual property
developed as a result of work being done on the Company's set-top boxes.
Production
Because the main components of the Company's products are complex, the assembly
of the motherboards is outsourced to various subcontractors located in the
United States and in Southeast Asia. Additionally, final assembly and the first
level of testing is performed by the subcontractors. The Company's proprietary
software is loaded by the subcontractor. The Company does final testing and
modifications.
Source and Availability of Raw Materials
Component parts are obtained from suppliers around the world. Components used in
all designs are state of the art and are Year 2000 compliant. Components such as
the latest mobile Intel processors, color video controllers and CACHE memory
chips are in high demand and are, thus, available in short supply. However, once
production has begun, management does not anticipate delays in the production
schedule.
Software Licensing Agreements
The Company is leasing BIOS (basic input/output software) for Orasis(R) from
Phoenix Technologies Ltd. ("Phoenix"). Phoenix designs, develops, markets and
licenses proprietary software products for original equipment manufacturers and
related software for personal computers. A Master License Agreement was signed
for the right of distribution of Phoenix software. The Company pays $4 per unit
sold for this license.
The Company has entered into a Pen Products Original Equipment Manufacturing
Distribution License Agreement and Sub-license Agreement for Dedicated Systems
with Annabooks Software LLC ("Annabooks"), the supplier of products offered by
Microsoft Corporation ("Microsoft"). Microsoft is the third-party beneficiary
under these agreements. Under the terms of these agreements, the Company is
authorized to install DOS, Windows 95, 98, 2000 and NT, and Windows for Pen,
among others, on the computers it sells. For this right, the Company must pay
Annabooks royalties for each unit sold, although quantity discounts are
available. The Company pays approximately $78 per license for each computer it
sells.
Patents, Copyrights and Trademarks
In view of rapid technological and design changes inherent to the computer
industry, the Company does not believe that, in general, patents and/or
copyrights are an effective means of protecting its interests. However, due to
the unique configuration of the Orasis(R), the Company did patent its mechanical
design and processor upgradability concepts. It also expects to patent its
set-top box design following development. The Company also attempts to maintain
its proprietary rights by trade secret protection and by the use of
non-disclosure agreements. It is possible that the Company's products could be
duplicated by competitors and duplication and sale could therefore adversely
affect the Company. However, management believes that the time spent by
competitors engineering the product would be too long for the rapidly changing
computer industry. In 1997 the Company applied for and received a trademark on
the name "Orasis."
DESCRIPTION OF PROPERTY
Our executive offices consist of 7,300 square feet of office space located
at 800 E. Northwest Hwy, Suite 950, Palatine, Illinois 60067. We pay
approximately $10,000 per month to rent the facilities. In December 1998, in
conjunction with upgrading the facilities, we signed a five-year lease
extension. The lease called for increased rent, but provided for reconstruction
of facilities to better suit our needs. We believe the space will be adequate
for the
27
foreseeable future. In addition, the Company operates a branch office consisting
of 2,800 square feet at II Merarchias 2 Street and Aki Miaouli, 185 35, Piraeus,
Greece. The lease is for 2 years and the monthly rent is $2,800.
RMS facilities are located at 1809 South Route 31, McHenry, Illinois 60050.
RMS occupies 53,000 square feet of space, of which 7,000 square feet is for
office space and 5,000 square feet is surface mount portion of production. The
lease was for a five-year term ending on May 31, 2002 with an optional extension
for an additional five years. The rent is approximately $16,000 per month. The
Company will not renew the lease.
ADD facilities are located at 937 N. Plum Grove Road, Schaumburg, Illinois
60173. The approximately 5,500 square feet of office space is owned by the
Company.
Suncoast. facilities are located at 150 Dunbar Avenue, Oldsmar, Florida
34677. Suncoast occupies 3,000 square feet of space of which 1,500 square feet
is for office space and 1,500 square feet is warehouse. The current lease
expires in July 2002 and is renewable for three years. The rent is approximately
$1,800 per month. The Company believes the space will be adequate for the
foreseeable future.
MANAGEMENT
Directors and Executive Officersagreement. The following table sets forth the name, age and position, present
principal occupation and employment history for the past five years for eachamount of our directors and executive officers, as of October 31, 2001.
Name Age Present Office
---- --- --------------
Andrew J. Kandalepas 50 Chairman of the Board of
Directors Chief Executive
Officer
Christopher L. Geier 40 Executive Vice President
Harry L. Lukens, Jr. 51 Vice President, Chief
Financial Officer and
Assistant Secretary
Jeffrey L. Goldberg 50 Secretary, Director
Gary E. Soiney 61 Director
Mary Ellen W. Conti, MD 57 Director
Mr. Kandalepas joined Dauphin as Chairman of the Board in February 1995. He
was named CEO and President of Dauphin in November of 1995. In addition, Mr.
Kandalepas is the founder and President of CADserv, engineering services firm.
Mr. Kandalepas graduatedproceeds we would receive from DeVry Institute in 1974 with a Bachelor's Degree
in Electronics Engineering Technology. He then served as a product engineer at
GTE for two years. Mr. Kandalepas left GTE to serve ten years as a supervisor of
PCB design for Motorola prior to founding CADserv in 1986.
Mr. Geier is Executive Vice President reporting directly to Dauphin's CEO.
Mr. Geier leads Dauphin's overall organization, including its subsidiaries.
Prior to joining Dauphin, Mr. Geier founded and managed several
multimillion-dollar private corporations, as well as a $100 million region of a
large retail distribution company. Mr. Geier earned an MBAFusion Capital from the Universitysale of Chicago Graduate School of Business and a Bachelor of Arts in Criminal
Justice/Pre Law from Washington State University.
Mr. Lukens was appointed Chief Financial Officer in May 2000 and named
Assistant Secretary in March 2001. From 1998 until his appointment, he served as
a personal asset manager for an individual investor. From 1993 until 1998, Mr.
Lukens was Vice President, Treasurer and Chief Financial Officer of Deublin
Company, a privately owned international manufacturer. From 1972 until 1993, he
was with Grant Thornton LLP, serving as a partner from 1986 until 1993.
28
Mr. Goldberg has served as Secretary and a Director since June of
1995. He is also a member of the Audit Committee. Mr. Goldberg is a principal
with Jeffrey L. Goldberg and Associates, a financial planning firm and is
currently Chief Executive Officer of Stamford International, a Canadian company.
He is a former principalshares at Essex. LLC., a financial planning and asset
management firm and at FERS Personal Financial LLC, an accounting and financial
planning firm. Mr. Goldberg formerly served as the President of Financial
Consulting Group, LTD., a lawyer at the Chicago law firm of Goldberg and
Goodman, and prior to that, was a tax senior with Arthur Andersen LLP. He is an
attorney and CPA.
Mr. Soiney has served as a Director since November of 1995. He is also
a member of the Audit Committee. Mr. Soiney graduated from the University of
Wisconsin in Milwaukee with a degree in Business Administration. He is currently
a 75% owner in Pension Design & Services, Inc., a Wisconsin corporation, which
performs administrative services for qualified pension plans to business
primarily in the Mid-West.
Dr. Conti was appointed to the Board of Directors and to the Audit
Committee in September, 2000. Dr. Conti is a Radiation Oncologist and owns and
operates four Radiation Therapy Clinics in the St. Louis, MO. area. She has
practiced in the medical field since 1974 and has been a member of the Planning
and Budget Committee of Memorial Hospital in Belleville, Illinois. Dr. Conti
currently serves as a member of the Board of Directors of Creighton University,
FirstStar Bank Health Care Board, Association of Freestanding Radiation Oncology
Centers and the Accreditation Association for Ambulatory Health Care.
All directors and executive officers are elected annually and hold
office until the next annual meeting of the stockholders or until their
successors have been elected and qualified.
Involvement in Certain Legal Proceedings
There have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the evaluation of the
ability and integrity of any director or executive officer during the past five
years.
Involvement by Management in Public Companies
Mr. Goldberg is Chief Executive Officer and Chairman of the Board of
Stamford International, Inc., which trades on the Canadian Dealer Network. Mr.
Goldberg also served as a Director of Econometrics, Inc. that was traded on the
over the counter market until October 2000. None of the other Directors,
Executive Officers or Officers has had, or presently has, any involvement with a
public company, other than the Company.
Indemnification of Directors and Officers
We have adopted a by-law provision which stipulates that we shall
indemnify any director or executive officer who was or is a party, or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, investigative or administrative, against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him/her in connection with such
action, suit or proceeding, if he/she acted in good faith and in a manner he/she
reasonably believed to be in, or not opposed to, our best interest, had no
reasonable cause to believe his/her conduct was unlawful; provided, however, no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his/her duty to the company, unless, and only
to the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability, but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court shall deem proper. These
indemnification provisions are not expected to alter the liability of directors
and executive officers under federal securities laws.
29
COMPENSATION OF EXECUTIVE OFFICERSvarying purchase prices: | | | | | | | | | | | | | |
| | | | | | | Percentage of Outstanding | | Proceeds from the Sale of Shares |
| | | | | Number of Shares to | | Shares After Giving Effect to | | to Fusion Capital Under the |
| Assumed Average | | be Issued if Full | | the Issuance to Fusion | | Common Stock Purchase |
| Purchase Price | | Purchase | | Capital(1) | | Agreement |
| $ | 0.10 | | | 35,000,000 | | | 4.5 | % | | $ | 3,500,000 | |
| $ | 0.145 | (2) | | 35,000,000 | | | 4.5 | % | | $ | 5,075,000 | |
| $ | 0.30 | | | 33,333,333 | | | 4.3 | % | | $ | 10,000,000 | |
| $ | 0.40 | | | 25,000,000 | | | 3.3 | % | | $ | 10,000,000 | |
| $ | 0.50 | | | 20,000,000 | | | 2.6 | % | | $ | 10,000,000 | |
| | |
|
| (1) | | The denominator is based on 743,414,888 shares outstanding as of June 26, 2008, which includes the 2,680,205 shares previously issued to Fusion Capital and the number of shares set forth in the adjacent column. The numerator is based on the number of shares issuable under the common stock purchase agreement at the corresponding assumed purchase price set forth in the adjacent column. |
|
|
|
| (2) | | Closing sale price of our shares on June 26, 2008. |
|
44
SELLING STOCKHOLDER
The following table sets forth inpresents information regarding the format required by applicable
regulationsselling stockholder. Neither the selling stockholder nor any of the Securities and Exchange Commission the compensation for
Executive Officers of the Company who served in such capacities as of December
31, 2001.
its affiliates has held a position or office, or had any other material relationship, with us.
| | | | | | | | | | | | | | | | | |
| | | Shares | | Percentage of | | Shares to be Sold in the Offering | | Percentage of |
| | | Beneficially | | Outstanding Shares | | Assuming The Company Issues | | Outstanding Shares |
| | | Owned Before | | Beneficially Owned | | The Maximum Number of Shares | | Beneficially Owned |
| Selling stockholder | | Offering | | Before Offering (1) | | Under the Purchase Agreement | | After Offering(1) |
| Fusion Capital Fund II, LLC (2) | | | 2,680,510 | (3) | | | 0.4 | % | | | 40,161,020 | | | | 0 | % |
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------
FISCAL LONG-TERM ALL OTHER
YEAR ANNUAL COMPENSATION COMPENSATION | | |
|
| (1) | | Applicable percentage of ownership is based on 743,414,885 shares of our common stock outstanding as of June 26, 2008, together with securities exercisable or convertible into shares of Common Stock within sixty days of June 26, 2008, for the selling stockholder. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. |
|
|
| (2) | | Steven G. Martin and Joshua B. Scheinfeld, the principals of Fusion Capital, are deemed to be beneficial owners of all of the shares of common stock owned by Fusion Capital. Messrs. Martin and Scheinfeld have shared voting and disposition power over the shares being offered under this Prospectus. |
|
| (3) | | As of the date hereof, 2,680,510 shares of our common stock have been acquired by Fusion Capital under the Purchase Agreement, consisting of: (1) COMPENSATION
ENDED2,480,510 shares which have already been issued as a commitment fee, (2) NAME AND TITLE DEC. 31
----------------------------------------------------------
SALARY BONUS AWARDS PAYOUTS
----------------------------------
SECURITIES LONG-TERM
UNDERLYING INCENTIVE
OPTIONS (#) PLAN PAYOUTS ($)
- ---------------------------------------------------------------------------------------------------------------------
Andrew J. Kandalepas 2001 $195,000 -0- -0- -0- $5,000
Chairman, CEO200,000 shares which we have issued to Fusion Capital as an expense reimbursement. Under the common stock purchase agreement (1) the Company may elect in its sole discretion to sell to Fusion Capital up to an additional 35.0 million shares and 2000 195,000 $50,000 -0- -0- 5,000
President 1999 84,000 -0- -0- -0- 5,000
Christopher L. Geier (3) 2001 $185,000 -0- -0- -0- -0-
Executive 2000 185,000 -0- -0- -0- -0-
Vice-President 1999 65,585 -0- -0- -0- -0-
Harry L. Lukens, Jr. (4) 2001 $175,000 -0- -0- -0- -0-
Chief Financial 2000 106,000 -0- -0- -0- -0-
Officer, Assistant
Secretary
- ---------------------------------------------------------------------------------------------------------------------
(2) we may issue to Fusion Capital up to an additional 2,480,510 shares in the future as a commitment fee pro rata as we receive the up to $10.0 million of future funding. All of such shares are included in the offering pursuant to this prospectus. Fusion Capital does not presently beneficially own any of these 37,480,510 shares as determined in accordance with the rules of the SEC. |
(1) The Company presently has no long-term compensation arrangements and
had no such plans during fiscal years 1999 through 2001.
(2) The amounts disclosed in this column consist of Company discretionary
contributionsUSE OF PROCEEDS
This prospectus relates to
the Company's 401(k) Plan and insurance premiums paid
by the Company. The Company made no discretionary contributions to the
410(k) Plan in fiscal years 1999 through 2001.
(3) Mr. Geier commenced employment in March 1999 and therefore, the
compensation shown for him for 1999 is for the period from March 1999
through December 1999.
(4) Mr. Lukens commenced employment in May 2000 and therefore, the
compensation shown for him for 2000 is for the period from May 2000
through December 2000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CADserv, an engineering services company based in Schaumburg, Illinois,
controlled by Andrew J. Kandalepas, Chief Executive Officer and a major
shareholder, has contributed to the design, packaging and manufacturing of the
Orasis(R) and assisted the Company in the design of the set-top box. The Company
paid $72,573 in 2001 for such services.
RMS facilities are leased from Enclave Corporation, a company that is owned
by the former President of RMS whose contract with the Company was terminated on
May 14, 1999. The Company paid $182,337 of rent and
30
$32,380 in real estate taxes for the property lease in 2001, $179,468 of rent
and $30,206 of real estate taxes for the property lease in 2000 and $179,684 of
rent and $24,150 of real estate taxes for 1999.
PRINCIPAL STOCKHOLDERS
The following table sets forth as of December 31, 2001, the number and
percentage of outstanding shares of the Company'sour common stock beneficially
owned by (i) each Executive Officer and Director, (ii) all Executive Officers
and Directors as a group, (iii) all persons known by the Company to own
beneficially more than 5% of the Company's common stock. Beneficial ownership
has been determined in accordance with Rule 13d-3 under the Exchange Act. Under
this rule, certain sharesthat may be deemedoffered and sold from time to be beneficially ownedtime by more than
one person (if, for example, persons shareFusion Capital, the power to vote orselling stockholder. We will receive no direct proceeds from the power to
disposesale of the shares). In addition, shares are deemed to be beneficially owned
by a person if the person has the right to acquire the shares (for example, upon
exercise of an option or warrant) within 60 days of the date as of which the
information is provided; in computing the percentage ownership of any person,
the amount of shares is deemed to include the amount of shares beneficially
owned by such person (and only such person) by reason of these acquisition
rights. As a result, the percentage of outstanding shares of any person as shown
in the following table does not necessarily reflect the person's actual voting
power at any particular date.
Amount and Nature Percent of
of Beneficial Shares of
Name Title Ownership Common Stock
- -------------------------------------------------------------------------------------------------------------
Andrew J. Kandalepas Chairman, Chief
Executive Officer
& President 4,526,337 (1) 6.6%
Harry L. Lukens, Jr. Chief Financial
Officer, Asst. Secretary 480,000 (2) *
Jeffrey L. Goldberg Secretary, Director 80,000 (3) *
Christopher L. Geier Executive Vice-
President 1,000,000 (4) 1.4%
Gary E. Soiney Director 80,000 (5) *
Mary Ellen Conti, M.D. Director 164,500 (6) *
Crescent International, Ltd. 5,507,636 (7) 7.8%
---------- -------
Executive Officers, Directors and 5%
Beneficial Owners as a group (7 persons) 11,814,173 (8) 16.7%
========== =======
___________________
* Less than 1%
(1) Includes options to purchase 1,150,000 shares under options immediately
exercisable.
(2) Includes options to purchase 480,000 shares under options immediately
exercisable.
(3) Includes options to purchase 80,000 shares under options immediately
exercisable.
(4) Includes options to purchase 1,000,000 shares under options immediately
exercisable.
(5) Includes options to purchase 80,000 shares under options immediately
exercisable.
(6) Includes options to purchase 40,000 shares under options immediately
exercisable.
(7) Assumes exercise of all shares being registered under the Convertible Note
and Incentive Warrant.
(8) Includes options to purchase 2,840,000 shares under options immediately
exercisable.
31
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of $0.001 par
value common stock and 10,000,000 shares of $0.01 par value preferred stock. As
of April 23, 2002 there were 65,050,646 shares of common stock outstanding and
beneficially owned by approximately 22,000 beneficial shareholders, and noin this offering. However, we may receive up to $10.0 million in proceeds from the sale of up to 35.0 million shares of preferredour common stock were outstanding.to Fusion Capital under the common stock purchase agreement. Any proceeds from Fusion Capital we receive under the common stock purchase agreement will be used, together with other funds available to us: (a) to manufacture vaccine supplies for our planned clinical trials; (b) to provide technical support and other assistance to the HVTN during the conduct of our planned Phase II clinical trial for a preventative HIV vaccine; (c) to plan and conduct a Phase II clinical trial investigating the use of our vaccine as a therapeutic treatment for individuals already infected with HIV; and (d) for working capital and general corporate purposes. 45
PLAN OF DISTRIBUTION
The common stock offered by this prospectus is being offered by Fusion Capital Fund II, LLC, the selling shareholder (“Fusion Capital).The common stock may be sold or distributed from time to time by the selling stockholder directly to one or more purchasers or through brokers, dealers, or underwriters who may act solely as agents at market prices prevailing at the time of sale, at prices related to the prevailing market prices, at negotiated prices, or at fixed prices, which may be changed. The sale of the common stock offered by this prospectus may be effected in one or more of the following methods:
| • | | ordinary brokers’ transactions; |
|
| • | | transactions involving cross or block trades; |
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| • | | through brokers, dealers, or underwriters who may act solely as agents; |
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| • | | “at the market” into an existing market for the common stock such as the over-the-counter bulletin board; |
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| • | | in other ways not involving market makers or established business markets, including direct sales to purchasers or sales effected through agents; |
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| • | | in privately negotiated transactions; or |
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| • | | any combination of the foregoing. |
In order to comply with the securities laws of certain states, if applicable, the shares may be sold only through registered or licensed brokers or dealers. In addition, in certain states, the shares may not be sold unless they have been registered or qualified for sale in the state or an exemption from the registration or qualification requirement is available and complied with.
Brokers, dealers, underwriters, or agents participating in the distribution of the shares as agents may receive compensation in the form of commissions, discounts, or concessions from the selling shareholder and/or purchasers of the common stock for whom the broker-dealers may act as agent. The compensation paid to a particular broker-dealer may be less than or in excess of customary commissions.
Fusion Capital is an “underwriter” within the meaning of the Securities Act.
Neither we nor Fusion Capital can presently estimate the amount of compensation that any agent will receive. We know of no existing arrangements between Fusion Capital, any other shareholder, broker, dealer, underwriter, or agent relating to the sale or distribution of the shares offered by this prospectus. At the time a particular offer of shares is made, a prospectus supplement, if required, will be distributed that will set forth the names of any agents, underwriters, or dealers and any compensation from the selling stockholder, and any other required information.
We will pay all of the expenses incident to the registration, offering, and sale of the shares to the public other than commissions or discounts of underwriters, broker-dealers, or agents. We have also agreed to indemnify Fusion Capital and related persons against specified liabilities, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling persons, we have been advised that in the opinion of the SEC this indemnification is against public policy as expressed in the Securities Act and is therefore, unenforceable.
Fusion Capital and its affiliates have agreed not to engage in any direct or indirect short selling or hedging of our common stock during the term of the common stock purchase agreement.
We have advised Fusion Capital that while it is engaged in a distribution of the shares included in this Prospectus it is required to comply with Regulation M promulgated under the Securities Exchange Act of 1934, as amended. With certain exceptions, Regulation M precludes the selling stockholder, any affiliated purchasers, and any broker-dealer or other person who participates in the distribution from bidding for or purchasing, or attempting to induce any person to bid for or purchase any security which is the subject of the distribution until the entire distribution is complete. Regulation M also prohibits any bids or purchases made in order to stabilize the price of a
46
security in connection with the distribution of that security. All of the foregoing may affect the marketability of the shares offered hereby this prospectus.
This offering will terminate on the date that all shares offered by this prospectus have been sold by Fusion Capital.
47
DESCRIPTION OF SECURITIES
The following summarydescription of our capital stock is summarized from, and qualified in its entirety by reference to, our certificate of incorporation, which has been previously filed with the SEC and is available upon request.
incorporated herein by reference. This summary is not intended to give full effect to provisions of statutory or common law. We urge you to review the following documents because they, and not this summary, define your rights as a holder of shares of common stock or preferred stock:
|
| • | | The General Corporation Law of the State of Delaware (the “DGCL”), as it may be amended from time to time; |
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|
|
| • | | Our certificate of incorporation, as it may be amended or restated from time to time, and |
|
|
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| • | | Our bylaws, as they may be amended or restated from time to time. |
|
General
Our authorized capital stock consists of 910,000,000 shares, which are divided into two classes consisting of 900,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share. As of June 26, 2008, there were issued and outstanding 743,414,885 shares of common stock, options to purchase 42,127,757 shares of common stock and warrants to purchase 67,881,345 shares of common stock. No preferred shares were outstanding.
Common Stock
The holders
Holders of our common stock are entitled to one vote for each share held in the election of recorddirectors and in all other matters to be voted on all matters submitted to a voteby the stockholders. There is no cumulative voting in the election of the shareholders. Subject to
preferences that may be applicable to any then outstanding preferred stock,
holdersdirectors. Holders of common stock are entitled to receive ratably such dividends as may be declared from time to time by theour Board of Directors out of funds legally available.available therefor. In the event of a liquidation, dissolution or winding up of the company,corporation, holders of the common stock are entitled to share ratably in all assets remaining after the payment of liabilities and the liquidation preference of any then outstanding preferred
stock.liabilities. Holders of common stock have no rightpre-emptive or conversion rights and are not subject to convert their common stock into
any other securities and have no cumulative voting rights.further calls or assessments. There are no redemption or sinking fund provisions applicable to the common stock. The rights of the holders of the common stock are subject to any rights that may be fixed for holders of preferred stock. All of the outstanding shares of common stock are fully paid and non-assessable.
Preferred Stock
The
We are also authorized to issue 10,000,000 shares of preferred stock. Under our certificate of incorporation, the Board of Directors has the power, without further action by the holders of common stock, to designate the relative rights and preferences of the preferred stock, may be issuedand issue the preferred stock in one or more series as designated by the termsBoard of Directors. The designation of rights and preferences could include preferences as to liquidation, redemption and conversion rights, voting rights, dividends or other preferences, any of which may be determined atdilutive of the timeinterest of issuance by the Boardholders of Directors,the common stock or the preferred stock of any other series. The ability of directors, without further action by shareholders, and may include voting rights (including the
right to vote as a series on particular matters), preferences as to dividends
and liquidation, conversion and redemption rights and sinking fund provisions.
We have no present plansstockholder approval, to issue preferred stock. However, the issuanceadditional shares of any
such preferred stock could be used as anti-takeover measures. Anti-takeover measures may result in you receiving less for your stock than you otherwise might. The issuance of preferred stock creates additional securities with dividend and liquidation preferences over common stock, and may have the effect of delaying or preventing a change in control without further stockholder action and may adversely affect the rights and powers, including voting rights, of the holders of common stock. In certain circumstances, the issuance of preferred stock and
reducecould depress the valuemarket price of the common stock. In particular, specific rights granted
We intend to
future holdersissue new stock certificates,upon request, to stockholders of
preferred stock could be used to restrict our ability to merge
with or sell our assets to a third party, thereby preserving controlrecord upon the effective date of the
company by present owners.
Warrantsreincorporation merger and
Options
As of April 23, 2002 warrants to purchase 8,265,411 shares of common stock
wereeach issued and outstanding
in the hands of approximately 60 investors. These
warrants are convertible at any time. The strike prices of these warrants range
from $0.20 to $5.481. The warrants expire between three and five years from the
date of issuance. The warrants include a change of form provision in them so
that if a change in the form of the common stock occurs due to stock splits,
stock dividends, or mergers, the holders are entitled to receive a pro-rata
increase of shares at a discounted price. However, the holders of the warrants
do not have any voting rights and are not entitled to receive any cash or
property dividends declared by the Board of Directors until they convert the
warrants into common shares. At the time such warrants are exercised, the common
shareholders' ownership percentage of the Company will be diluted. In December
2000, the Company re-priced approximately 3,012,000 warrants it had previously
issued to outside consultants. The warrants were originally issued with an
exercise price ranging from $10.00 to $5.00, and were re-priced with exercise
prices ranging from $5.00 to $2.00 per share. The re-pricing created a charge to
earnings of approximately $234,000.
As of April 23, 2002 there are a total of 5,605,562 options issued and
outstanding in the hands of more than thirty employees and former employees.
These options are exercisable at any time into the Company's $0.001 par value
common stock. The per share
strike prices of these options range from $0.50 to
$3.875. These options expire three years from the date of issuance. At the time
such options are exercised, the common shareholders ownership percentage of the
Company will be diluted.
Transfer Agent and Registrar
Our transfer agent and registrar is American Stock Transfer and Trust
Company, 59 Maiden Lane, Plaza Level, New York, New York 10038 (212) 936-5100.
32
PLAN OF DISTRIBUTION
We are registering 5,507,636 shares of common stock on behalf of Crescent
International Ltd. The shares are shares that may be acquired by it through the
exercise of warrants and the conversion of a convertible note.
The selling shareholder may sell its shares from time to time at prices and
at terms prevailing at the time of sale. The selling shareholder may exercise
its 700,000 warrants from time to time prior to expiration. As of April 23,
2002, we would have received $914,480 from the exercise of such warrants if all
are exercised prior to expiration. We will receive none of the proceeds of any
subsequent sale of shares issued under the warrants or conversion of the
Convertible Note.
Crescent is contractually restricted from engaging in short sales of our common stock and has informed us that it does not intend to engage in short
sales or other stabilization activities.
Sales may be made on the over-the-counter market or otherwise at prices and
at terms then prevailing or at prices related to the then current market price,
or in negotiated private transactions, or in a combination of these methods. The
selling shareholder will act independently of us in making decisions with
respect to the form, timing, manner and size of each sale. We have been informed
by the selling shareholder that there are no existing arrangements between the
selling shareholder and any other person, broker, dealer, underwriter or agent
relating to the sale or distribution of shares of common stock which may be sold
by selling shareholder through this prospectus. The selling shareholder may be
deemed an underwriter in connection with resales of its shares.
The common shares may be sold in one or more of the following manners:
. a block trade in which the broker or dealer so engaged will attempt to
sell the shares as agent, but may position and resell a portion of the
block as principal to facilitate the transaction;
. purchases by a broker or dealer for its account under this
prospectus;
. ordinary brokerage transactions and transactions in which the broker
solicits purchases, or
. privately negotiated transactions.
In effecting sales, brokers or dealers engaged by the selling shareholder
may arrange for other brokers or dealers to participate. Except as disclosed in
a supplement to this prospectus, no broker-dealer will be paid more than a
customary brokerage commission in connection with any sale of the common shares.
Brokers or dealers may receive commissions, discounts or other concessions from
the selling shareholder in amounts to be negotiated immediately prior to the sale. The compensation to a particular broker-dealer may be in excess of
customary commissions. Profits on any resaleeffective date of the common shares as a principal
by such broker-dealers and any commissions received by such broker-dealers may
be deemed to be underwriting discounts and commissions under the Securities Act
of 1933. Any broker-dealer participating in such transactions as agent may
receive commissions from the selling shareholder (and, if they act as agent for
the purchaser of such common shares, from such purchaser).
Broker-dealers may agree with the selling shareholder to sell a specified
number of common shares at a stipulated price per share, and, to the extent a
broker dealer is unable to do so acting as agent, to purchase as principal any
unsold common shares at a price required to fulfill the broker-dealer commitment
to the selling shareholder. Broker-dealers who acquire common shares as
principal may thereafter resell such common shares from time to time in
transactions (which may involve crosses and block transactions and which may
involve sales to and through other broker-dealers, including transactions of the
nature described above) in the over-the-counter market, in negotiated
transactions or otherwise at market prices prevailing at the time of sale or at
negotiated prices, and in connection with such resales may pay to or receive
from the purchasers of such common shares commissions computed as described
above. Brokers or dealers who acquire common shares as principal and any other
participating brokers or dealers may be deemed to be underwriters in connection
with resales of the common shares.
In addition, any common shares covered by this prospectus which qualify for
sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this prospectus. Wemerger will not receive any of the proceeds from the sale
33
of these common shares, although we have paid the expenses of preparing this
prospectus and the related registration statement of which it is a part.
The selling shareholder will pay all commissions and its own expenses, if
any, associated with the sale of their common shares, other than the expenses
associated with preparing this prospectus and the registration statement of
which it is a part.
SELLING SHAREHOLDER
The following table provides certain information with respect to the common
stock beneficially owned by Crescent International Ltd., who is classified as a
selling shareholder and is entitled to use this prospectus. The information in
the table is as of the date of this prospectus. Although the selling shareholder
has not advised us of its intent to sell shares pursuant to this registration
and after conversion of the note to shares, it may choose to sell all or a
portion of the shares from time to time in the over-the-counter market or
otherwise at prices and terms then prevailing or at prices related to the
current market price, or negotiated transactions. The selling shareholder is not
nor has been an affiliate of the Company or holds more than 5% of the
outstanding shares.
Beneficially
Beneficially Owned Owned Registered Shares
Shares Beneficially Shares to be Shares Beneficially Owned
Owned Registered to be Sold After Registration
Name Number % Number % Number Number %
- ---- ------ - ------ - ------ ------ -
Crescent International Ltd. 0 0.0% 5,507,636 7.8% 0 5,507,636 7.8%
On September 28, 2001, we entered into a $10 million securities purchase
agreement with Crescent International Ltd., ("Crescent") an institutional
investor managed by Greenlight (Switzerland) SA. The initial funding was a $2.5
million Convertible Note and warrants exercisable to purchase 700,000 shares of
common stock at a price of $1.3064 per share for a five-year term. The
Convertible Note is convertible into common stock at the lower of (i)$1.1561,
which represents 110% of the average of the Bid Prices during the ten Trading
Days prior to September 28, 2001 and (ii)the average of the lowest three
consecutive Bid prices during the 22-day period immediately preceding the
conversion date. If converted as of April 23, 2002, such shares would convert
into 4,807,693 of common stock assuming a conversion price of $0.52 per share.
The Company and Crescent had signed a Stock Purchase Agreement on May 28,
1999. Under that agreement, the Company sold to Crescent 1,398,951 shares of
common stock for $598,050 and issued warrants to purchase 750,000 shares of
common stock at a price of $.6435 per share. Crescent exercised its warrants
during 2000. By July 31, 2001, Crescent had sold all of its shares of the
Company in the over-the- counter market or through negotiated transactions.
Beneficialevidence ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated, we believe each person
possesses sole voting and investment power with respect to all of the shares of common stock owned by such person,of GeoVax Delaware after the effective date of the merger. 48
Delaware anti-takeover law
We have elected not to be subject to community property laws where
applicable.certain provisions of Delaware law that could make it more difficult to acquire us by means of a tender offer, a proxy contest, open market purchases, removal of incumbent directors and otherwise. These provisions, summarized below, are expected to discourage types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to first negotiate with us.
In computinggeneral, Section 203 of the numberDGCL prohibits a publicly held Delaware corporation from engaging in various “business combination” transactions with any interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:
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| • | | The transaction is approved by the board of directors prior to the date the interested stockholder obtained interested stockholder status; |
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|
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| • | | Upon consummation of the transaction that resulted in the stockholder’s becoming an interested stockholder, the stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares beneficially owned by (a) persons who are directors and also officers and (b) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or |
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| • | | On or subsequent to the date the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 662/3% of the outstanding voting stock that is not owned by the interested stockholder. |
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A “business combination” is defined to include mergers, asset sales and other transactions resulting in financial benefit to a stockholder. In general, an “interested stockholder” is a person who, together with affiliates and associates, owns or within three years, did own, 15% or more of a corporation’s voting stock.
Section 203 applies to Delaware corporations that have a class of voting stock that is listed on a national securities exchange or held of record by more than 2,000 stockholders; provided, however, the percentage ownershiprestrictions of that person,this statute will not apply to a corporation if:
| • | | the corporation’s original charter contains a provision expressly electing not to be governed by the statute, |
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| • | | the Board of Directors adopts an amendment to the corporation’s bylaws within 90 days of the effective date of the statute expressly electing not to be governed by it, |
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| • | | the stockholders of the corporation adopt an amendment to its charter or bylaws expressly electing not to be governed by the statute (so long as such amendment is approved by the affirmative vote of a majority of the shares entitled to vote), |
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| • | | a stockholder becomes an interested stockholder inadvertently and as soon as practicable divests himself of ownership of sufficient shares so that he ceases to be an interested stockholder and during the three year period immediately prior to a business combination would not have been an interested stockholder but for the inadvertent acquisition, |
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| • | | the business combination is proposed prior to the consummation or abandonment of a merger or consolidation, a sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets of the corporation or a proposed tender or exchange offer for 50% or more of the outstanding voting shares of the corporation, or |
49
the business combination is with an interested stockholder who became an interested stockholder at a time when the restrictions contained in the statutes did not apply.
Our certificate of common stockincorporation includes a provision electing not to be governed by Section 203 of the DCGL. Accordingly, our Board of Directors does not have the power to reject certain business combinations with interested stockholders based on Section 203 of the DCGL.
50
WHERE YOU CAN FIND MORE INFORMATION
We are subject to
options or warrants held by that person that are currently exercisable or
exercisable within 60 days are deemed outstanding. Such shares, however, are not
deemed outstanding for the
purpose of computing the percentage ownership of any
other person.
Except as previously discussed, the selling shareholder has not held any
positions or offices or had material relationships with us or any of our
affiliates within the past three years. We may amend or supplement this
prospectus from time to time to update the disclosure.
34
LEGAL MATTERS
Certain legal matters with respect to the validityinformational reporting requirements of the shares being
registered have been passed upon forExchange Act, which requires us to file annual, quarterly, and current reports, proxy statements and other information with the companySEC. The SEC maintains an Internet site that contains such information regarding issuers that file electronically, such as GeoVax Labs, Inc. The public may inspect our filings over the Internet at the SEC’s home page atwww.sec.gov. The public may also read and copy any document we file at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by Rieck and Crotty, P.C., 55
West Monroe Street, Suite 3390, Chicago, Illinois 60603.
the public by calling the SEC at 1-800-SEC-0330. EXPERTS
The audited consolidated financial statements
as of
GeoVax, Labs, Inc. and
subsidiary for the
three years ended December 31,
2001, which are2007 and 2006 and for the period of time considered part of the development stage from January 1, 2006 to December 31, 2007, included in
this prospectus and appear in the
registration statementRegistration Statement have been audited by
Grant ThorntonPorter Keadle Moore LLP,
an independent
certifiedregistered public
accountants,accounting firm, as set forth in their report
thereon which appears
elsewhere in the prospectus and in the registration statement, and isappearing herein. Such financial statements have been so included in reliance upon the
authorityreports of such firm
given upon their authority as experts in accounting and auditing.
35
Dauphin Technology, The audited consolidated financial statements of GeoVax Labs, Inc. and subsidiary for the year ended December 31, 2005 and for the period from inception of the development stage (June 27, 2001) to December 31, 2005, included in the Registration Statement have been audited by Tripp, Chafin & Causey LLC, an independent registered public accounting firm, as set forth in their report appearing herein. Such financial statements have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of our common stock offered by the selling stockholder will be passed upon by the law firm of Womble Carlyle Sandridge & Rice, PLLC, Atlanta, Georgia.
51
INDEX TO CONSOLIDATEDTHE FINANCIAL STATEMENTS
------------------------------------------
Report of Independent Certified Public Accountants ..................
| | |
| Years Ended 2007, 2006, and 2005 and the Period from Inception (June 27, 2001) to December 31, 2007 |
| | |
| | F-2 |
| | |
| | F-4 |
| | |
| | F-5 |
| | |
| | F-6 |
| | |
| | F-7 |
| | |
| | F-8 |
| | |
| | F-19 |
| | |
| Three Months Ended March 31, 2008 and 2007 and the Period from Inception (June 27, 2001) to March 31, 2008 (unaudited) |
| | |
| | F-20 |
| | |
| | F-21 |
| | |
| | F-22 |
| | |
| | F-24 |
| | |
| | F-25 |
F-1
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 2001 AND 2000 ............. F-3
CONSOLIDATED STATEMENTS
REPORT OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999 .................................. F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001 ...................... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999 .................................. F-6
NOTES TO CONSOLIDATEDINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENTS .......................... F-7
F-1
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors and Shareholders of
Dauphin Technology,
GeoVax Labs, Inc. and Subsidiaries:
Atlanta, Georgia
We have audited the accompanying consolidated balance sheetssheet of DAUPHIN
TECHNOLOGY, INC. (an Illinois corporation)GeoVax Labs, Inc. and Subsidiaries,subsidiary (a development stage company) (the “Company”) as of December 31, 20012007 and 2000,2006, and the related consolidated statements of operations, shareholders'stockholders’ equity, and cash flows for the three years then ended, and for the period of time considered part of the development stage from January 1, 2006 to December 31, 2001.2007, except we did not audit the Company’s financial statements for the period from June 27, 2001 to December 31, 2005 which were audited by other auditors, whose latest report dated February 8, 2006 on those financial statements included an explanatory paragraph expressing substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
audit.
We conducted our auditsaudit in accordance with auditingstandards of the Public Company Accounting Oversight Board (United States). 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 2006 consolidated financial statements referred to above present fairly, in all material respects, the financial position of GeoVax Labs, Inc. and subsidiary as of December 31, 2007 and 2006, and the results of their operations and their cash flows for the years then ended 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 1 to the consolidated financial statements, the Company has suffered negative cash flows from operations since inception. This 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 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our audit of the consolidated financial statements also included the financial statement schedule of the Company, listed in Item 15(a) of thisForm 10-K. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audit of the consolidated financial statements. In our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), GeoVax Labs, Inc. and subsidiary’s internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 15, 2008, expressed an unqualified opinion on the effectiveness of GeoVax Labs, Inc.’s internal control over financial reporting.
/s/ PORTER KEADLE MOORE LLP
Atlanta, Georgia
February 15, 2008
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENTS Board of Directors
GeoVax, Inc.
Atlanta, Georgia
We have audited the accompanying balance sheet of GeoVax, Inc. (a Georgia corporation in the development stage) as of December 31, 2005 and the related statements of operations, stockholders’ deficiency and cash flows for the two years then ended and for the period from inception (June 27, 2001) to December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the audited 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 provideaudit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Dauphin
Technology, Inc. and its Subsidiaries as of December 31, 2001 and 2000 and the
consolidated results of their operations and their cash flows for the three
years ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company
incurred a net loss of $13,252,360 during the year ended December 31, 2001, and,
as of that date, the Company's accumulated deficit is $59,594,075. In addition,
the Company has consistently used, rather than provided, cash in its operations.
These factors, among others, as discussed in Note 21 to the financial statements, the Company’s recurring losses and negative cash flows from operations raise substantial doubt about the Company'sCompany’s ability to continue as a going concern. Management'sManagement’s plans in regard toconcerning these matters are also described in Note 2.1. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result frombe necessary should the outcome of this uncertainty.
As disclosed in Note 20,Company be unable to continue as a going concern.
In our opinion, the
accompanying consolidated financial statements
referred to above present fairly, in all material respects, the financial position of GeoVax, Inc. as of December 31, 2005, and the results of its operations and its cash flows for the
yeartwo years then ended
and for the period from inception (June 27, 2001) to December 31,
2000 have been restated.
GRANT THORNTON LLP
Chicago, Illinois
April 9, 2002
F-2
Dauphin Technology, Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
--------------------------
- --------------------------------------------------------------------------------
2001 2000
---- ----
RESTATED
CURRENT ASSETS:
Cash $ 725,364 $ 2,683,480
Accounts receivable-
Trade, net of allowance for bad debt of $50,621 at December 31,
2001 and 2000 67,201 321,377
Employee receivables 3,248 21,590
Inventory, net of reserves for obsolescence of $2,981,623 and
$2,491,216 at December 31, 2001 and 2000 518,452 505,749
Prepaid expenses 37,883 20,794
------------ ------------
Total current assets 1,352,148 3,552,990
INVESTMENT IN RELATED PARTY - 290,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$475,899 and $1,127,040 at December 31, 2001 and 2000 1,824,935 1,477,787
ESCROW DEPOSIT 368,181 752,500
ASSETS NOT USED IN BUSINESS 75,017 -
INSTALLATION CONTRACTS, net of
accumulated amortization of $22,857 at December 31, 2001 297,143 -
GOODWILL, net of accumulated amortization of $412,500 at
December 31, 2000 - 5,087,500
------------ ------------
Total assets $ 3,917,424 $ 11,160,777
============ ============
CURRENT LIABILITIES
Accounts payable $ 477,716 $ 290,474
Accrued expenses 103,792 80,433
Current portion of long-term debt 82,507 113,629
Customer deposits 7,741 53,244
------------ ------------
Total current liabilities 671,756 537,780
LONG-TERM DEBT 43,580 102,133
CONVERTIBLE DEBENTURES 1,153,197
------------
Total liabilities 1,868,533 639,913
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 10,000,000 shares authorized
but unissued - -
Common stock, $0.001 par value, 100,000,000 shares authorized;
64,059,813 shares issued and outstanding at December 31, 2001
and 61,652,069 shares issued and outstanding at December 31,
2000 64,061 61,653
Warrants to purchase 9,198,744 and 8,822,572 shares at December
31, 2001 and 2000 4,227,499 3,321,810
Paid-in capital 57,351,406 53,479,116
Accumulated deficit (59,594,075) (46,341,715)
------------ ------------
Total shareholders' equity 2,048,891 10,520,864
------------ ------------
Total liabilities and shareholders' equity $ 3,917,424 $ 11,160,777
============ ============
The accompanying notes are an integral part of these balance sheets.
F-3
Dauphin Technology, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
RESTATED
NET SALES $ 1,274,045 $ 63,913 $ 2,279,058
DESIGN SERVICE REVENUE 1,346,162 795,924 -
-------------- -------------- --------------
TOTAL REVENUE 2,620,207 859,837 2,279,058
COST OF SALES 1,608,380 2,375,948 4,833,601
COST OF SERVICES 1,136,619 499,679 -
-------------- -------------- --------------
Gross loss (124,792) (2,015,790) (2,554,543)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,742,028 3,630,199 3,405,620
RESEARCH AND DEVELOPMENT EXPENSE 2,434,006 1,472,093 510,287
AMORTIZATION OF GOODWILL 1,100,000 412,500 -
ASSET IMPAIRMENT AND OTHER LOSSES 4,277,500 - 767,475
WRITE OFF ASSETS NO LONGER USED IN
BUSINESS 525,691 - -
-------------- -------------- --------------
Loss from operations (13,204,017) (7,530,582) (7,237,925)
INTEREST EXPENSE 274,407 67,753 2,099,179
INTEREST INCOME 226,064 83,356 30,800
-------------- -------------- --------------
Loss before income taxes (13,252,360) (7,514,979) (9,306,304)
INCOME TAXES - - -
-------------- -------------- --------------
Net loss $ (13,252,360) $ (7,514,979) $ (9,306,304)
============== ============== ==============
LOSS PER SHARE:
Basic $ (0.21) $ (0.13) $ (0.20)
============== ============== ==============
Diluted $ (0.21) $ (0.13) $ (0.20)
============== ============== ==============
Weighted average number of shares of common
stock outstanding
Basic 63,147,476 58,711,286 46,200,408
Diluted 63,147,476 58,711,286 46,200,408
The accompanying notes are an integral part of these statements.
F-4
Dauphin Technology, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 2001, 2000 and 1999
Common Stock Paid-in
Shares Amount Capital Warrants
------ ------ ------- --------
BALANCE, January 1, 1999 40,000,000 $ 40,000 $ 32,343,785 $ 55,181
Issuance of common stock in connection with:
Conversions of debt 4,985,358 4,985 3,842,235 287,700
Private placement 6,003,529 6,004 1,481,167 895,208
Settlement of Trade Payables 656,322 656 395,243 -
Stock bonuses paid 26,373 26 26,890 -
Net loss - - - -
----------- ------------ ------------ ------------
BALANCE, December 31, 1999 51,671,582 $ 51,671 $ 38,089,320 $ 1,238,089
Issuance of common stock in connection with:
Private placement, restated 4,654,613 4,656 6,877,639 419,556
Stock purchase agreement 2,136,616 2,137 5,854,991 1,142,872
Warrant exercised 1,999,602 1,999 1,234,715 (620,641)
Consulting fees 500,000 500 312,000 1,103,669
Employee stock compensation - - 70,622 -
Settlement of trade payables 480,000 480 299,520 -
Stock options exercised 2,000 2 998 -
Vendor payments 207,656 208 739,311 38,265
Net loss, restated - - - -
----------- ------------ ------------ ------------
BALANCE, December 31, 2000, restated 61,652,069 $ 61,653 $ 53,479,116 $ 3,321,810
Issuance of common stock in connection with:
Stock purchase agreement 258,968 259 280,640 19,101
Beneficial conversion feature and
warrants - - 914,279 684,600
Stock Options exercised 35,600 36 28,528 -
Warrants exercised 285,000 285 242,025 (71,236)
Acquisition of business 766,058 766 1,125,339 -
Personal guarantee 1,032,118 1,032 1,240,709 -
Vendor payments 30,000 30 40,770 273,224
Net loss - - - -
----------- ------------ ------------ ------------
BALANCE, December 31, 2001 64,059,813 $ 64,061 $ 57,351,406 $ 4,227,499
=========== ============ ============ ============
Treasury Stock Accumulated
Shares Amount Deficit Total
------ ------ ------- -----
BALANCE, January 1, 1999 (138,182) $ (33,306) $(29,520,432) $ 2,885,228
Issuance of common stock in connection with:
Conversions of debt 101,673 24,402 - 4,159,322
Private placement 14,963 3,591 - 2,385,970
Settlement of Trade Payables 1,546 371 - 396,270
Stock bonuses paid 20,000 4,942 - 31,858
Net loss - - (9,306,304) (9,306,304)
----------- ------------ ------------ ------------
BALANCE, December 31, 1999 - $ - $(38,826,736) $ 552,344
Issuance of common stock in connection with:
Private placement, restated - - - 7,301,851
Stock purchase agreement - - - 7,000,000
Warrant exercised - - - 616,073
Consulting fees - - - 1,416,169
Employee stock compensation - - - 70,622
Settlement of trade payables - - - 300,000
Stock options exercised - - - 1,000
Vendor payments - - - 777,784
Net loss, restated - - (7,514,979) (7,514,979)
----------- ------------ ------------ ------------
BALANCE, December 31, 2000, restated - $ - $(46,341,715) $ 10,520,864
Issuance of common stock in connection with:
Stock purchase agreement - - - 300,000
Beneficial conversion feature and
warrants - - - 1,598,879
Stock Options exercised - - - 28,564
Warrants exercised - - - 171,074
Acquisition of business - - - 1,126,105
Personal guarantee - - - 1,241,741
Vendor payments - - - 314,024
Net loss - - (13,252,360) (13,252,360)
----------- ------------ ------------ ------------
BALANCE, December 31, 2001 - $ - $(59,594,075) $ 2,048,891
=========== ============ ============ ============
The accompanying notes are an integral part of these statements.
F-5
Dauphin Technology, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
RESTATED
--------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (13,252,360) $ (7,514,979) $ (9,306,304)
Non-cash items included in net loss
Depreciation and amortization 1,630,454 827,348 1,101,616
Inventory reserve 490,407 545,920 1,793,296
Bad debt reserve - (377,978) 417,361
Asset impairment losses 4,277,500 - -
Write off assets not used in business 525,691 - -
Interest expense on convertible debt 252,076 - 2,062,451
Common stock issued for personal guarantee 1,241,741 - -
Warrants issued in lieu of consulting fees 266,998 680,005 -
Common stock issued to vendors 40,800 1,052,019 -
Employee stock compensation - 70,622 -
Settlement of trade payables - (436,478) -
Stock bonus - - 31,858
Changes in-
Accounts receivable
- trade 268,845 181,445 147,508
- employee 18,342 (21,472) 45,869
Inventory (390,056) 470,217 (361,495)
Prepaid expenses 7,237 17,985 7,817
Escrow deposits 384,319 (752,500) -
Accounts payable 47,128 (1,176,470) (208,909)
Accrued expenses 23,359 53,714 (188,586)
Customer deposits (45,503) 53,244 -
------------- ------------ ------------
Net cash used in operating activities (4,213,022) (6,327,358) (4,457,518)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (661,283) (2,195) (25,680)
Acquisition of business - (6,025,000) -
Investment - - 10,000
------------- ------------ ------------
Net cash used in investing activities (661,283) (6,027,195) (15,680)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of shares 300,000 14,201,671 2,385,970
Proceeds from exercise of warrants and options 205,864 1,179,182 -
Issuance of convertible debentures and warrants net
of financing 2,500,000 - 1,776,614
(Decrease) increase in short-term borrowing - (286,000) 286,000
Repayment of long-term leases and other obligations (89,675) (87,907)
------------- ------------ ------------
Net cash provided by financing activities 2,916,189 15,006,946 4,448,584
------------- ------------ ------------
Net increase (decrease) in cash (1,958,116) 2,652,393 (24,614)
CASH, beginning of year 2,683,480 31,087 55,701
------------- ------------ ------------
CASH, end of year $ 725,364 $ 2,683,480 $ 31,087
============= ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid $ 22,331 $ 36,728 $ 36,728
NONCASH TRANSACTIONS:
Common stock issued in connection with
Settlement of customer deposits and payables $ - $ 300,000 $ 396,270
Conversion of debentures - - 4,159,322
The accompanying notes are an integral part of these statements
F-6
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Description of Business
Dauphin Technology, Inc. ("Dauphin" or the "Company") and its Subsidiaries
design and market mobile hand-held, pen-based computers, broadband set-top
boxes; provide private, interactive cable systems to the extended stay
hospitality industry; and perform design services, specializing in hardware and
software development, out of three locations in northern Illinois, one in
central Florida and its branch office in Piraeus, Greece. Through one of its
subsidiaries, the Company marketed its contract manufacturing services through
July 1999. The Company, an Illinois corporation, was formed on June 6, 1988 and
became a public entity in 1991.
Basis of Presentation
The consolidated financial statements include the accounts of Dauphin and its
wholly owned subsidiaries, R.M. Schultz & Associates, Inc. ("RMS"), Advanced
Digital Designs, Inc. ("ADD") and Suncoast Automation, Inc. ("Suncoast"). All
significant inter-company transactions and balances have been eliminated in
consolidation.
2. REALIZATION OF ASSETS:
The accompanying financial statements have been prepared2005, in conformity with accounting principles generally accepted in the United States of America, which
contemplate continuationAmerica. /s/ TRIPP, CHAFIN & CAUSEY, LLC
Marietta, Georgia
February 8, 2006
F-3
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | |
| | | December 31, | |
| | | 2007 | | | 2006 | |
| |
ASSETS |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 1,990,356 | | | $ | 2,088,149 | |
| Grant funds receivable | | | 93,260 | | | | — | |
| Stock subscriptions receivable | | | 897,450 | | | | — | |
| Prepaid expenses and other | | | 49,748 | | | | 38,130 | |
| | | | | | | | | |
| Total current assets | | | 3,030,814 | | | | 2,126,279 | |
| Property and equipment, net of accumulated depreciation of $76,667 and $47,092 at December 31, 2007 and 2006, respectively | | | 75,144 | | | | 104,719 | |
| Other assets: | | | | | | | | |
| Licenses, net of accumulated amortization of $109,390 and $84,504 at December 31, 2007 and 2006, respectively | | | 139,466 | | | | 164,352 | |
| Deposits | | | 980 | | | | 980 | |
| | | | | | | | | |
| Total other assets | | | 140,446 | | | | 165,332 | |
| | | | | | | | | |
| Total assets | | $ | 3,246,404 | | | $ | 2,396,330 | |
| | | | | | | | | |
| |
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities: | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 390,993 | | | $ | 83,983 | |
| Amounts payable to Emory University (a related party) | | | 156,225 | | | | — | |
| Accrued salaries | | | 51,320 | | | | 109,131 | |
| | | | | | | | | |
| Total current liabilities | | | 598,538 | | | | 193,114 | |
| Commitments (Note 4) | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
| Common stock, $.001 par value, 900,000,000 shares authorized 731,627,926 and 711,167,943 shares outstanding at December 31, 2007 and 2006, respectively | | | 731,628 | | | | 711,168 | |
| Additional paid-in capital | | | 12,441,647 | | | | 7,775,661 | |
| Deficit accumulated during the development stage | | | (10,525,409 | ) | | | (6,283,613 | ) |
| | | | | | | | | |
| Total stockholders’ equity | | | 2,647,866 | | | | 2,203,216 | |
| | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 3,246,404 | | | $ | 2,396,330 | |
| | | | | | | | | |
See accompanying report of independent registered public accounting firm and notes to financial statements.
F-4
GEOVAX LABS. INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | From Inception
| |
| | | | | | | | | | | | (June 27,
| |
| | | | | | | | | | | | 2001) to
| |
| | | Years Ended December 31, | | | December 31,
| |
| | | 2007 | | | 2006 | | | 2005 | | | 2007 | |
| |
| Grant revenue | | $ | 237,004 | | | $ | 852,905 | | | $ | 670,467 | | | $ | 3,648,185 | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Research and development | | | 1,757,125 | | | | 665,863 | | | | 1,640,814 | | | | 8,750,174 | |
| General and administrative | | | 2,784,182 | | | | 843,335 | | | | 655,199 | | | | 5,628,057 | |
| | | | | | | | | | | | | | | | | |
| | | | 4,541,307 | | | | 1,509,198 | | | | 2,296,013 | | | | 14,378,231 | |
| | | | | | | | | | | | | | | | | |
| Loss from operations | | | (4,304,303 | ) | | | (656,293 | ) | | | (1,625,546 | ) | | | (10,730,046 | ) |
| Other income (expense) | | | | | | | | | | | | | | | | |
| Interest income | | | 62,507 | | | | 72,127 | | | | 16,073 | | | | 210,306 | |
| Interest expense | | | — | | | | — | | | | (1,613 | ) | | | (5,669 | ) |
| | | | | | | | | | | | | | | | | |
| | | | 62,507 | | | | 72,127 | | | | 14,460 | | | | 204,637 | |
| | | | | | | | | | | | | | | | | |
| Net loss | | $ | (4,241,796 | ) | | $ | (584,166 | ) | | $ | (1,611,086 | ) | | $ | (10,525,409 | ) |
| | | | | | | | | | | | | | | | | |
| Basic and diluted: | | | | | | | | | | | | | | | | |
| Loss per common share | | $ | (0.01 | ) | | $ | (0.00 | ) | | $ | (0.01 | ) | | $ | (0.03 | ) |
| Weighted average shares | | | 714,102,311 | | | | 414,919,141 | | | | 312,789,565 | | | | 368,183,870 | |
See accompanying report of independent registered public accounting firm and notes to financial statements.
F-5
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Deficit
| | | | |
| | | | | | | | | | | | | | | Accumulated
| | | Total
| |
| | | | | | | | | Additional
| | | Stock
| | | During the
| | | Stockholders’
| |
| | | Common Stock | | | Paid In
| | | Subscription
| | | Development
| | | Equity
| |
| | | Shares | | | Amount | | | Capital | | | Receivable | | | Stage | | | (Deficiency) | |
| |
| Capital contribution at inception (June 27, 2001) | | | — | | | $ | — | | | $ | 10 | | | $ | — | | | $ | — | | | $ | 10 | |
| Net loss for the year ended December 31, 2001 | | | — | | | | — | | | | — | | | | — | | | | (170,592 | ) | | | (170,592 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2001 | | | — | | | | — | | | | 10 | | | | — | | | | (170,592 | ) | | | (170,582 | ) |
| Sale of common stock for cash | | | 139,497,711 | | | | 139,498 | | | | (139,028 | ) | | | — | | | | — | | | | 470 | |
| Issuance of common stock for technology license | | | 35,226,695 | | | | 35,227 | | | | 113,629 | | | | — | | | | — | | | | 148,856 | |
| Net loss for the year ended December 31, 2002 | | | — | | | | — | | | | — | | | | — | | | | (618,137 | ) | | | (618,137 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2002 | | | 174,724,406 | | | | 174,725 | | | | (25,389 | ) | | | — | | | | (788,729 | ) | | | (639,393 | ) |
| Sale of common stock for cash | | | 61,463,911 | | | | 61,464 | | | | 2,398,145 | | | | — | | | | — | | | | 2,459,609 | |
| Net loss for the year ended December 31, 2003 | | | — | | | | — | | | | — | | | | — | | | | (947,804 | ) | | | (947,804 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2003 | | | 236,188,317 | | | | 236,189 | | | | 2,372,756 | | | | — | | | | (1,736,533 | ) | | | 872,412 | |
| Sale of common stock for cash and stock subscription receivable | | | 74,130,250 | | | | 74,130 | | | | 2,915,789 | | | | (2,750,000 | ) | | | — | | | | 239,919 | |
| Cash payments received on stock subscription receivable | | | — | | | | — | | | | — | | | | 750,000 | | | | — | | | | 750,000 | |
| Issuance of common stock for technology license | | | 2,470,998 | | | | 2,471 | | | | 97,529 | | | | — | | | | — | | | | 100,000 | |
| Net loss for the year ended December 31, 2004 | | | — | | | | — | | | | — | | | | — | | | | (2,351,828 | ) | | | (2,351,828 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2004 | | | 312,789,565 | | | | 312,790 | | | | 5,386,074 | | | | (2,000,000 | ) | | | (4,088,361 | ) | | | (389,497 | ) |
| Cash payments received on stock subscription receivable | | | — | | | | — | | | | — | | | | 1,500,000 | | | | | | | | 1,500,000 | |
| Net loss for the year ended December 31, 2005 | | | — | | | | — | | | | — | | | | — | | | | (1,611,086 | ) | | | (1,611,086 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2005 | | | 312,789,565 | | | | 312,790 | | | | 5,386,074 | | | | (500,000 | ) | | | (5,699,447 | ) | | | (500,583 | ) |
| Cash payments received on stock subscription receivable | | | — | | | | — | | | | — | | | | 500,000 | | | | — | | | | 500,000 | |
| Conversion of GeoVax, Inc. preferred stock to common stock in connection with merger | | | 177,542,538 | | | | 177,543 | | | | 897,573 | | | | — | | | | — | | | | 1,075,116 | |
| Common shares issued to Dauphin Technology, Inc. in the merger on September 28, 2006 | | | 217,994,566 | | | | 217,994 | | | | 1,494,855 | | | | — | | | | — | | | | 1,712,849 | |
| Issuance of common stock for cashless warrant exercise | | | 2,841,274 | | | | 2,841 | | | | (2,841 | ) | | | — | | | | — | | | | — | |
| Net loss for the year ended December 31, 2006 | | | — | | | | — | | | | — | | | | — | | | | (584,166 | ) | | | (584,166 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2006 | | | 711,167,943 | | | | 711,168 | | | | 7,775,661 | | | | — | | | | (6,283,613 | ) | | | 2,203,216 | |
| Sale of common stock for cash | | | 20,336,433 | | | | 20,336 | | | | 3,142,614 | | | | — | | | | — | | | | 3,162,950 | |
| Issuance of common stock upon stock option exercise | | | 123,550 | | | | 124 | | | | 4,876 | | | | — | | | | — | | | | 5,000 | |
| Stock-based compensation expense | | | — | | | | — | | | | 1,518,496 | | | | — | | | | — | | | | 1,518,496 | |
| Net loss for the year ended December 31, 2007 | | | — | | | | — | | | | — | | | | — | | | | (4,241,796 | ) | | | (4,241,796 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2007 | | | 731,627,926 | | | $ | 731,628 | | | $ | 12,441,647 | | | $ | — | | | $ | (10,525,409 | ) | | $ | 2,647,866 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying report of independent registered public accounting firm and notes to financial statements.
F-6
GEOVAX LABS. INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | From Inception
| |
| | | | | | | | | | | | (June 27,
| |
| | | | | | | | | | | | 2001) to
| |
| | | Years Ended December 31, | | | December 31,
| |
| | | 2007 | | | 2006 | | | 2005 | | | 2007 | |
| |
| Cash flows from operating activities: | | | | | | | | | | | | | | | | |
| Net loss | | $ | (4,241,796 | ) | | $ | (584,166 | ) | | $ | (1,611,086 | ) | | $ | (10,525,409 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | | 54,461 | | | | 49,095 | | | | 37,450 | | | | 186,057 | |
| Accretion of preferred stock redemption value | | | — | | | | 58,561 | | | | 78,080 | | | | 346,673 | |
| Stock-based compensation expense | | | 1,518,496 | | | | — | | | | — | | | | 1,518,496 | |
| Changes in assets and liabilities | | | | | | | | | | | | | | | | |
| Prepaid expenses | | | (11,618 | ) | | | 124,701 | | | | (159,648 | ) | | | (49,748 | ) |
| Grant funds receivable | | | (93,260 | ) | | | — | | | | — | | | | (93,260 | ) |
| Stock subscriptions receivable | | | (897,450 | ) | | | — | | | | — | | | | (897,450 | ) |
| Deposits | | | — | | | | — | | | | — | | | | (980 | ) |
| Accounts payable and accrued expenses | | | 405,424 | | | | (123,227 | ) | | | (335,298 | ) | | | 598,538 | |
| Unearned grant revenue | | | — | | | | (852,905 | ) | | | 183,433 | | | | — | |
| | | | | | | | | | | | | | | | | |
| Total adjustments | | | 976,053 | | | | (743,775 | ) | | | (195,983 | ) | | | 1,608,326 | |
| | | | | | | | | | | | | | | | | |
| Net cash used in operating activities | | | (3,265,743 | ) | | | (1,327,941 | ) | | | (1,807,069 | ) | | | (8,917,083 | ) |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | |
| Purchase of property and equipment | | | — | | | | (69,466 | ) | | | (48,485 | ) | | | (151,811 | ) |
| | | | | | | | | | | | | | | | | |
| Net cash used in investing activities | | | — | | | | (69,466 | ) | | | (48,485 | ) | | | (151,811 | ) |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | |
| Net proceeds from sale of common stock | | | 3,162,950 | | | | 2,212,849 | | | | 1,500,000 | | | | 10,325,807 | |
| Net proceeds from exercise of stock options | | �� | 5,000 | | | | — | | | | — | | | | 5,000 | |
| Net proceeds from sale of preferred stock | | | — | | | | — | | | | — | | | | 728,443 | |
| Proceeds from issuance of note payable | | | — | | | | — | | | | — | | | | 250,000 | |
| Repayment of note payable | | | — | | | | — | | | | — | | | | (250,000 | ) |
| | | | | | | | | | | | | | | | | |
| Net cash provided by financing activities | | | 3,167,950 | | | | 2,212,849 | | | | 1,500,000 | | | | 11,059,250 | |
| | | | | | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | (97,793 | ) | | | 815,442 | | | | (355,554 | ) | | | 1,990,356 | |
| Cash and cash equivalents at beginning of period | | | 2,088,149 | | | | 1,272,707 | | | | 1,628,261 | | | | — | |
| | | | | | | | | | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 1,990,356 | | | $ | 2,088,149 | | | $ | 1,272,707 | | | $ | 1,990,356 | |
| | | | | | | | | | | | | | | | | |
| Supplemental disclosure of cash flow information Interest paid | | $ | — | | | $ | — | | | $ | 1,613 | | | $ | 5,669 | |
Supplemental disclosure of non-cash investing and financing activities:
In connection with the Merger discussed in Note 6, all of the outstanding shares of the Company’s mandatory redeemable convertible preferred stock were converted into shares of common stock as of September 28, 2006.
See accompanying report of independent registered public accounting firm and notes to financial statements.
F-7
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2007, 2006 and 2005 and
Period from Inception (June 27, 2001) to December 31, 2007
| |
| 1. | Description of Company and Nature of Business |
GeoVax Labs, Inc. (“GeoVax” or the “Company”), is a development stage biotechnology company engaged in research and development activities with a mission to develop, license and commercialize the manufacture and sale of human vaccines for diseases caused by Human Immunodeficiency Virus (HIV) and other infectious agents. The Company has exclusively licensed from Emory University certain Acquired Immune Deficiency Syndrome (AIDS) vaccine technology which was developed in collaboration with the National Institutes of Health and the Centers for Disease Control and Prevention.
GeoVax was originally incorporated under the laws of Illinois as Dauphin Technology, Inc. (“Dauphin”). Until December 2003, Dauphin marketed mobile hand-held, pen-based computers and broadband set-top boxes and provided private, interactive cable systems to the extended stay hospitality industry. The Company was unsuccessful and its operations were terminated in December 2003. On September 28, 2006, Dauphin completed a merger (the “Merger”) with GeoVax, Inc. which was incorporated on June 27, 2001 (date of “inception”). As a result of the Merger, the shareholders of GeoVax, Inc. exchanged their shares of common stock for Dauphin common stock and GeoVax, Inc. became a wholly-owned subsidiary of Dauphin. In connection with the Merger, Dauphin changed its name to GeoVax Labs, Inc., replaced its officers and directors with those of GeoVax, Inc. and moved its offices to Atlanta, Georgia. The Company currently does not plan to conduct any business other than GeoVax, Inc.’s business of developing new products for the protection from, and treatment of, human diseases.
The Merger was accounted for under the purchase method of accounting as a reverse acquisition in accordance with U.S. generally accepted accounting principles. Under this method of accounting, Dauphin was treated as the “acquired” company and, for accounting purposes, the Merger was treated as the equivalent of GeoVax, Inc. issuing stock for the net monetary assets of Dauphin, accompanied by a recapitalization of GeoVax, Inc. Accordingly, comparative financial information for periods prior to the Merger date presented in the accompanying condensed consolidated financial statements, or in the notes herein, as well as any references to operations prior to that date, are those of GeoVax, Inc.
As discussed in Note 2, the Company is a development stage enterprise and we are devoting substantially all of our present efforts to research and development. We have funded our activities to date almost exclusively from equity financings and government grants. We will continue to require substantial funds to continue our research and development activities, including preclinical studies and clinical trials of our product candidates, and to commence sales and marketing efforts, if the United States Food and Drug Administration (“FDA”) or other regulatory approvals are obtained. The proceeds from a recent government grant received by us (see Note 9) and from recent equity offerings (see Note 7) will not be sufficient to fund our planned research and development activities through the end of 2008. In order to meet our current and future operating cash flow requirements we are considering additional offerings of our common stock, debt or convertible debt instruments. While we believe that we will be successful in obtaining the necessary financing to fund our operations, there can be no assurances that such additional funding will be achieved and that we will succeed in our future operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
However,The accompanying financial statements have been prepared on a going concern basis, which contemplates the
company
has sustained substantial losses from operations in recent years,realization of assets and
such
losses have continued through the
unaudited quarter ended March 31, 2002.
Revenues from the Company's design services have declined. In addition, the
company has used, rather than provided, cash in its operations.
In viewsatisfaction of
the matters describedliabilities and commitments in the
preceding paragraph, recoverabilitynormal course of
a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the company, which in turn is
dependent upon the company's ability to meet its financing requirements on a
continuing basis, to maintain present financing, and to succeed in its future
operations.business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts
and
classification of liabilities that might be necessary should the
companyCompany be unable to continue in existence.
Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue in existence: The Company has concentrated its efforts on
marketing its set-top boxes, halted all further development of the next
generation Orasis and are exploring alternative mobile hand-held computer
products through original equipment manufacturers. In January 2002 the
management of the Company began terminating employees who were not a critical
part of the marketing efforts. The facilities in McHenry, which housed the RMS
operations, has been closed, the majority of the personnel have been terminated
and the remaining inventory and equipment will be auctioned in the second
quarter of 2002.
F-7
Dauphin Technology, Inc.
F-8
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
3. RISK AND UNCERTAINTIES:
Absence— (Continued)
| |
| 2. | Summary of Significant Accounting Policies |
Basis of Operating Profit
Presentation and Principles of Consolidation
As more thoroughly discussed in Note 6, the accompanying consolidated financial statements include the accounts of GeoVax, Inc. from inception together with those of GeoVax Labs, Inc. from September 28, 2006. All intercompany transactions have been eliminated in consolidation.
Development-Stage Enterprise
The Company has incurredis a net operating loss in each yeardevelopment stage enterprise as defined by Statement of Financial Accounting Standards (“SFAS”) No. 7,Accounting and Reporting by Development Stage Enterprises. All losses accumulated since it's founding
andinception have been considered as of December 31, 2001 has an accumulated deficit of $59,594,075. The
Company expects to incur operating losses over the near term. The Company's
ability to achieve profitability will depend on many factors including the
Company's ability to market commercially acceptable products including its
set-top box. There can be no assurance that the Company will ever achieve a
profitable level of operations or if profitability is achieved, that it can be
sustained.
Early Stage of Developmentpart of the Company's Products
From JuneCompany’s development stage activities.
Use of 1997 through JuneEstimates
The preparation of 1999,financial statements in conformity with accounting principles generally accepted in the Company was principally engaged in
researchUnited States of America requires management to make estimates and development activities involvingassumptions that affect the hand-held computer. Since
then,reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the Company has been working on new technologies, in particular the design
and developmentdate of the set-top boxes. In 2001,financial statements and the Company also began developing
a new versionreported amounts of its hand-held computer. The Company's products have been sold
in limited quantitiesrevenues and there can be no assurance that a significant market
will develop for such products inexpenses during the future. Therefore, the Company's inability
to develop and market its products on a timely basisreporting period. Actual results may have a material adverse
effect on the Company's financial results.
4. SUMMARY OF MAJOR ACCOUNTING POLICIES:
differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include
We consider all cash andhighly liquid investments that maturewith a maturity of three months or less from when theypurchased to be cash equivalents. Our cash and cash equivalents consist primarily of bank deposits and high yield money market accounts. The recorded values approximate fair market values due to the short maturities.
Fair Value of Financial Instruments and Concentration of Credit Risk
Financial instruments that subject us to concentration of credit risk consist primarily of cash and cash equivalents. These assets are purchased.maintained by reputable third party financial institution custodians. The carrying amount
approximatesvalues reported in the balance sheets for cash and cash equivalents approximate fair value due to short maturity of these investments.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market and primarily consist of purchased parts and assemblies.
values.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred, while additions and improvements are capitalized. Depreciation is being computed using the straight-line methodsmethod over the estimated useful lives (principallyof the assets which range from three to sevenfive years. Depreciation expense was $29,575, $24,210 and $12,563 during the years ended December 31, 2007, 2006 and 2005, respectively.
Other Assets
Other assets consist principally of license agreements for machinery and equipment and twenty-five years for building) and
leasehold improvements over the lesseruse of technology obtained through the issuance of the lease term or their useful life.
Goodwill and long-lived assets
Goodwill arising from business acquisitions isCompany’s common stock. These license agreements are amortized on a straight-linestraight line basis ranging from five years toover ten years. Goodwill associated with the
acquisition of ADDAmortization expense related to these agreements was being amortized on a straight-line basis over 5 years.
Goodwill associated with the acquisition of RMS was being amortized on a
straight-line basis over 10 years. Installation contracts acquired in the
acquisition of Suncoast are being amortized on a straight-line basis over the
term$24,886 during each of the contract, typically sevenyears ended December 31, 2007, 2006 and 2005, respectively, and is expected to remain the same for each of the next five years.
F-9
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Impairment of Long-Lived Assets
Long-lived assets, including
goodwill and other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss wouldRecoverability of assets to be recognized whenheld and used is measured by a comparison of the carrying amount of an asset exceeds the estimated undiscountedassets to the future net cash flows expected to result frombe generated by such assets. If such assets are considered to be impaired, the use ofimpairment to be recognized is measured by the asset and its eventual disposition. Theamount by which the carrying amount of the impairment loss to be recorded is calculated byassets exceeds the excessdiscounted expected future net cash flows from the assets.
Accrued Liabilities
As part of the asset's
carrying value over its fair value. Fair valueprocess of preparing our financial statements, we estimate expenses that we believe we have incurred, but have not yet been billed by our third party vendors. This process involves identifying services and activities that have been performed by such vendors on our behalf and estimating the level to which they have been performed and the associated cost incurred for such service as of each balance sheet date in our financial statements. Examples of expenses for which we accrue include fees for professional services, and fess owed to contract manufacturers in conjunction with the manufacture of vaccines for our clinical trials. We make these estimates based upon progress of activities related to contractual obligations and also information received from vendors.
Restatement for Recapitalization
All share amounts and per share figures in the accompanying consolidated financial statements and the related footnotes have been restated for the 2006 recapitalization discussed in Note 6, based on the 29.6521 exchange ratio indicated therein.
Net Loss Per Share
Basic and diluted loss per common share are computed based on the weighted average number of common shares outstanding. Common share equivalents (which may consist of options and warrants) are excluded from the computation of diluted loss per share since the effect would be antidilutive. Common share equivalents which could potentially dilute basic earnings per share in the future, and which were excluded from the computation of diluted loss per share, totaled 93,637,594, 56,431,032 and 36,086,606 shares at December 31, 2007, 2006 and 2005, respectively.
Revenue Recognition
We recognize revenue in accordance with the SEC’s Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements,as amended by Staff Accounting Bulletin No. 104,Revenue Recognition,(“SAB No. 104”). SAB No. 104 provides guidance in applying U.S. generally accepted accounting principles to revenue recognition issues, and specifically addresses revenue recognition for upfront, nonrefundable fees received in connection with research collaboration agreements. During 2007, our revenue consisted of government grant revenue received directly from the National Institutes of Health (see Note 9); in prior years our revenue consisted of grant revenue subcontracted to us from Emory University pursuant to collaborative arrangements. Revenue from these arrangements is
F-8
Dauphin Technology, Inc.
recorded as income as the related costs are incurred. Research and Development and Patent Costs
All research and development costs, including all related salaries, clinical trial expenses, regulatory expenses and facility costs are charged to expense when incurred. Our expenditures related to obtaining and
F-10
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
4. SUMMARY OF MAJOR ACCOUNTING POLICIES - Continued
Goodwill— (Continued)
protecting patents are also charged to expense when incurred, and long-lived assets-Continued
determined using a discounted cash flow analysis. The Company recorded
$1,100,000are included in general and $412,500 of amortization expense during 2001 and 2000,
respectively. Atadministrative expense.
Period to Period Comparisons
Our operating results are expected to fluctuate for the endforeseeable future. Therefore, period-to-period comparisons should not be relied upon as predictive of the year,results for future periods.
Income Taxes
We account for income taxes using the Company recorded an impairment loss of
$3,987,500 on goodwillliability method. Under this method, deferred tax assets and an impairment loss of $290,000 on its investment in
non-marketable securities (See Notes 6 and 13).
Income Taxes
Deferred tax liabilities and assets are recognized for the expectedestimated future tax consequences of events that have been included in the financial statements and
tax returns. Deferred tax liabilities and assets are determined based on the
differenceattributable to differences between the financial statement basis and tax basiscarrying amounts of existing assets and liabilities (excluding non-deductible goodwill) and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the yearsyear in which thetemporary differences are expected to become recoverablebe recovered or payable.
Revenue Recognition
The Company recognizes revenue upon shipment of mobile computers, computer
accessories, set-top boxes and assembled products. Revenue from design services,
consulting and intellectual property development is recognizedsettled. Deferred tax assets are reduced by a valuation allowance unless, in the month the
services are performed.
(Loss) Per Common Share
Basic loss per common shareopinion of management, it is calculated by dividing net loss for the year by
the weighted-average number of shares outstanding during the period, which were
63,147,476, 58,711,286 and 46,200,408 for the years ended December 31, 2001,
2000 and 1999, respectively. Diluted loss per common share is adjusted for the
assumed exercise of stock options and warrants unless such adjustment would have
an anti-dilutive effect
Concentration of Credit Risk
Financial instruments which potentially subject Dauphin to concentrations of
credit risk consist principally of accounts receivable. Generally, credit risk
with respect to accounts receivable is diversified due to the number of entities
comprising Dauphin's customer base. However, one individual customer accounted
for approximately 50% and 53% of total accounts receivable at December 31, 2001
and 2000, respectively and the same customer accounted for approximately 45% and
53% of total revenues for the year ended December 31, 2001 and 2000,
respectively. Another customer accounted for approximately 42% of total revenues
for the year ended December 31, 2001.
Use of Estimates
The presentationmore likely than not that some portion or all of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts ofdeferred tax assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
On July 20, 2001, thewill be realized.
Stock-Based Compensation
Effective January 1, 2006, we adopted Financial Accounting Standards Board
("FASB"(“FASB”)
issued
Statement of Financial Accounting Standards No.141 ("SFAS No. 141"), "Business
Combinations", and Statement of Financial Accounting Standards No.
142 ("123 (revised 2004),Share-Based Payments(“SFAS No.
142"123R”),
"Goodwillwhich requires the measurement and
Intangible Assets".recognition of compensation expense for all share-based payments made to employees and directors based on estimated fair values on the grant date. SFAS No.
141 is
F-9
Dauphin Technology, Inc.
123R replaces SFAS No. 123,Accounting for Stock-Based Compensation(“SFAS No. 123”), and supersedes Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees. We adopted SFAS No. 123R using the prospective application method which requires us to apply the provisions of SFAS No. 123R prospectively to new awards and to awards modified, repurchased or cancelled after December 31, 2005. Awards granted after December 31, 2005 are valued at fair value in accordance with the provisions of SFAS No. 123R and recognized on a straight line basis over the service periods of each award.
Prior to January 1, 2006, we accounted for stock-based compensation using the intrinsic value method in accordance with APB Opinion No. 25 and applied the disclosure provisions of SFAS No. 123, as amended by Statement of Financial Accounting Standards No. 148,Accounting for Stock-Based Compensation and Disclosure. The following table illustrates the effect on net loss and net loss per share in 2005 had we applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation arrangements.
| | | | | |
| | | Year Ended
| |
| | | December 31,
| |
| | | 2005 | |
| |
| Net loss, as reported | | $ | (1,611,086 | ) |
| Deduct stock-based compensation expense determined under fair value method | | | (105,955 | ) |
| | | | | |
| Pro forma net loss | | $ | (1,717,041 | ) |
| | | | | |
| Net loss per share (basic and diluted): | | | | |
| As reported | | $ | (0.01 | ) |
| Pro forma | | | (0.01 | ) |
See Note 7 for additional stock-based compensation information.
F-11
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
4. SUMMARY OF MAJOR ACCOUNTING POLICIES - Continued
— (Continued)
New Accounting Pronouncements -Continued
effective
In June 2006, the FASB issued FASB Interpretation No. 48,Accounting for all business combinations completed after June 30, 2001. SFASUncertainty in Income Taxes — an interpretation of FASB Statement No. 142109(“FIN No. 48”), which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in an income tax return. FIN No. 48 presents a two-step process for evaluating a tax position. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, based on the technical merits of the position. The second step is to measure the benefit to be recorded from tax positions that meet the more-likely-than-not recognition threshold, by determining the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement, and recognizing that amount in the financial statements. FIN No. 48 is effective for fiscal years beginning after December 15, 2001; however,
certain provisions2006. We adopted FIN No. 48 effective January 1, 2007; such adoption did not have a material impact on our results of suchoperations, financial position, or cash flows.
In September 2006, the FASB issued Statement applyof Financial Accounting Standards No. 157,Fair Value Measurements(“SFAS No. 157”), which provides enhanced guidance for using fair value to goodwillmeasure assets and other intangibleliabilities. SFAS No. 157 provides a common definition of fair value and establishes a framework to make the measurement of fair value under generally accepted accounting principles more consistent and comparable. SFAS No. 157 also requires expanded disclosures to provide information about the extent to which fair value is used to measure assets acquired between July 1, 2001,and liabilities, the methods and assumptions used to measure fair value, and the effect of fair value measures on earnings. We adopted SFAS No. 157 effective dateJanuary 1, 2008. We do not expect the adoption of SFAS No. 142.
Major provisions157 will have a material impact on our results of these Statements and their effective dates for the Company
are as follows:
1. All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before
July 1, 2001.
2. Intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from contractualoperations, financial position, or other legal rights or are separable from the acquired entity and can
be sold, transferred, licensed, rented, or exchanged, either
individually or as part of a related contract, asset, or liability.
3. Goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001, will not be amortized. Effective
January 1, 2002, all previously recognized goodwill and intangible
assets with indefinite lives will no longer be subject to
amortization.
4. Effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator.
5. All acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting.
The Company has written-off the remaining goodwill as of the end of the year in
accordance with SFAS 121, therefore the provisions of SFAS 141 and SFAS 142 will
not effect the Company.
During 2001,cash flows.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 144, AccountingNo. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. We adopted SFAS No. 159 effective January 1, 2008. We do not expect the adoption of SFAS No. 159 to have a material impact on our results of operations, financial position, or cash flows.
In June 2007, FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on EITF IssueNo. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (“EITFNo. 07-3”). EITFNo. 07-3 addresses the diversity that exists with respect to the accounting for the Impairment or Disposalnon-refundable portion of Long-Lived Assets, to address significant implementation issues related to
SFAS 121, Accountinga payment made by a research and development entity for the Impairment of Long-Lived Assetsfuture research and for Long-Lived
Assets to Be Disposed Of, and to develop a single accounting model to account
for long-lived assets to be disposed of. SFAS 144 carries over the recognition
and measurement provisions of SFAS 121. Accordingly,development activities. Under EITFNo. 07-3, an entity should recognize
an impairment losswould defer and capitalize non-refundable advance payments made for research and development activities until the related goods are delivered or the related services are performed. We adopted EITFNo. 07-3 effective January 1, 2008. We do not expect the adoption of EITFNo. 07-3 to have a material impact on our results of operations, financial position, or cash flows.
We do not believe that any other recently issued, but not yet effective, accounting standards if the carrying amountcurrently adopted would have a material effect on our financial statements.
During 2002, we entered into a license agreement with Emory University (the “Emory License”), a related party, for technology required in conjunction with certain products under development by us in exchange for 35,226,695 shares of
a long-lived asset or asset group
(a) is not recoverable and (b) exceeds its fair value. Similar to SFAS 121, SFAS
144 requires an entity to test an asset or asset group for impairment whenever
events or circumstances indicate that its carrying amount may not be
recoverable. SFAS 144 provide guidance on estimating future cash flows to test
recoverability. SFAS 144 includes criteria that have to be met for an entity to
classify a long-lived asset or asset group as held for sale. However, if the
criteria to classify an asset as held for sale are met after the balance sheet
date but before the issuance of the financial statements, the asset group would
continue to be classified as held and used in those financial statements when
issued, which is a change from current practice.our common stock valued at $148,856. The
measurement of a long-lived
asset or asset group classified as held for sale is at the lower of its carrying
amount of fair value less cost to sell. Expected future losses associated with
the operations of a long-lived asset or asset group classified as held for sale
are excluded from that measurement.
SFAS 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years. However,
the provisions of SFAS 144 related to assets to be disposed of are effective for
disposal activities initiated by an entity's commitment to a plan after the
effective date or after the Statement are initially applied.
F-10
Dauphin Technology, Inc.
Emory License, among other
F-12
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
5. INVENTORY
Inventory is comprised— (Continued)
contractual obligations, requires payments based on milestone achievements (as defined), royalties on our sales or on payments to us by our sublicensees, and payment of material, labor and overhead and consistsmaintenance fees in the event certain milestones (as defined) are not met within the time periods specified in the contract. We may terminate the Emory License on three months’ written notice. In any event, the Emory License expires on the date of the followinglatest expiration date of the underlying patents.
Pursuant to the Emory License, prior patent costs (pre-2002) are payable to Emory University, one half of which is due when capital raised subsequent to the date of the Emory License is equal to $5 million and the remainder is due when cumulative capital raised equals $12.5 million, or upon the earlier occurrence of the fifth anniversary of the agreement. We reached the first threshold of $5 million in December 2005, and fulfilled the first half of our payment obligation ($137,392) in January 2006. The second financing threshold has not been reached, but we became obligated to pay the second half of our payment obligation ($137,392) upon reaching the five year anniversary of the Emory License during 2007. We made this payment in January 2008, and the amount is included in accrued liabilities on our December 31, 2007 Consolidated Balance Sheet and is recorded in general and administrative expense for 2007. We are also obligated to reimburse Emory University for certain ongoing costs in connection with the filing, prosecution and maintenance of patent applications subject to the Emory License. The expense associated with these ongoing patent cost reimbursements to Emory amounted to $106,261, $98,842 and $96,938 for the years ended December 31, 2007, 2006 and 2005, respectively.
We also entered into a license agreement with another entity during 2004 in exchange for 2,470,998 shares of our common stock valued at $100,000. Pursuant to this agreement, we obtained a fully paid, worldwide, irrevocable exclusive license to certain patents covering technology that may be employed by our products.
Leases
We lease the office and laboratory space used for our operations in Atlanta under a lease agreement on a month-to-month basis from Emtech Biotechnology Development, Inc., a related party associated with Emory University. We also share the lease expense for office space in the Chicago area for one of our officers and directors, but we are not obligated under any lease agreement for such space. Rent expense totaled $56,588, $38,921 and $27,444 for the years ended December 31:
2001 2000
---- ----
Finished goods $ 359,890 $ 88,211
Work in process 156,040 156,040
Raw materials 2,984,145 2,752,714
---------- ----------
3,500,075 2,996,965
Less - Reserve31, 2007, 2006 and 2005, respectively.
Manufacturing Contracts
In June 2007, we entered into two manufacturing contracts with third party suppliers for Obsolescence 2,981,623 2,491,216
---------- ----------
Less - Reserve for obsolescence 2,981,623 2,491,216
---------- ----------
$ 518,452 $ 505,749
========== ==========
During the fourth quarterproduction of 2001, the Company determined that its current
inventory could notvaccine to be used in the productionour Phase II human clinical trials planned for 2008. We recorded $476,963 associated with these contracts during 2007. At December 31, 2007, there is approximately $964,000 of unrecorded contractual commitments associated with these arrangements, for services expected to be rendered to us during 2008.
At December 31, 2007, we have a new versionconsolidated federal net operating loss (“NOL”) carryforward of approximately $68.3 million, available to offset against future taxable income which expires in varying amounts in 2010 through 2027. Additionally, we have approximately $254,000 in research and development (“R&D”) tax credits that expire in 2022 through 2026 unless utilized earlier. No income taxes have been paid to date.
As a result of the
Orasis(R),
when it is completed, and therefore adjusted its remaining raw materials and
workMerger discussed in
process inventoryNote 6, our NOL carryforward increased substantially due to
an estimated liquidation value. The Company plans
on liquidating this inventory in the
second quarter of 2002. The amount of the
write down was $490,000. During the fourth quarter of 2000, the Company wrote
down approximately $1,440,000 of inventory, consisting primarily of raw
materials, and disposed of certain excess and obsolete inventory which will not
be used in the production of the Orasis(R) or the set top box. In addition
the
Company also set up a reserve for obsolescence of approximately
$510,000 to
adjust$59.7 million of historical NOL carryforwards for
the net realizable value of the remaining inventory associated with
the Orasis(R). Upon liquidation and disposal of the inventory, the reserve for
obsolescence will be adjusted.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
2001 2000
---- ----
Furniture and fixtures $ 249,007 $ 89,084
Office equipment 480,765 374,732
Manufacturing and warehouse equipment 1,039,282 624,690
Leasehold improvements 131,780 407,186
Plastic molds for the Orasis(R) - 696,862
Building 400,000 400,000
Automobile - 12,273
---------- ----------
2,300,834 2,604,827
Less - Accumulated depreciation and amortization 475,899 1,127,040
---------- ----------
$1,824,935 $1,477,787
========== ==========
During the fourth quarter of 2001, the Company decided to terminate its
operations at the facilities in McHenry, Illinois and liquidate the remaining
assets. The property and equipment at this facility were written down to an
estimated liquidation value. The result was a write down of obsolete assets of
$221,000. In addition, in the fourth quarter the Company concluded that the
plastic molds for the Orasis(R) were deemed unusable in the development and
production of a new version of the Orasis(R) and were written off, resulting in
a charge of approximately $305,000. The remaining liquidation value of the
assets has been reclassified to Assets not used in the Business.
F-11
Dauphin Technology, Inc.
F-13
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
7. INVESTMENT
During— (Continued)
However, Section 382 of the third quarterInternal Revenue Code contains provisions that may limit our utilization of 1998,NOL and R&D tax credit carryforwards in any given year as a result of significant changes in ownership interests that have occurred in past periods or may occur in future periods.
Deferred income taxes reflect the Company invested in non-marketable
securitiesnet effect of a company that was managed by a former directortemporary differences between the carrying amounts of Dauphin. The
investment was carried on the books at cost. The Company recorded dividend
income of approximately $26,000 in 2000. Dividends were discontinued in 2001.
The Company has determined that due to the discontinuance of dividendsassets and liabilities for financial reporting purposes and the poor financial conditionamounts used for income tax purposes. Significant components of our deferred tax assets and liabilities included the company, the carrying value has been impaired.
Therefore the Company wrote off the investment in 2001 infollowing at December 31, 2007 and 2006:
| | | | | | | | | |
| | | 2007 | | | 2006 | |
| |
| Deferred tax assets: | | | | | | | | |
| Net operating loss carryforward | | $ | 23,573,099 | | | $ | 22,527,726 | |
| Research and development tax credit carryforward | | | 254,285 | | | | 254,285 | |
| Stock-based compensation expense | | | 516,289 | | | | — | |
| Other | | | — | | | | 13,600 | |
| | | | | | | | | |
| Total deferred tax assets | | | 24,343,673 | | | | 22,795,611 | |
| Deferred tax liabilities | | | | | | | | |
| Depreciation | | | 4,750 | | | | 3,308 | |
| | | | | | | | | |
| Total deferred tax liabilities | | | 4,750 | | | | 3,308 | |
| | | | | | | | | |
| Net deferred tax assets | | | 24,338,923 | | | | 22,792,303 | |
| Valuation allowance | | | (24,338,923 | ) | | | (22,792,303 | ) |
| | | | | | | | | |
| | | $ | — | | | $ | — | |
| | | | | | | | | |
We have established a full valuation allowance equal to the amount of
$290,000
and the expense is included in the asset impairment loss in the statement of
operations.
8. LONG-TERM DEBT
As of December 31, 2001, the fair value of long-term debt approximates its book
value. At December 31, long-term liabilities consist of:
2001 2000
---- ----
McHenry County Department of Planning and Development loan for expansion of RMS,
payable in equal monthly installments over 84 months with 6% interest. This
loan is unsecured and isour net deferred tax assets due on October 1, 2004. $ 69,073 $ 89,508
PACJETS Financial Ltd. equipment lease, payable in equal monthly installments
over 60 months. The lease is collateralized by the equipment and has a
one-dollar buy-out option. The lease carries 12% interest and is due on
October 15, 2003. 52,891 92,575
PACJETS Financial Ltd. furniture lease payable in equal monthly installments
over 36 months. The lease carries a 23% annual interest rate and was due on
November 15, 2000. The lease was collateralized by the furniture and has a
one-dollar buy-out option. - 23,269
Other - Capital leases for certain vehicles, machinery and equipment and certain
priority tax claims due and payable in equal monthly installments over 36
to 72 months. All debts, collateralized by the equipment, are due October
2002 and carry interest rates
ranging from 9% to 18%. 4,123 10,410
--------- ---------
Total long-term liabilities 126,087 215,762
Less short-term 82,507 113,629
--------- ---------
Total long-term $ 43,580 $ 102,133
========= =========
Future minimum debt payments are as follows:
Year Amount Due
---- ----------
2002 $ 82,507
2003 24,343
2004 19,237
---------
Total long-term debt $ 126,087
=========
F-12
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
9. CONVERTIBLE DEBT AND WARRANTS
On September 28, 2001 the Company entered into a $10 million Securities Purchase
Agreement with Crescent International Ltd., an institutional investor. Under the
Securities Purchase Agreement, the Company issued a Convertible Note for $2.5
million on October 2, 2001. Although the Company had the option to issue further
convertible notes to Crescent subject to certain conditions precedent, such
option expired on February 1, 2002 and no additional notes were issued. In
addition, the Company issued warrants exercisable to purchase 700,000 shares of
common stock at a price of $1.3064 per share for a five-year term. The
Securities Purchase Agreement further permits the Company to sell to Crescent up
to $7.5 million in common stock of the Company over a 24-month period.
Additionally, the Company agreed not to exercise any drawdowns against its
existing common stock purchase agreement with Techrich International Ltd., which
expired on January 28, 2002.
The Securities Purchase Agreement permits the Company to sell to Crescent and
requires Crescent to purchase from the Company, at the Company's sole
discretion, common stock of the Company for up to $7.5 million over a 24-month
period. Individual sales are limited to $1.5 million, or a higher amount if
agreed to by the Company and Crescent, and each sale is subject to our
satisfaction of the following conditions precedent (none of which are within the
control of Crescent): (1) the Company's representations and warranties must be
true and complete, (2) the Company must have one or more then currently
effective registration statements covering the resale by Crescent of all shares
issued in prior sales to Crescent and issuable upon the conversion of the
Convertible Note, (3) there must be no dispute as to the adequacy of disclosures
made in any such registration statement, (4) such registration statements must
not be subject to any stop order, suspension or withdrawal, (5) the Company must
have performed its covenants and obligations under the Securities Purchase
Agreement, (6) no statute, rule, regulation, executive order, decree, ruling or
injunction may have been enacted, entered, promulgated or adopted by any court
of governmental authority that would prohibit the Company's performance under
the Securities Purchase Agreement, (7) the company's common stock must not have
been delisted from its principal trading market and there must be no trading
suspension of its common stock in effect, and (8) the issuance of the designated
number of shares of common stockuncertainties with respect to the applicable sale must not
violate the shareholder approval requirements of the Company's principal trading
market. The aggregate amount of all sale shares and convertible notes issued
cannot exceed $10 million. The amount of the sale is limitedour ability to twice the
average of the bid price multiplied by the trading volume during the 22 trading
day period immediately preceding the date of sale. When the total amount of
securities issuedgenerate sufficient taxable income to Crescent equals or exceeds $5 million, then the Company
shall issue to Crescent a subsequent incentive warrant exercisable to purchase
400,000 shares of common stock at a price equal to the bid price on the date the
incentive warrant is issued.
The Convertible Note was funded on October 2, 2001 and is due September 28,
2004. The Company shall not be required to pay interest on the Convertible Note
unless the Company fails to deliver shares upon conversion. In such event, the
Note will bear an interest rate of 8.0% per annum, payable in quarterly
installments. The Company has recorded a beneficial conversion feature on the
Convertible Note and Warrants based on the fair value of the common stock of
$0.99 per share as of the date of commitment. The Warrants with an exercise
price of $1.3064 per share, are valued using the Black-Scholes valuation method,
and are recorded at $684,600. The beneficial conversion feature is calculated to
be $914,279 and has been recorded as Additional Paid in Capital and a discount
to the Convertible Note. The beneficial conversion feature is being amortized
over three years, the life of the Note. For the year ended December 31, 2001,
the Company recognized $252,076 as interest expense on the amortization of the
beneficial conversion feature. At conversion, the Company may record an
additional beneficial conversion based on the market price of the stock at the
conversion date.
On March 30, 1999, the Company signed an agreement with Augustine Funds, LP
("Augustine"), an accredited investor operated by Augustine Capital Management.
Augustine agreed to commit up to $6 million according to the following
conditions:
F-13
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
9. CONVERTIBLE DEBT AND WARRANTS - Continued
A) The first closing for $1 million will occur upon execution of agreed upon
documentation as well as a deposit of 2 million common shares (which shall be
pledged by current shareholders) in escrow. This tranche will take the form of
an 8% promissory note convertible into stock beginning sixty days after closing.
B) If the Company's stock value is below the 5/8 bid for two consecutive days
the Company must replenish the escrow account with additional shares until the
escrow value is greater than $1.5 million. Augustine received a warrant to
purchase 100,000 shares of common stock at an exercise price of $1.00 per share
for the commitment.
In April 1999, the Company received the funds and subsequently deposited an
additional 400,000 shares into an escrow account to compensate for the decline
in share price. In May 1999, the note was converted into common stock and the
escrow account was disbursed to Augustine. The agreement with Augustine was then
cancelled.
10. STOCK-BASED COMPENSATION
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" the
Company has elected to continue to account for stock compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". During 2001 and 2000, the Company issued non-qualified stock options
to purchase 1,496,164 and 3,921,832 shares of common stock, respectively, to
certain key employees at exercise prices ranging from $0.50 to $3.875 per share
(approximating the market price at date of grant). The options vest immediately
and expire in three years if the individual is still employed with the Company.
Had the Company accounted for its stock options in accordance with Statement
123, at December 31, 2001 and 2000 pro forma earnings per share would have been:
December 31, 2001 December 31, 2000
Net loss as reported (000's) $ (13,252) $ (7,515)
Pro forma net loss for Statement 123 (000's) (15,232) (11,320)
Basic loss per common share as reported (0.21) (0.13)
Pro forma basic loss per common share (0.24) (0.19)
Diluted loss per common share as reported (0.21) (0.13)
Pro forma diluted loss per common share (0.24) (0.19)
For purposes of determining the pro forma effect ofrealize these options, the fair
value of each option is estimated on the date of grant based on the
Black-Scholes single-option-pricing model:
December 31, 2001 December 31, 2000
Dividend yield 0.0% 0.0%
Risk-free interest rate 5.0% 6.0%
Volatility factor 433% 224%
Expected life in years 2.75 2.60
F-14
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
10. STOCK-BASED COMPENSATION - Continued
Information regarding these options for 2001 and 2000 is as follows:
2001 2000
---- ----
Weighted Weighted
Average Average
Shares Exercise Shares Exercise Price
------ -------- ------ --------------
Price
-----
Options outstanding beginning of year 3,913,332 $ 1.1658 50,000 $ 0.6563
Options exercised (35,600) 0.8023 (2,000) 0.5000
Options granted 1,496,164 1.9679 3,921,832 1.1644
Options forfeited - - (56,500) 0.6604
---------- --------- ---------- ---------
Options outstanding at year end 5,373,896 $ 1.3913 3,913,332 $ 1.1658
Weighted average fair value of options granted
during the year $ 1.9679 $ 1.0316
Options exercisable at year end 5,373,896 3,913,332
Option price range at year end $ 0.50 to $4.3125 $ 0.50 to $4.3125
The following table summarizes information about the options outstanding at
December 31, 2001 and 2000:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------- -------------------------------
Range of Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- --------------- ------ ---------------- -------------- ------ --------------
$0.5000 1,084,500 1.02 $0.5000 1,084,500 $0.5000
$0.7600 3,750 2.92 $0.7600 3,750 $0.7600
$0.7812 1,810,000 1.97 $0.7812 1,810,000 $0.7812
$0.8700 16,000 2.88 $0.8700 16,000 $0.8700
$0.8900 139,066 2.88 $0.8900 139,066 $0.8900
$0.9531 25,000 1.98 $0.9531 25,000 $0.9531
$0.9800 50,000 2.75 $0.9800 50,000 $0.9800
$1.0000 416,000 1.09 $1.0000 416,000 $ 1.000
$1.0500 25,000 2.98 $1.0500 25,000 $ 1.050
$1.0800 240,000 2.68 $1.0800 240,000 $ 1.080
$1.1562 25,000 2.79 $1.1562 25,000 $1.1562
$1.1600 50,000 2.84 $1.1600 50,000 $1.1600
$1.1900 3,750 2.67 $1.1900 3,750 $1.1900
$1.3100 20,000 2.32 $1.3100 20,000 $1.3100
$1.3700 10,000 2.75 $1.3700 10,000 $1.3700
$1.4100 166,666 2.63 $1.4100 166,666 $1.4100
$1.4600 200,000 2.50 $1.4600 200,000 $1.4600
$1.5156 25,000 2.23 $1.5156 25,000 $1.5156
$2.7500 142,500 2.29 $2.7500 142,500 $2.7500
$3.5938 230,000 1.73 $3.5938 230,000 $3.5938
$3.8750 666,664 2.00 $3.8750 666,664 $3.8750
$4.3125 25,000 1.73 $4.3125 25,000 $4.3125
--------- ---- ------- --------- -------
Total for 2001 5,373,896 1.84 $1.3913 5,373,896 $1.3913
F-15
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
10. STOCK-BASED COMPENSATION - Continued
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------- -------------------------------
Range of Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- --------------- ------ ---------------- -------------- ------ --------------
$ 0.5000 1,092,500 2.02 $ 0.5000 1,092,500 $ 0.5000
$ 0.7812 1,810,000 2.97 $ 0.7812 1,810,000 $ 0.7812
$ 0.9531 25,000 2.99 $ 0.9531 25,000 $ 0.9531
$ 1.0000 400,000 2.02 $ 1.0000 400,000 $ 1.0000
$ 2.7500 47,500 2.80 $ 2.7500 47,500 $ 2.7500
$ 3.5938 180,000 2.61 $ 3.5938 180,000 $ 3.5938
$ 3.8750 333,332 2.76 $ 3.8750 333,332 $ 3.8750
$ 4.3125 25,000 2.74 $ 4.3125 25,000 $ 4.3125
--------- ---- -------- --------- --------
Total for 2000 3,913,332 2.60 $ 1.1658 3,913,332 $ 1.1658
11. WARRANTS
During 2001 and 2000, the Company issued warrants to purchase 983,672 and
6,309,972 shares of common stock, respectively, to certain investors at exercise
prices ranging from $0.20 to $5.481 per share (approximating the market price at
date of grant). The warrants expire in three to five years. The warrants issued
to consultants are measured at fair value and recorded as expense, while the
warrants issued in capital raising are measured in fair value and recorded as an
allocation of the capital received. The warrants are recorded at the fair value
estimated on the date of grant based on the Black- the Black-Scholes
single-option-pricing model:
December 31, 2001 December 31, 2000
Dividend yield 0.0% 0.0%
Risk-free interest rate 5.0% 6.0%
Volatility factor 433% 224%
Expected life in years 2.75 2.60
Information regarding these warrants for 2001 and 2000 is as follows:
2001 2000
---- ----
Weighted Weighted
Average Average
Shares Exercise Shares Exercise Price
------ -------- ------ --------------
Price
-----
Warrants outstanding beginning of year 8,522,572 $ 2.0809 4,221,958 $ 0.7258
Warrants exercised (285,000) 0.6221 (2,009,358) 0.6366
Warrants granted 983,672 1.3316 6,309,972 2.5264
Warrants expired (22,500) 1.3896 - -
---------- --------- ----------- ---------
Warrants outstanding at year end 9,198,744 $ 2.0477 8,522,572 $ 2.0809
Weighted average fair value of options granted
during the year $ 1.3316 $ 2.5264
Warrants exercisable at year end 9,198,744 8,522,572
Warrant price range at year end $ 0.20 to $5.481 $ 0.20 to $5.481
F-16
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
11. WARRANTS - Continued
The following table summarizes information about the warrants outstanding at
December 31, 2001 and 2000:
Warrants Outstanding Warrants Exercisable
- ----------------------------------------------------------------------------- -------------------------------
Range of Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- --------------- ------ ---------------- -------------- ------ --------------
$0.2000 60,000 0.97 $0.2000 60,000 $0.2000
$0.2300 125,000 0.66 $0.2300 125,000 $0.2300
$0.2500 924,000 1.01 $0.2500 924,000 $0.2500
$0.3500 125,000 2.66 $0.3500 125,000 $0.3500
$0.4600 220,100 2.53 $0.4600 220,100 $0.4600
$0.5000 877,863 0.77 $0.5000 877,863 $0.5000
$0.5500 150,000 0.34 $0.5500 150,000 $0.5500
$0.6000 50,000 0.16 $0.6000 50,000 $0.6000
$1.0000 840,000 1.21 $1.0000 840,000 $1.0000
$1.3064 700,000 4.74 $1.3064 700,000 $1.3064
$1.0312 125,000 1.99 $1.0312 125,000 $1.0312
$1.1000 200,000 2.20 $1.1000 200,000 $1.1000
$1.1452 22,006 2.72 $1.1452 22,006 $1.1452
$1.2500 35,000 1.96 $1.2500 35,000 $1.2500
$1.3600 70,000 2.31 $1.3600 70,000 $1.3600
$1.5000 666,666 1.47 $1.5000 666,666 $1.5000
$2.0000 1,806,000 1.04 $2.0000 1,806,000 $2.0000
$3.2668 25,714 1.88 $3.2668 25,714 $3.2668
$4.0579 51,751 1.62 $4.0579 51,751 $4.0579
$4.2244 49,712 1.66 $4.2244 49,712 $4.2244
$4.4369 18,932 1.84 $4.4369 18,932 $4.4369
$5.0000 1,806,000 1.04 $5.0000 1,806,000 $5.0000
$5.4810 250,000 1.27 $5.4810 250,000 $5.4810
--------- ---- ------- ------- -------
Total for 2001 9,198,744 1.45 $2.0477 9,198,744 $2.0477
$0.2000 60,000 1.97 $0.2000 60,000 $0.2000
$0.2300 135,000 1.66 $0.2300 125,000 $0.2300
$0.2500 924,000 2.01 $0.2500 924,000 $0.2500
$0.3500 125,000 3.66 $0.3500 125,000 $0.3500
$0.4600 220,100 3.53 $0.4600 220,100 $0.4600
$0.5000 1,077,863 1.77 $0.5000 877,863 $0.5000
$0.5500 150,000 1.34 $0.5500 150,000 $0.5500
$0.6000 50,000 1.16 $0.6000 50,000 $0.6000
$1.0000 890,000 2.11 $1.0000 840,000 $1.0000
$1.0312 125,000 2.99 $1.0312 125,000 $1.0312
$1.1000 200,000 3.20 $1.1000 200,000 $1.1000
$1.2500 35,000 2.96 $1.2500 35,000 $1.2500
$1.2938 15,000 0.36 $1.2938 15,000 $1.2938
$1.5000 500,000 1.03 $1.5000 666,666 $1.5000
$1.5813 7,500 0.54 $1.5813 7,500 $1.5813
$2.0000 1,806,000 2.04 $2.0000 1,806,000 $2.0000
$3.2668 25,714 2.88 $3.2668 25,714 $3.2668
$4.0579 51,751 2.62 $4.0579 51,751 $4.0579
$4.2244 49,712 2.66 $4.2244 49,712 $4.2244
F-17
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
11. WARRANTS - Continued
Warrants Outstanding Warrants Exercisable
- -------------------------------------------------------------------------- --------------------------------
Range of Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- --------------- ------ ---------------- -------------- ------ --------------
$4.4369 18,932 2.84 $4.4369 18,932 $4.4369
$5.0000 1,806,000 2.04 $5.0000 1,806,000 $5.0000
$5.4810 250,000 2.27 $5.4810 250,000 $5.4810
--------- ---- ------- --------- -------
Total for 2000 8,522,572 2.05 $2.0809 8,522,572 $2.0809
In December 2000, the Company re-priced approximately 3,012,000 warrants it had
previously issued to outside consultants. The warrants were originally issued
with an exercise price ranging from $10.00 to $5.00, and were re-priced with
exercise prices ranging from $5.00 to $2.00 per share. The re-pricing created a
charge to earnings of approximately $234,000, which was calculated using the
Black-Scholes pricing model assuming 0% dividend yield, risk free interest rate
of 6%, volatility factor of 224% and an expected life of 2.6 years.
12. EMPLOYEE BENEFIT PLAN
The Company maintains a salary deferral 401(k) plan covering substantially all
employees who meet specified service requirements. Contributions are based upon
participants' salary deferrals and compensation and are made within Internal
Revenue Service limitations. For the years 2001, 2000 and 1999, the Company did
not make any matching contributions. The Company does not offer post-employment
or post-retirement benefits. The Company does not administer this plan, and
contributions are determined in accordance with provisions of the plan.
13. IMPAIRMENT OF ASSETS
On an ongoing basis, the Company estimates the future undiscounted cash flows,
before interest, of the operating unit to which the goodwill relates in order to
evaluate its impairment. If there is an indication of impairment exists, the
carrying amount of the goodwill is reduced to its fair valueby the estimated
shortfall of cash flows. During the fourth quarter of 2001 the Company
determined that the set-top box design was completed and the design services
business with outside customers was declining, therefore an impairment of the
goodwill associated with the acquisition of ADD occurred. The Company revised
its projections and determined that the projected results would not fully
support the goodwill balance. In accordance with the Company policy, management
assessed the recoverability of goodwill using a cash flow projection based on
the remaining amortization period of three and three quarter years. Based on
this projection, the cumulative cash flow over the remaining period was
insufficient to fully recover the goodwill. The Company estimated there was no
value and the remaining goodwill of decided to write off the remaining
$3,987,500 was written off of goodwill.
In addition, the Company determined that the carrying value of its investment in
non-marketable securities had been impaired since the investment had
discontinued paying dividends in 2001 and due to the overall poor financial
condition of the company. Therefore, the Company wrote off its investmentassets in the amount of $290,000.
During the fourth quarter of 2001, the Company decided to terminate its
operations at the facilities in McHenry, Illinois and liquidate the remaining
assets. The property and equipment at this facility were written down to an
estimated liquidation value. The result was a total write down of obsolete
assets of $221,000. In addition, during the fourth quarter the Company concluded
that the plastic molds for the Orasis(R) were deemed unusable in the development
and production of a new version of the Orasis(R) and the remaining undepreciated
value of approximately $305,000 was written off.
F-18
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
13. IMPAIRMENT OF ASSETS - Continued
During the third quarter of 1999 the Company experienced an impairment of the
goodwill associated with the acquisition of RMS, when an estimated cash flow
from the operating unit dramatically decreased. The Company recorded $767,475 as
an expense during 1999.
14. INCOME TAXES:
future. A reconciliation of the income tax benefit on losses at the U.S. federal statutory rate to the reported income tax expense is as follows:
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| U.S. federal statutory rate applied to pretax loss | | $ | (1,442,211 | ) | | $ | (198,616 | ) | | $ | (547,769 | ) |
| Permanent differences | | | 4,691 | | | | 22,208 | | | | 26,976 | |
| Research and development credits | | | — | | | | 51,863 | | | | 74,636 | |
| Change in valuation allowance (excluding impact of the Merger discussed in Note 6) | | | 1,437,520 | | | | 124,545 | | | | 446,157 | |
| | | | | | | | | | | | | |
| Reported income tax expense | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | |
2001 2000 1999
---- ---- ----
U.S. federal statutory rate applied to pretax loss $ (4,117,158) $ (2,379,856) $(2,143,858)
Permanent differences | |
| 6. | Merger and adjustments 25,269 33,112 785,739
Net operating losses not recognized 4,091,889 2,346,744 1,358,119
------------ ------------ -----------
Income tax provision $ - $ - $ -
============ ============ ===========
Recapitalization |
As of December 31, 2001 and 2000, the Company had generated deferred tax assets
as follows:
December 31,
------------
2001 2000
---- ----
Gross deferred tax assets-
Net operating loss (NOL) carryforward $ 47,019,457 $ 33,295,253
Reserves for inventory obsolescence 2,981,623 2,491,216
Bad debt reserve 50,621 50,621
Depreciation 86,704 39,349
Goodwill - 275,000
Asset Impairment 290,000 -
Assets not used in business 525,691 -
Other timing differences 10,200 10,200
------------ ------------
50,964,296 36,161,639
Current federal statutory rate 34% 34%
------------ ------------
Deferred tax assets 17,327,861 12,294,957
Less valuation allowance 17,327,861 12,294,957
------------ ------------
Net deferred tax asset $ - $ -
============ ============
Deferred income taxes include the tax impact of net operating loss (NOL)
carryforwards. Realization of these assets, as well as other assets listed
above, is contingent on future taxable earnings by the Company. A valuation
allowance of $17,327,861 and $12,294,957 at December 31, 2001 and 2000,
respectively, has been applied to these assets. During 1995, there was an
ownership change in the Company as defined under Section 382 of the Internal
Revenue Code of 1986, which adversely affects the Company's ability to utilize
the NOL carryforward.
F-19
In January 2006, Dauphin Technology, Inc. and GeoVax, Inc. entered into an Agreement and Plan of Merger (the “Merger Agreement”), which was consummated on September 28, 2006. In accordance with the Merger Agreement, as amended, Dauphin’s wholly-owned subsidiary, GeoVax Acquisition Corp., merged with and into GeoVax, Inc., which survived the merger and became a wholly-owned subsidiary of Dauphin (the “Merger”). Dauphin then changed its name to GeoVax Labs, Inc. Following the Merger, common shareholders of GeoVax, Inc. and holders of GeoVax, Inc. redeemable convertible preferred stock received 29.6521 shares of the Company’s common stock for each share of GeoVax, Inc. common or preferred stock, or a total of
F-14
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
15. BUSINESS SEGMENTS:— (Continued)
490,332,103 shares (approximately 69.2%) of the Company’s 708,326,669 shares of common stock then outstanding.
We accounted for the Merger under the purchase method of accounting as a reverse acquisition in accordance with accounting principles generally accepted in the United States for accounting and financial reporting purposes. Under this method of accounting, Dauphin was treated as the “acquired” company. In accordance with guidance applicable to these circumstances, the Merger was considered to be a capital transaction in substance. Accordingly, for accounting purposes, the Merger was treated as the equivalent of GeoVax, Inc. issuing stock for the net monetary assets of Dauphin, accompanied by a recapitalization. The Company has adopted SFAS No. 131 "Disclosures about Segmentsnet monetary assets of an
Enterprise and Related Information". During 2001,Dauphin (consisting primarily of cash) were stated at their fair values, essentially equivalent to historical costs, with no goodwill or other intangible assets recorded. The deficit accumulated during the Company has three
reportable segments: Dauphin Technology,development stage of GeoVax, Inc., ("Dauphin"), Advanced Digital
Designs, was carried forward after the Merger. The accompanying consolidated financial statements reflect the operations of GeoVax, Inc. ("ADD") and Suncoast Automation, Inc. ("Suncoast"). During 2000,
the Company had two reportable segments: Dauphin and ADD. During 1999, the
Company had two reportable segments: Dauphin and R.M. Schultz & Associates, Inc.
("RMS"). Dauphin is involved in design, manufacturing and distribution of
hand-held pen-based computer systems and accessories. ADD is a design
engineering company performing design services, process methodology consulting
and intellectual property development. Suncoast provides private, interactive
cable systemsprior to the hospitality industry. RMS was an electronic contract
manufacturing firm. The operations of RMS were terminated in 1999 because the
entity was not profitableMerger, and used, rather than provided, cash in its
operations.
The reportable segments are managed separately because each business has
different customer requirements, either as a result of the regional environmentcombined companies subsequent to the Merger.
Common Stock Transactions
In November 2006, we issued 2,841,274 shares of
the country or differencesour common stock in
products and services offered. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. Intangible assets are included in each
segment's reportable assets and the amortization of these intangible assets is
included in the determinationconnection with a cashless exercise of a
segment's operating profit or loss. The
Company evaluates performance based on profit or loss from operations before
income taxes, interest, and non-operating income (expenses).
2001 2000 1999
---- ---- ----
Revenue
-------
Dauphin $ 1,138,858 $ 63,913 $ 273,544
RMS - - 2,134,563
ADD 2,668,599 984,674 -
Suncoast 135,187 - -
Inter-company elimination (1,322,437) (188,750) (129,049)
------------ ------------ -----------
Total 2,620,207 859,837 2,279,058
Operating (Loss)
Dauphin (13,851,651) (7,523,421) (2,947,396)
RMS - - (4,286,231)
ADD (186,196) (195,911) -
Suncoast (488,607) - -
Inter-company elimination ,322,437 88,750 (4,298)
------------ ------------ -----------
Total (13,204,017) (7,530,582) (7,237,925)
Assets
------
Dauphin 17,355,029 17,794,438 6,443,079
RMS 106,116 598,782 2,156,937
ADD 2,699,250 6,735,372 -
Suncoast 1,702,791 - -
Inter-company elimination (17,945,762) (13,967,815) (5,227,862)
------------ ------------ -----------
Total 3,917,424 11,160,777 3,372,154
Capital Expenditures
--------------------
Dauphin 377,590 2,195 18,544
RMS - - 7,136
ADD - - -
Suncoast 283,693 - -
------------ ------------ -----------
Total 661,283 2,195 25,680
F-20
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
16. COMMITMENTS AND CONTINGENCIES:
The Company conducts its operations from facilities which are rented under
non-cancelable operating leases. The leases on these facilities expire
throughout 2002 and contain renewal options and escalation clauses. Minimum
rental paymentspreviously issued stock purchase warrant. In January 2007, we sold 1,543,210 shares of our common stock to two individual accredited investors for 2002 amount to approximately $210,000, including real estate
taxes. Total rental expense was approximately $376,000, $294,000 and $300,000
for 2001, 2000 and 1999 respectively.
During 2001 and through the datean aggregate purchase price of this report, the Company has been engaged in
various legal proceedings. Management believes that any existing litigation
would not be material$250,000. We also issued to the overall financial conditioninvestors warrants to purchase an aggregate of the Company.
17. RELATED-PARTY TRANSACTIONS:
CADserv, an engineering services company based in Schaumburg, Illinois,
controlled by an Officer and a major shareholder, has contributed to the design
and development771,605 shares of the new version of the Orasis(R) and assisted the Company in
the design of the set-top box. The Company paid $72,573 in 2001 for such
services.
RMS facilities are leased from Enclave Corporation, a company that is owned by
the former President of RMS whose contract with the Company was terminated on
May 14, 1999. The Company paid $182,337 of rent and $32,380 in real estate taxes
or the property lease in 2001, $179,468 of rent and $30,206 of real estate taxes
for the property lease in 2000 and $179,684 of rent and $24,150 of real estate
taxes for 1999.
18. EQUITY TRANSACTIONS:
2001 Transactions
During the first quarter of 2001, the Company received proceeds in the amount of
$102,300 for the exercise of 210,000 warrants. Additionally, employees exercised
4,000common stock options at a price of $.50$0.75 per share.
Duringshare, expiring on December 31, 2009.
In January 2007, we issued 123,550 shares of our common stock to a former employee for an aggregate purchase price of $5,000, pursuant to the second quarterexercise of 2001, employees exercised 4,000 stock optionsoptions.
In July 2007, we entered into a Subscription Agreement with an institutional investor (the “Investor”), pursuant to which we agreed to sell shares of our common stock at a price of $.50$0.155 per share In April 2001,for an aggregate purchase price of $7,500,000. The transaction was to be consummated in two closings, during August and November. We also agreed to issue to the Company issuedInvestor a 3 year stock purchase warrant to certain consultants 30,000purchase shares of common
stock and warrants to purchase 70,000 shares ofour common stock at an exercise price of $1.36$0.33 per share,share. In September 2007, the Investor advanced $300,000 to us as payment towards its obligation associated with the first closing, but defaulted on its remaining obligation. In December 2007, we settled with the Investor through the issuance of a pro rata portion of the shares (1,935,484 shares) and warrants (1,571,429 warrants) which would have been issued upon the first closing, in exchange for certain promotionalthe $300,000 advanced to us.
In November and consulting
services. In September 2001,December 2007, we sold an aggregate of 16,857,739 shares of our common stock to twenty-six individual accredited investors for an aggregate purchase price of $2,612,950, $897,450 of which was paid in January 2008 and is recorded in the Companyaccompanying Consolidated Balance Sheet as a subscription receivable. We also issued additionalto the investors warrants to purchase 16,666an aggregate of 26,733,470 shares of common stock at a price of $0.33 per share, 15,096,774 of which have a 5 year term, with the remainder having a four year term.
Stock Options
In 2006 we adopted the GeoVax Labs, Inc. 2006 Equity Incentive Plan (the “2006 Plan”) for the granting of qualified incentive stock options (“ISO’s”), nonqualified stock options, restricted stock awards or restricted stock bonuses to employees, officers, directors, consultants and advisors of the Company. The exercise price for any option granted may not be less than fair value (110% of fair value for ISO’s granted to certain
F-15
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
employees). Prior to adoption of the 2006 Plan, stock option awards were subject to the GeoVax, Inc. 2002 Stock Plan and Incentive Plan (the “2002 Plan”) which has been discontinued. All outstanding stock options issued pursuant to the 2002 Plan were assumed by the 2006 Plan. Options granted under the plans have a maximum ten-year term and generally vest over four years. The Company has reserved 51,000,000 shares of its common stock for issuance under the 2006 Plan.
A summary of our stock option activity under the 2006 Plan as of December 31, 2007, and changes during the year then ended is presented below:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Weighted-
| | | | |
| | | | | | Weighted-
| | | Average
| | | | |
| | | | | | Average
| | | Remaining
| | | Aggregate
| |
| | | Number
| | | Exercise
| | | Contractual
| | | Intrinsic
| |
| | | of Shares | | | Price | | | Term (Yrs) | | | Value | |
| |
| Outstanding at January 1, 2007 | | | 34,431,032 | | | $ | 0.04 | | | | | | | | | |
| Granted | | | 11,810,000 | | | | 0.31 | | | | | | | | | |
| Exercised | | | (123,550 | ) | | | 0.04 | | | | | | | | | |
| Forfeited or expired | | | (6,256,392 | ) | | | 0.05 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Outstanding at December 31, 2007 | | | 39,861,090 | | | $ | 0.12 | | | | 4.5 | | | $ | 3,614,019 | |
| | | | | | | | | | | | | | | | | |
| Exercisable at December 31, 2007 | | | 31,872,249 | | | $ | 0.08 | | | | 3.4 | | | $ | 3,583,216 | |
| | | | | | | | | | | | | | | | | |
Additional information concerning our stock options for the years ended December 31, 2007, 2006 and 2005 is as follows:
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Weighted average fair value of options granted during the period | | $ | 0.30 | | | $ | — | | | $ | 0.01 | |
| Intrinsic value of options exercised during the period | | | 22,181 | | | | — | | | | — | |
| Total fair value of options vested during the period | | | 1,156,020 | | | | 104,837 | | | | 105,955 | |
During 2007 and 2006 we used a Black-Scholes model for determining the grant date fair value of our stock option grants. During 2005 (prior to adoption of SFAS No. 123R) we used a minimum value option-pricing model to estimate the fair values of stock option grants. These models utilize certain information, such as the interest rate on a risk-free security with a term generally equivalent to the expected life of the option being valued and requires certain other assumptions, such as the expected amount of time an option will be outstanding until it is exercised or expired, to calculate the fair value of stock options granted. The significant assumptions we used in our fair value calculations were as follows (during 2006, we did not grant any stock options; therefore, fair value calculations were not required):
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Weighted average risk-free interest rates | | | 4.5 | % | | | — | | | | 4.0 | % |
| Expected dividend yield | | | 0.0 | % | | | — | | | | 0.0 | % |
| Expected life of option | | | 6.8 yrs | | | | — | | | | 8.0 yrs | |
| Expected volatility | | | 135 | % | | | — | | | | 25 | % |
Stock-based compensation expense related to the 2006 Plan was $1,296,196, $-0- and $-0- during the years ended December 31, 2007, 2006 and 2005, respectively. The 2007 expense includes $242,113 associated with a 5 year extension of a previously issued stock option grant (which is accounted for as a reissuance) to our President and Chief Executive Officer, which was due to expire in December 2007. For the year ended December 31, 2007, total stock-based compensation expense of $1,296,196 was allocated $284,113 to research
F-16
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and development expense and $1,012,083 to general and administrative expense. As of December 31, 2007, there was $2,450,577 of unrecognized compensation expense related to stock-based compensation arrangements. The unrecognized compensation expense is expected to be recognized over a weighted average remaining period of 1.9 years.
Compensatory Warrants
We may, from time to time, issue stock purchase warrants to consultants or others in exchange for services. A summary of our compensatory warrant activity as of December 31, 2007, and changes during the year then ended is presented below:
��
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Weighted-
| | | | |
| | | | | | Weighted-
| | | Average
| | | | |
| | | | | | Average
| | | Remaining
| | | Aggregate
| |
| | | Number
| | | Exercise
| | | Contractual
| | | Intrinsic
| |
| | | of Shares | | | Price | | | Term (Yrs) | | | Value | |
| |
| Outstanding at January 1, 2007 | | | — | | | $ | — | | | | | | | | | |
| Granted | | | 2,700,000 | | | | 0.33 | | | | | | | | | |
| Exercised | | | — | | | | — | | | | | | | | | |
| Forfeited or expired | | | — | | | | — | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Outstanding at December 31, 2007 | | | 2,700,000 | | | $ | 0.33 | | | | 2.7 | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| Exercisable at December 31, 2007 | | | 1,080,000 | | | $ | 0.33 | | | | 2.7 | | | $ | — | |
| | | | | | | | | | | | | | | | | |
Additional information concerning our compensatory warrants for the years ended December 31, 2007, 2006 and 2005 is as follows:
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Weighted average fair value of warrants granted during the period | | $ | 0.25 | | | $ | — | | | $ | — | |
| Intrinsic value of warrants exercised during the period | | | — | | | | — | | | | — | |
| Total fair value of warrants vested during the period | | | 266,760 | | | | — | | | | — | |
We use a Black-Scholes model for determining the grant date fair value of our compensatory warrants. The significant assumptions we used in our fair value calculations were as follows:
| | | | | | | | | | | | | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Weighted average risk-free interest rates | | | 4.6 | % | | | — | | | | — | |
| Expected dividend yield | | | 0.0 | % | | | — | | | | — | |
| Expected life of option | | | 3 yrs | | | | — | | | | — | |
| Expected volatility | | | 113.6 | % | | | — | | | | — | |
Expense associate with compensatory warrants was $222,300, $-0- and $-0- during the years ended December 31, 2007, 2006 and 2005, respectively. For the year ended December 31, 2007, all of such expense was allocated to general and administrative expense. As of December 31, 2007, there was $444,600 of unrecognized compensation expense related to our compensatory warrant arrangements. The unrecognized compensation expense is expected to be recognized over a weighted average remaining period of 0.7 years.
Investment Warrants
In addition to outstanding stock options and compensatory warrants, as of December 31, 2007 we have a total of 51,076,504 outstanding stock purchase warrants issued to investors with exercise prices ranging from
F-17
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$0.07 to $0.75. Such warrants have a weighted-average exercise price of $0.22 and a weighted-average remaining contractual life of 3.2 years.
We participate in a multi-employer defined contribution retirement plan (the “401k Plan”) administered by a third party service provider, and has contributed to the 401k Plan on behalf of its employees based upon a matching formula. During the years ended December 31, 2007, 2006 and 2005 our contributions to the 401k Plan were $6,535, $6,744 and $7,473, respectively.
In September 2007, the National Institutes of Health (NIH) awarded us an Integrated Preclinical/Clinical AIDS Vaccine Development (IPCAVD) grant to support our HIV/AIDS vaccine program. The project period for the grant covers a five year period commencing October 2007, with an award of approximately $3 million per year, or $15 million in the aggregate. We will utilize this funding to further our HIV/AIDS vaccine development, optimization, production and human clinical trial testing including Phase 2 human clinical trials planned for 2008. We will record revenue associated with the grant as the related costs and expenses are incurred. During 2007, we recorded $237,004 of revenue associated with the grant, $93,260 of which was received in January 2008 and is recorded as a receivable (Other Current Assets) at December 31, 2007 in the accompanying Consolidated Balance Sheet.
| |
| 10. | Selected Quarterly Financial Data (unaudited) |
A summary of selected quarterly financial data for 2007 and 2006 is as follows:
| | | | | | | | | | | | | | | | | |
| | | 2007 Quarter Ended | |
| | | March 31 | | | June 30 | | | September 30 | | | December 31 | |
| |
| Revenue from grants | | $ | — | | | $ | — | | | $ | — | | | $ | 237,004 | |
| Net income (loss) | | | (587,281 | ) | | | (1,333,126 | ) | | | (1,165,519 | ) | | | (1,155,870 | ) |
| Net income (loss) per share | | | (0.00 | ) | | | (0.00 | ) | | | (0.00 | ) | | | (0.00 | ) |
| | | | | | | | | | | | | | | | | |
| | | 2006 Quarter Ended | |
| | | March 31 | | | June 30 | | | September 30 | | | December 31 | |
| |
| Revenue from grants | | $ | — | | | $ | 478,853 | | | $ | — | | | $ | 374,052 | |
| Net income (loss) | | | (432,856 | ) | | | 196,163 | | | | (283,434 | ) | | | (64,039 | ) |
| Net income (loss) per share | | | (0.00 | ) | | | (0.00 | ) | | | (0.00 | ) | | | (0.00 | ) |
In January 2008, we entered into an agreement with a third party consultant for investor relations and financial consulting services. The agreement provides for the issuance, during 2008, of 500,000 shares of our common stock and a three year warrant to purchase a total of 2,700,000 shares of our common stock at an exercise price of
$1.395$0.33 per
share to
finalize the arrangementshare. Concurrent with the
consultants.
Effective July 1, 2001,execution of this agreement, we terminated a prior agreement with the
Company completedconsultant, resulting in the
acquisitioncancellation of
substantially
all of2,700,000 previously issued warrants. Neither the
assets of Suncoast Automation, Inc., a wholly owned subsidiary of
ProtoSource Corporation,shares issuable pursuant to
an Asset Purchase Agreement. The purchase
price was 766,058 shares of the
Company's common stock valued at approximately
$1.1 million based on the closing bid price of $1.47 per share on June 29, 2001.
During the third quarter of 2001, the Company received proceeds in the amount of
$75,000 for the exercise of 75,000 warrants.
On August 14, 2001 the Company issued a drawdown notice in connection withagreement nor the common stock
purchase agreement with Techrich International for $300,000. Upon
receipt ofunderlying the
funds, the Company issued 258,968 shares of common stock and
warrants to purchase 22,006 shares of common stock at an exercise price of
$1.14516.
F-21
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
18. EQUITY TRANSACTIONS - Continued
On September 13, 2001 the Company filedwarrant have been registered with the Securities and Exchange Commission and no registration rights were granted to the consultant.
F-18
GEOVAX LABS, INC.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2007, 2006 and 2005
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Additions | | | | | | | |
| | | Balance at
| | | Charged to
| | | Charged to
| | | | | | Balance at
| |
| | | Beginning
| | | Costs and
| | | Other
| | | | | | End
| |
Description | | of Period | | | Expenses | | | Accounts | | | Deductions | | | of Period | |
| |
| Reserve Deducted in the Balance Sheet | | | | | | | | | | | | | | | | | | | | |
| From the Asset to Which it Applies: | | | | | | | | | | | | | | | | | | | | |
| Allowance for Deferred Tax Assets | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2007 | | $ | 22,740,440 | | | $ | 1,082,194 | | | $ | — | | | $ | — | | | $ | 23,822,634 | |
| Year ended December 31, 2006 | | | 2,257,226 | | | | 20,483,214 | | | $ | — | | | $ | — | | | | 22,740,440 | |
| Year ended December 31, 2005 | | | 1,600,555 | | | | 656,671 | | | | — | | | | — | | | | 2,257,226 | |
F-19
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | | |
| | | March 31, | | | December 31, | |
| | | 2008 | | | 2007 | |
| | | (Unaudited) | | | | | |
| ASSETS | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 2,120,597 | | | $ | 1,990,356 | |
| Grant funds receivable | | | 119,936 | | | | 93,260 | |
| Stock subscriptions receivable | | | — | | | | 897,450 | |
| Prepaid expenses and other | | | 81,697 | | | | 49,748 | |
| | | | | | | |
| | | | | | | | | |
| Total current assets | | | 2,322,230 | | | | 3,030,814 | |
| | | | | | | | | |
| Property and equipment, net of accumulated depreciation of $83,134 and $76,667 at March 31, 2008 and December 31, 2007, respectively | | | 70,915 | | | | 75,144 | |
| | | | | | | | | |
| Other assets: | | | | | | | | |
| Licenses, net of accumulated amortization of $115,611 and $109,390 at March 31, 2008 and December 31, 2007, respectively | | | 133,245 | | | | 139,466 | |
| Deposits | | | 980 | | | | 980 | |
| | | | | | | |
| | | | | | | | | |
| Total other assets | | | 134,225 | | | | 140,446 | |
| | | | | | | |
| | | | | | | | | |
| Total assets | | $ | 2,527,370 | | | $ | 3,246,404 | |
| | | | | | | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 129,483 | | | $ | 390,993 | |
| Amounts payable to Emory University (a related party) | | | 5,185 | | | | 156,225 | |
| Accrued salaries | | | — | | | | 51,320 | |
| | | | | | | |
| | | | | | | | | |
| Total current liabilities | | | 134,668 | | | | 598,538 | |
| | | | | | | | | |
| Commitments (Note 4) | | | | | | | | |
| | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
| Common stock, $.001 par value, 900,000,000 shares authorized 731,927,926 and 731,627,926 shares outstanding at March 31, 2008 and December 31, 2007, respectively | | | 731,928 | | | | 731,628 | |
| Additional paid-in capital | | | 12,868,693 | | | | 12,441,647 | |
| Deficit accumulated during the development stage | | | (11,207,919 | ) | | | (10,525,409 | ) |
| | | | | | | |
| | | | | | | | | |
| Total stockholders’ equity | | | 2,392,702 | | | | 2,647,866 | |
| | | | | | | |
| | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 2,527,370 | | | $ | 3,246,404 | |
| | | | | | | |
See accompanying notes to financial statements.
F-20
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | | | | | | | | |
| | | | | | | | | | | From Inception | |
| | | Three Months Ended | | | (June 27, 2001) to | |
| | | March 31, | | | March 31, | |
| | | 2008 | | | 2007 | | | 2008 | |
| Revenues: | | | | | | | | | | | | |
| Grant revenue | | $ | 599,991 | | | $ | — | | | $ | 4,248,176 | |
| | | | | | | | | | |
| | | | 599,991 | | | | — | | | | 4,248,176 | |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | |
| Research and development | | | 603,478 | | | | 212,608 | | | | 9,353,652 | |
| General and administrative | | | 705,642 | | | | 399,114 | | | | 6,333,699 | |
| | | | | | | | | | |
| | | | 1,309,120 | | | | 611,722 | | | | 15,687,351 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Loss from operations | | | (709,129 | ) | | | (611,722 | ) | | | (11,439,175 | ) |
| | | | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | | |
| Interest income | | | 26,619 | | | | 24,441 | | | | 236,925 | |
| Interest expense | | | — | | | | — | | | | (5,669 | ) |
| | | | | | | | | | |
| | | | 26,619 | | | | 24,441 | | | | 231,256 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net loss and comprehensive loss | | $ | (682,510 | ) | | $ | (587,281 | ) | | $ | (11,207,919 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Basic and diluted: | | | | | | | | | | | | |
| Loss per common share | | $ | (0.00 | ) | | $ | (0.00 | ) | | $ | (0.03 | ) |
| | | | | | | | | | |
| Weighted average shares outstanding | | | 731,794,959 | | | | 712,772,280 | | | | 383,791,705 | |
| | | | | | | | | | |
See accompanying notes to financial statements.
F-21
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY) | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Deficit | | | | |
| | | | | | | | | | | | | | | | | | | Accumulated | | | Total | |
| | | | | | | | | | | | | | | Stock | | | during the | | | Stockholders’ | |
| | | Common Stock | | | Additional | | | Subscription | | | Development | | | Equity | |
| | | Shares | | | Amount | | | Paid In Capital | | | Receivable | | | Stage | | | (Deficiency) | |
| Capital contribution at inception (June 27, 2001) | | | — | | | $ | — | | | $ | 10 | | | $ | — | | | $ | — | | | $ | 10 | |
| Net loss for the year ended December 31, 2001 | | | — | | | | — | | | | — | | | | — | | | | (170,592 | ) | | | (170,592 | ) |
| | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2001 | | | — | | | | — | | | | 10 | | | | — | | | | (170,592 | ) | | | (170,582 | ) |
| Sale of common stock for cash | | | 139,497,711 | | | | 139,498 | | | | (139,028 | ) | | | — | | | | — | | | | 470 | |
| Issuance of common stock for technology license | | | 35,226,695 | | | | 35,227 | | | | 113,629 | | | | — | | | | — | | | | 148,856 | |
| Net loss for the year ended December 31, 2002 | | | — | | | | — | | | | — | | | | — | | | | (618,137 | ) | | | (618,137 | ) |
| | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2002 | | | 174,724,406 | | | | 174,725 | | | | (25,389 | ) | | | — | | | | (788,729 | ) | | | (639,393 | ) |
| Sale of common stock for cash | | | 61,463,911 | | | | 61,464 | | | | 2,398,145 | | | | — | | | | — | | | | 2,459,609 | |
| Net loss for the year ended December 31, 2003 | | | — | | | | — | | | | — | | | | — | | | | (947,804 | ) | | | (947,804 | ) |
| | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2003 | | | 236,188,317 | | | | 236,189 | | | | 2,372,756 | | | | — | | | | (1,736,533 | ) | | | 872,412 | |
| Sale of common stock for cash and stock subscription receivable | | | 74,130,250 | | | | 74,130 | | | | 2,915,789 | | | | (2,750,000 | ) | | | — | | | | 239,919 | |
| Cash payments received on stock subscription receivable | | | — | | | | — | | | | — | | | | 750,000 | | | | — | | | | 750,000 | |
| Issuance of common stock for technology license | | | 2,470,998 | | | | 2,471 | | | | 97,529 | | | | — | | | | — | | | | 100,000 | |
| Net loss for the year ended December 31, 2004 | | | — | | | | — | | | | — | | | | — | | | | (2,351,828 | ) | | | (2,351,828 | ) |
| | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2004 | | | 312,789,565 | | | | 312,790 | | | | 5,386,074 | | | | (2,000,000 | ) | | | (4,088,361 | ) | | | (389,497 | ) |
| Cash payments received on stock subscription receivable | | | — | | | | — | | | | — | | | | 1,500,000 | | | | | | | | 1,500,000 | |
| Net loss for the year ended December 31, 2005 | | | — | | | | — | | | | — | | | | — | | | | (1,611,086 | ) | | | (1,611,086 | ) |
| | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2005 | | | 312,789,565 | | | | 312,790 | | | | 5,386,074 | | | | (500,000 | ) | | | (5,699,447 | ) | | | (500,583 | ) |
| Cash payments received on stock subscription receivable | | | — | | | | — | | | | — | | | | 500,000 | | | | — | | | | 500,000 | |
| Conversion of preferred stock to | | | | | | | | | | | | | | | | | | | | | | | | |
| Conversion of preferred stock to common stock | | | 177,542,538 | | | | 177,543 | | | | 897,573 | | | | — | | | | — | | | | 1,075,116 | |
| Common stock issued in connection with merger | | | 217,994,566 | | | | 217,994 | | | | 1,494,855 | | | | — | | | | — | | | | 1,712,849 | |
| Issuance of common stock for cashless warrant exercise | | | 2,841,274 | | | | 2,841 | | | | (2,841 | ) | | | — | | | | — | | | | — | |
| Net loss for the year ended December 31, 2006 | | | — | | | | — | | | | — | | | | — | | | | (584,166 | ) | | | (584,166 | ) |
| | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2006 | | | 711,167,943 | | | | 711,168 | | | | 7,775,661 | | | | — | | | | (6,283,613 | ) | | | 2,203,216 | |
| Sale of common stock for cash | | | 20,336,433 | | | | 20,336 | | | | 3,142,614 | | | | — | | | | — | | | | 3,162,950 | |
| Issuance of common stock upon stock option exercise | | | 123,550 | | | | 124 | | | | 4,876 | | | | — | | | | — | | | | 5,000 | |
| Stock-based compensation expense | | | — | | | | — | | | | 1,518,496 | | | | — | | | | — | | | | 1,518,496 | |
| Net loss for the year ended December 31, 2007 | | | — | | | | — | | | | — | | | | — | | | | (4,241,796 | ) | | | (4,241,796 | ) |
| | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2007 | | | 731,627,926 | | | | 731,628 | | | | 12,441,647 | | | | — | | | | (10,525,409 | ) | | | 2,647,866 | |
Continued on following page
F-22
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Deficit | | | | |
| | | | | | | | | | | | | | | | | | | Accumulated | | | Total | |
| | | | | | | | | | | | | | | Stock | | | during the | | | Stockholders’ | |
| | | Common Stock | | | Additional | | | Subscription | | | Development | | | Equity | |
| | | Shares | | | Amount | | | Paid In Capital | | | Receivable | | | Stage | | | (Deficiency) | |
| Balance at December 31, 2007 | | | 731,627,926 | | | | 731,628 | | | | 12,441,647 | | | | — | | | | (10,525,409 | ) | | | 2,647,866 | |
| Issuance of common stock for consulting services (unaudited) | | | 300,000 | | | | 300 | | | | 46,700 | | | | — | | | | — | | | | 47,000 | |
| Stock-based compensation expense (unaudited) | | | — | | | | — | | | | 380,346 | | | | — | | | | — | | | | 380,346 | |
| Net loss for the three months ended March 31, 2008 (unaudited) | | | — | | | | — | | | | — | | | | — | | | | (682,510 | ) | | | (682,510 | ) |
| | | | | | | | | | | | | | | | | | | |
| Balance at March 31, 2008 (unaudited) | | | 731,927,926 | | | $ | 731,928 | | | $ | 12,868,693 | | | $ | — | | | $ | (11,207,919 | ) | | $ | 2,392,702 | |
| | | | | | | | | | | | | | | | | | | |
See accompanying notes to financial statements.
F-23
GEOVAX LABS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | | | | | | | | | | | | |
| | | Three Months Ended | | | From Inception | |
| | | March 31, | | | (June 27, 2001) to | |
| | | 2008 | | | 2007 | | | March 31, 2008 | |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net loss | | $ | (682,510 | ) | | $ | (587,281 | ) | | $ | (11,207,919 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 12,688 | | | | 13,910 | | | | 198,745 | |
| Accretion of preferred stock redemption value | | | — | | | | — | | | | 346,673 | |
| Stock-based compensation expense | | | 380,346 | | | | 45,755 | | | | 1,898,842 | |
| Stock issued to consultant in lieu of cash | | | 18,250 | | | | | | | | 18,250 | |
| Changes in assets and liabilities: | | | | | | | | | | | | |
| Grant funds receivable | | | (26,676 | ) | | | — | | | | (119,936 | ) |
| Prepaid expenses and other current assets | | | (3,199 | ) | | | 10,355 | | | | (52,947 | ) |
| Deposits | | | — | | | | — | | | | (980 | ) |
| Accounts payable and accrued expenses | | | (463,870 | ) | | | (113,126 | ) | | | 134,668 | |
| | | | | | | | | | |
| Total adjustments | | | (82,461 | ) | | | (43,106 | ) | | | 2,423,315 | |
| | | | | | | | | | |
| Net cash used in operating activities | | | (764,971 | ) | | | (630,387 | ) | | | (8,784,604 | ) |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Purchase of property and equipment | | | (2,238 | ) | | | — | | | | (154,049 | ) |
| | | | | | | | | | |
| Net cash used in investing activities | | | (2,238 | ) | | | — | | | | (154,049 | ) |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Net proceeds from sale of common stock | | | 897,450 | | | | 250,000 | | | | 10,325,807 | |
| Net proceeds from exercise of stock options | | | — | | | | 5,000 | | | | 5,000 | |
| Net proceeds from sale of preferred stock | | | — | | | | — | | | | 728,443 | |
| Proceeds from issuance of note payable | | | — | | | | — | | | | 250,000 | |
| Repayment of note payable | | | — | | | | — | | | | (250,000 | ) |
| | | | | | | | | | |
| Net cash provided by financing activities | | | 897,450 | | | | 255,000 | | | | 11,059,250 | |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 130,241 | | | | (375,387 | ) | | | 2,120,597 | |
| Cash and cash equivalents at beginning of period | | | 1,990,356 | | | | 2,088,149 | | | | — | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 2,120,597 | | | $ | 1,712,762 | | | $ | 2,120,597 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
| Interest paid | | $ | — | | | $ | — | | | $ | 5,669 | |
See accompanying notes to financial statements.
F-24
GEOVAX LABS, INC.
(A DEVELOPMENT-STAGE ENTERPRISE)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
1. Description of Company and Basis of Presentation
GeoVax Labs, Inc. (“GeoVax” or the “Company”), is a Form S-3 registration statement relatingdevelopment stage biotechnology company engaged in research and development activities with a mission to 6,964,724 sharesdevelop, license and commercialize the manufacture and sale of common stock.human vaccines for diseases caused by Human Immunodeficiency Virus (HIV) and other infectious agents. The sharesCompany has exclusively licensed from Emory University certain Acquired Immune Deficiency Syndrome (AIDS) vaccine technology which was developed in collaboration with the National Institutes of Health and the Centers for Disease Control and Prevention.
GeoVax was originally incorporated under the laws of Illinois as Dauphin Technology, Inc. (“Dauphin”). Until December 2003, Dauphin marketed mobile hand-held, pen-based computers and broadband set-top boxes and provided private, interactive cable systems to the extended stay hospitality industry. The Company was unsuccessful and its operations were
issued by the Companyterminated in
respectDecember 2003. On September 28, 2006, Dauphin completed a merger (the “Merger”) with GeoVax, Inc. which was incorporated on June 27, 2001 (date of “inception”). As a result of the
following:
(i) 766,058 shares were issued byMerger, the
Company in connection with the acquisitionshareholders of
the net assets of Suncoast; (ii) 52,000 shares were issued by the Company as
payment for certain advertising and promotional expenses and consulting
services; and (iii) 6,146,666 shares issuable by the Company to shareholders
upon the exercise by them of issued and outstanding warrants and options. On
September 27, 2001, the Securities and Exchange Commission declared the
registration statement effective.
During the fourth quarter of 2001, employees exercised 27,600 stock options at a
price of $.89 per share.
In November 2001, the Company issued warrants to purchase 175,000GeoVax, Inc. exchanged their shares of common stock
at exercise prices ranging from $1.00 to $1.50, as payment for
certain advertising and promotional expenses.
On November 19, 2001 the Company filed with the Securities and Exchange
Commission a Form S-1 registration statement relating to 4,000,000 shares ofDauphin common stock
to be issued upon the conversionand GeoVax, Inc. became a wholly-owned subsidiary of
the Convertible Note (see Note
9). This registration statement is still pending approval by the Securities and
Exchange Commission.
Personal Guarantee
On April 3, 2001, the Company and Estel Telecommunications S.A. cancelled the
performance bond issued on October 26, 2000 and the 1,550,000 shares of
restricted stock held by Best S.A. were returned to the Company.Dauphin. In connection with the
cancellationMerger, Dauphin changed its name to GeoVax Labs, Inc., replaced its officers and directors with those of
the shares, Best S.A. executed the personal guarantee
of Mr. Andrew J. Kandalepas, which he had grantedGeoVax, Inc. and moved its offices to
secure the performance of
the Company's obligation to register the 1,550,000 shares issued in connection
with the performance bond and retained the 1,032,118 shares. The set-top box
agreement with Estel Telecommunications S.A. terminated on July 1, 2001 due to
lack of performance on behalf of Estel. This transaction was entered into on
behalf of the Company and therefore the Company recorded an expense of
$1,241,741, with an offsetting entry to additional paid in capital.
On December 20, 2001, the Board of Directors approved the issuance of 1,032,118
shares to the Chairman of the Board and CEO of the Company to replace the shares
that Best S.A. retained under the personal guarantee. The shares were valued at
$1,241,741 based on the closing price of $1.20 on April 3, 2001.
2000 Transactions
During the first and second quarter of 2000, the Company conducted a private
placement of 4,654,613 common shares and approximately 1,300,000 warrants to a
group of accredited investors in exchange for approximately $7,300,000. The
proceeds were used to settle the majority of trade payables, for day-to-day
operations and to start the development of the set-top box.
In January 2000, the Company issued 480,000 shares to a customer in exchange for
cancellation of $300,000 of customer deposits.
In January 2000, the Company issued warrants to an investment banker, for
services rendered, to purchase 350,000 shares at an exercise price of $1.00.
In January 2000, the Company issued 500,000 shares to a consulting firm for
services rendered in relation to the set-top box agreement with Estel
Telecommunications S.A.
F-22
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
18. EQUITY TRANSACTIONS - Continued
In April 2000, the Company completed its private placement and issued 3,630,000
warrants to an investment banker in lieu of consulting fees.
On April 26, 2000, the Company completed a common stock purchase agreement,
escrow agreement and registration rights agreement with Techrich International
Limited ("Techrich"). These agreements provide a $100,000,000 equity line of
credit as the Company requests over an 18 month period, in return for common
stock and warrants to be issued to the investor. Once every 22 days, the Company
may request a draw of up to $10,000,000 of that money, subject to a maximum of
18 draws. The maximum amount the Company actually can draw down upon each
request will be determined by the volume-weighted average daily price of the
Company's common stock for the 22 trading days prior to its request and the
average trading volume for the 45 trading days prior to the request. Each draw
down must be for at least $250,000. Use of a 22 day trading average was
negotiated to reduce the impact of market price fluctuations over any calendar
month, which generally includes 22 trading days. At the end of a 22-day trading
period following the drawdown request, the amount of shares is determined based
on the volume-weighted average stock price during that 22-day period in
accordance with the formulas in the common stock purchase agreement.
On April 28, 2000, the Company filed with the Securities and Exchange Commission
a Form S-1 registration statement relating to 15,332,560 shares of common stock
issued to stockholders in private transactions, 11,958,963 shares for other
stockholders, and 6,000,000 shares to be issued when the Company requests a
drawdown under the common stock purchase agreement referred to above.
On July 28, 2000, the Securities and Exchange Commission declared the
registration statement effective. Pursuant to the common stock purchase
agreement with Techrich, the Company issued as a placement fee warrants to
purchase 250,000 shares of common stock at an exercise price of $5.481.
On July 31, 2000, the Company issued a drawdown notice in connection with the
common stock purchase agreement with Techrich for $5,000,000. Upon receipt of
the funds, the Company issued 1,354,617 shares of common stock and warrants to
purchase 101,463 shares of common stock at exercise prices ranging from $4.06 to
$4.22.
In September 2000, the Company issued 73,750 stock options to certain employees
under employment agreements. At the time of issuance, the option price was below
the market price and the Company recorded $70,622 as additional compensation
expense.
On October 17, 2000, the Company issued a drawdown notice in connection with the
common stock purchase agreement with Techrich for $2,000,000. Upon receipt of
the funds, the Company issued 781,999 shares of common stock and warrants to
purchase 44,646 shares of common stock at exercise prices ranging from $3.26676
to $4.4369.
On October 20, 2000 the Company entered into an agreement with Best S.A. to act
as its distributor/agent in Greece. On October 26, 2000 the Company issued
1,550,000 shares of restricted stock to Best S.A. as a performance bond to
assure the Company's compliance with the Set-Top Box Agreement by and between
the Company and Estel S.A. These shares have not been included in the issued and
outstanding shares as of December 31, 2000, as Best S.A. has acknowledged that
they would return the shares to the Company upon satisfactory compliance with
the Set-Top Box Agreement. The agreement with Best S.A. requires the Company to
register these shares with the Securities and Exchange Commission during 2000.
To secure performance of the Company's obligation to register these shares,
Andrew J. Kandalepas, Chairman of the Board and CEO of the Company, granted to
Best S.A. a security interest in 1,032,118 shares of Company stock owned by him.
F-23
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
18. EQUITY TRANSACTIONS - Continued
In December 2000, the Company issued 22,000 shares of common stock and warrants
to purchase 148,265 shares of common stock at exercise prices ranging from
$1.0312 to $1.25, as payment for certain advertising and promotional expenses
and consulting services related to the establishment of an office in Europe.
In December 2000, the Company re-priced approximately 3,012,000 warrants it had
previously issued to outside consultants. The warrants were originally issued
with an exercise price ranging from $10.00 to $5.00, and were re-priced with
exercise prices ranging from $5.00 to $2.00 per share. The re-pricing created a
charge to earnings of approximately $234,000, which was calculated using the
Black-Scholes pricing model assuming 0% dividend yield, risk free interest rate
of 6%, volatility factor of 224% and an expected life of 2.6 years.
1999 Transactions
In January and April 1999, the Company issued a total of 46,373 shares under an
employment contract with Richard M. Schultz, former President of RMS. As of May
14, 1999, the Company no longer employs Richard M. Schultz.
In February and March 1999, the Company issued a total of 87,380 treasury shares
and 1,570,927 shares in exchange for $660,000 of principal, $17,123 of interest
and $32,909 of original issue discount amortization on Convertible Debentures -
2001A. In addition, in March the short-term loan from an investor in the amount
of $250,000 together with $7,500 of interest was converted into 427,667 shares.
In March 1999, the Company issued warrants to an investment banker to purchase
50,000 shares at an exercise price of $0.60 exercisable after the market bid
price of the Company's stock exceeds $1.00 for 15 consecutive trading days. Also
in March of 1999 the Company issued warrants to the same investment banker to
purchase 50,000 shares at an exercise price of $0.50 exercisable after the
market bid price of the Company's stock exceeds $2.00 for 15 consecutive trading
days. The warrants were valued at $48,000 using the Black-Scholes securities
valuation model, assuming among other things, a 6% risk free interest rate, 0%
dividend yield, 1 and 2 year life respectively and 120% volatility.
In March 1999, the Company issued 507,160 shares to five accredited investors in
exchange for $403,492. In addition to the shares, the Company issued warrants to
purchase 300,000 shares of common stock at an exercise price of $1.10 per share
exercisable immediately. The warrants were valued at $165,600 using the
Black-Scholes securities valuation model, assuming among other things, a 7% risk
free interest rate, 0% dividend yield, 5 year life and 120% volatility.
On March 30, 1999, Dauphin signed an agreement with Augustine Funds LP
("Augustine"), an accredited investor operated by Augustine Capital Management,
where Augustine agreed to commit up to $6 million. The first closing for $1
million occurred on April 15, 1999 when the parties executed agreed upon
documentation and Dauphin deposited 2 million common shares in escrow. This
tranche was in the form of an 8% promissory note convertible into stock
beginning sixty days after closing. The conversion was at 15% discount from the
closing bid price of the Company's common stock. The contract also called for
the adjustment in escrowed shares in case stock value decreases, under the 5/8
bid for two consecutive days. As specified on the contract, on April 22 due to
decline in market price of the stock, the Company deposited additional 400,000
shares in an escrow account to replenish the $1.5 million value in the account.
As an incentive, Augustine received a warrant to purchase 100,000 common shares
of stock at an exercise price of $1.00 per share. The warrant was valued at
$52,200 using Black-Scholes securities valuation model, assuming among other
things, a 6% risk free interest rate, 0% dividend yield, 1 and 2 year life
respectively and 120% volatility. On May 24, 1999 $1 million funded under the
note, together with accrued interest, was converted into 2,441,414 shares of
common stock of which 2,400,000 common shares were disbursed to Augustine. The
agreement with Augustine has been cancelled.
F-24
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
18. EQUITY TRANSACTIONS - Continued
In May 1999, the Company issued 150,000 shares to two accredited investors in
exchange for $82,500. In addition to the shares the Company issued warrants to
purchase 150,000 shares of common stock at an exercise price of $0.55 per share.
The warrants are exercisable immediately and expire in three years. The warrants
were valued at $53,250 using the Black-Scholes securities valuation model,
assuming among other things, a 6% risk free interest rate, 0% dividend yield, 5
year life and 120% volatility.
In May 1999, the company issued 586,764 common shares in exchange for $240,000
of the remaining principal of the Convertible Debentures-2001A. That closed out
all debts the Company had in relation to the Convertible Debentures.
On May 28, 1999 the Company signed a Stock Purchase Agreement with Crescent
International Ltd. ("Crescent"), an investment company managed by GreenLight
(Switzerland) SA, which allows the Company and obligates Crescent to purchase
shares from the Company based on terms and conditions outlined in the agreement.
In total Crescent agreed to purchase up to $2,250,000 of the common stock within
the next twenty-four months. Crescent agreed to purchase from the Company shares
based on ninety percent of the daily average trading value, which is computed by
multiplying the closing bid price by the daily volume of the Company's common
stock traded average over the twenty days prior to closing. In connection
therewith the Company sold to Crescent 1,048,951 shares for $450,000 at an
average price of $0.43 per share including $58,000 of closing fees.Atlanta, Georgia. The Company has the rightcurrently does not plan to sell additional shares with an intervalconduct any business other than GeoVax, Inc.’s business of 25 business days
with a minimumdeveloping new products for protection from, and treatment of, $100,000 per sale and a maximum of $500,000 based on the
average daily value as described above. In addition to the stock, Crescent
received an Incentive Warrant to purchase 750,000 common shares at a price of
$0.6435 per share. human diseases. The
Warrants were valued at $235,500 using Black-Scholes
securities valuation model assuming among other things 6% risk free rate, 0%
dividend yield, five years life and 120% volatility.
In connection with the Stock Purchase Agreement signed by the Company on May 28,
1999, the Company sold to Crescent 350,000 shares for $148,050 at an average
price of $0.423 per share, including $2,961 of closing fees.
In the third quarter of 1999, the Company issued 14,963 treasury shares and
2,086,540 common shares to a group of accredited investors in exchange for
$598,817 or an average of $0.29 per share. In addition to the shares the Company
issued warrants to purchase 1,651,600 shares of common stock at an average
exercise price of $0.47 per share. The warrants are exercisable immediately and
expire in three to five years. The Warrants were valued at $443,622 using
Black-Scholes securities valuation model assuming among other things 6% risk
free rate, 0% dividend yield, five years life and 120% volatility.
During the third quarter, the Company agreed to issue a total of 407,868 shares
to satisfy certain payables in the cumulative amount of $223,825 or
approximately $0.55 per share.
In September 1999, a Warrant for a total of 100,000 shares that was issued in
July 1999 was exercised at $0.53 per share. The Company received a total of
$53,000 from such exercise.
On October 26 1999, the Company issued 93,358 shares in exchange for $29,643 or
$0.32 per share net of $605 of closing fees in accordance with the Stock
Purchase Agreement signed by the Company on May 28, 1999 with Crescent.
On October 27, 1999 in connection with the Stock Purchase Agreement signed by
the Company on May 28, 1999 with Crescent, the Company sold to Crescent 447,012
shares for $141,935 at an average price of $0.32 per share, including $2,897 of
closing fees.
F-25
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
18. EQUITY TRANSACTIONS - Continued
In November 1999, the Company issued 457,650 shares to three accredited
investors in exchange for $156,500 or $0.33 per share.
During the third quarter of 1999 a Warrant for 302,858 shares at $0.20 was
exercised. The Company received a total of $60,285 for the shares. As of the
date of this report, these shares have not been issued.
In November 1999, in exchange for services rendered, the Company issued 300,000
shares to a consultant.
In December 1999, the Company converted $70,000 of short-term notes including
$5,000 of interest from an affiliate into 350,000 shares.
In December 1999, the Company issued 362,858 shares in exchange for $72,572 from
two accredited investors. In addition to shares, the Company issued two Warrants
for the total of 362,858 common shares to the investors with a strike price of
$0.20. The Warrants were valued at $68,637 using Black-Scholes securities
valuation model assuming among other things 6% risk free rate, 0% dividend
yield, five years life and 120% volatility.
19. ACQUISITIONS:
On July 1, 2001, the Company acquired substantially all of the assets of
Suncoast Automation, Inc. The purchase price was 766,058 shares of the Company's
common stock valued at $1,126,105 based on the closing bid price of $1.47 per
share on June 29, 2001. The transactionMerger was accounted for under the purchase method of accounting. accounting as a reverse acquisition in accordance with U.S. generally accepted accounting principles. Under this method of accounting, Dauphin was treated as the “acquired” company and, for accounting purposes, the Merger was treated as the equivalent of GeoVax, Inc. issuing stock for the net monetary assets of Dauphin, accompanied by a recapitalization of GeoVax, Inc. Accordingly, all financial information prior to September 28, 2006 presented in the accompanying condensed consolidated financial statements, or in the notes herein, as well as any references to prior operations, are those of GeoVax, Inc.The Company is a development stage enterprise as defined by Statement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises”, and we are devoting substantially all of our present efforts to research and development. We have funded our activities to date almost exclusively from equity financings and government grants. We will continue to require substantial funds to continue our research and development activities, including preclinical studies and clinical trials of our product candidates, and to commence sales and marketing efforts, if the United States Food and Drug Administration (“FDA”) or other regulatory approvals are obtained.
In September 2007, the National Institutes of Health awarded the Company a grant of approximately $15 million to be funded over a 5 year period (see Note 7). The proceeds from this grant, combined with our existing cash resources and recent sales of our equity securities (see Note 8), will be sufficient to fund our planned research and development activities into the fourth quarter of 2008, but additional funds will be necessary to meet our future operating cash flow requirements. In May 2008, we entered into a $10,000,000 common stock purchase price, was allocatedagreement with a third party institutional fund (see Note 9) which we anticipate will provide the operating capital necessary to fund our operations for at least the next two years. This financing arrangement commences upon the date on which a registration statement related to the transaction is declared effective by the U.S. Securities & Exchange Commission (“SEC”). While we believe that we will be successful in obtaining the necessary financing to fund our operations through the aforementioned financing arrangement or through other sources, there can be no assurances that such additional funding will be achieved and that we will succeed in our future operations. These matters raise substantial doubt about the Company’s ability to continue as follows:
Accounts Receivable $ 14,669
Inventory 113,054
Prepaid expenses 24,326
Equipment 794,170
Installation contracts 320,000
-----------
1,266,105
Less Accounts payable 140,114
-----------
Total $ 1,126,105
===========
Pro Formaa going concern.The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might be necessary should the Company be unable to continue in existence.
The accompanying consolidated financial statements at March 31, 2008 and for the three month periods ended March 31, 2008 and 2007 are unaudited, but include all adjustments, consisting of normal recurring entries, which the Company’s management believes to be necessary for a fair presentation of the dates and periods presented. Interim results are not
F-25
necessarily indicative of results for a full year. The financial statements should be read in conjunction with the Company’s audited financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2007. Our operating results are expected to fluctuate for the foreseeable future. Therefore, period-to-period comparisons should not be relied upon as if the acquisition had occurred at the beginningpredictive of the respectiveresults in future periods.
The Company disclosed in Note 2 to its financial statements included in the Form 10-K for the years endingyear ended December 31, 2001 an d 2000, as required
under2007 those accounting policies that it considers significant in determining its results of operations and financial position. There have been no material changes to, or application of, the accounting policies previously identified and described in the Form 10-K.
2. New Accounting Pronouncements
Effective January 1, 2008, we adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 141, Business Combinations,157,Fair Value Measurements(“SFAS 157”), which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS 157 provides a common definition of fair value and establishes a framework to make the measurement of fair value under generally accepted accounting principles more consistent and comparable. SFAS 157 also requires expanded disclosures to provide information about the extent to which fair value is used to measure assets and liabilities, the methods and assumptions used to measure fair value, and the effect of fair value measures on earnings. The adoption of SFAS 157 had no impact on our results of operations, financial position, or cash flows.
Effective January 1, 2008, we adopted FASB Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are
as
follows:
2001 2000
---- ----
Revenue $ 2,620,207 $ 1,064,676
Operating loss (13,652,231) (8,489,753)
Net loss (13,702,198) (8,365,215)
Net loss per share
Basic $ (0.22) $ (0.14)
Diluted $ (0.22) $ (0.14)
F-26
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
19. ACQUISITIONS - Continued
On August 28, 2000, the Company acquired T & B Designs, Inc. (formerly known as
Advanced Digital Designs, Inc.), Advanced Technologies, Inc. and 937 Plum Grove
Road Partnership in exchange for $3 million in cash and $3 millionnot currently required to be heldmeasured at fair value. The adoption of SFAS 159 had no impact on our results of operations, financial position, or cash flows. Effective January 1, 2008, we adopted FASB Emerging Issues Task Force Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in escrowFuture Research and disbursedDevelopment Activities” (“EITF 07-3”). EITF No. 07-3 addresses the diversity that exists with respect to the accounting for the non-refundable portion of a payment made by a research and development entity for future research and development activities. Under EITF 07-3, an entity would defer and capitalize non-refundable advance payments made for research and development activities until the related goods are delivered or the related services are performed. The adoption of EITF 07-3 did not have a material impact on our results of operations, financial position, or cash flows.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R),“Business Combinations” (“SFAS 141(R)”). SFAS 141(R) requires the acquiring entity in accordance witha business combination to recognize all assets acquired and liabilities assumed in the termstransaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and conditions of an Escrow
Agreement. The transaction was accounted for underliabilities assumed, and requires the purchase method of
accounting. Goodwill was recordedacquirer to disclose the nature and is to be amortized under the straight-line
method over a 5-year period.
The purchase price, plus direct costsfinancial effect of the acquisition, were allocated as
follows:
Building $ 400,000
Computer equipment 110,000
Other equipment 15,000
Excess of Cost over Net Assets Acquired 5,500,000
-----------
Total $ 6,025,000
===========
Pro Forma operating results as ifbusiness combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. If and when GeoVax acquires one or more entities in the acquisition had occurred at the beginning
of the respectivefuture, we will apply SFAS 141(R) for the purposes of accounting for such acquisitions.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years endingbeginning after December 31, 200015, 2008. GeoVax presently has no such noncontrolling interests. If and 1999,at such time as required
under APB 16 (Accounting Principles Board Opinion number 16, regarding Business
Combinations), are as follows:
2000 1999
---- ----
Revenue $ 3,548,801 $ 5,513,493
Operating loss (7,023,058) (6,594,083)
Net loss (8,253,941) (8,650,289)
Net loss per share
Basic $ (0.14) $ (0.19)
Diluted $ (0.14) $ (0.19)
20. RESTATEMENT:
Selling, generalsuch an interest exists, we will apply SFAS 160.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and administrative expenses, interest expense, net lossHedging Activities” (“SFAS 161”). SFAS 161 amends and
per
share amounts have been adjusted from previously reported amounts to offsetexpands the
difference between the quoted market pricedisclosure requirements of SFAS 133, “Accounting for Derivative Instruments and the proceeds from stock sales
under a private placementHedging.” SFAS 161 is effective for fiscal years beginning after December 15, 2008. We will adopt SFAS 161 in the first quarter of
2000 against additional paid
in capital rather than interest expense amounting to $1,302,383 ($0.02 per
share).
F-27
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
A summary of selected quarterly information for 20012009 and 2000 is as follows:
2001 Quarter Ended
------------------
March 31, June 30, Sept. 30, Dec. 31,
--------- ----------------------------- --------
Revenues $ 445,154 $ 382,087 $ 421,544 $ 1,371,422
Gross Profit (Loss) 116,569 67,272 50,737 (359,370)
Net Loss (1,015,162) (3,070,590)* (1,405,379) (7,761,229)
Net Loss per share
Basic $ (0.02) $ (0.05)* $ (0.02) $ (0.12)
Diluted $ (0.02) $ (0.05)* $ (0.02) $ (0.12)
2000 Quarter Ended
------------------
March 31, June 30, Sept. 30, Dec. 31,
--------- -------- --------- --------
Revenues $ 4,736 $ 11,305 $ 344,975 $ 498,821
Gross Profit (Loss) 238,886 (346,256) 27,747 (1,936,167)
Net Loss (2,312,421)** $ (1,249,631) (1,173,789)** (4,081,521)
Net Loss per share
Basic $ (0.04)** $ (0.02) $ (0.02)** $ (0.07)
Diluted $ (0.04)** $ (0.02) $ (0.02)** $ (0.07)
* Netwe are currently evaluating the impact, if any, the adoption will have on our financial statements. We do not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on our financial statements.
F-26
3. Basic and Diluted Loss Per Common Share
Basic net loss and per share amountsis computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares primarily consist of employee stock options and warrants. Common share equivalents which potentially could dilute basic earnings per share in the future, and which were excluded from the computation of diluted loss per share, as the effect would be anti-dilutive, totaled approximately 93.6 million and 66.2 million shares at March 31, 2008 and 2007, respectively.
4. Stockholders’ Equity
Common Stock Transactions
In January 2008, we entered into an agreement with a third party consultant for investor relations and financial consulting services. The agreement provides for the quarterissuance, during 2008, of an aggregate 500,000 shares of our common stock, 300,000 of which were issued during the three months ended June 30, 2001March 31, 2008. During the three months ended March 31, 2008, we issued 300,000 shares of our common stock pursuant to this arrangement which were valued at $47,000; $18,250 of which is recorded as general and administrative expense and $28,750 of which is recorded as a prepaid expense.
Stock Options
We currently have one equity-based compensation plan from which stock-based compensation awards can be granted to employees, directors and consultants. The following table summarizes stock option activity for the three months ended March 31, 2008:
| | | | | | | | | |
| | | | | | | Weighted Average |
| | | Number of Shares | | Exercise Price |
| | | |
| Outstanding at December 31, 2007 | | | 39,861,090 | | | $ | 0.12 | |
| Granted | | | — | | | | — | |
| Exercised | | | — | | | | — | |
| Forfeited or Expired | | | (133,333 | ) | | | 0.36 | |
| | | |
| Outstanding at March 31, 2008 | | | 39,727,757 | | | $ | 0.12 | |
| | | | | | | | | |
| Exercisable at March 31, 2008 | | | 34,658,916 | | | $ | 0.10 | |
For the three month period ending March 31, 2008, we recorded total stock-based compensation expense of $380,346, which was allocated $37,917 to research and development expense and $308,409 to general and administrative expense. For the three month period ending March 31, 2007, total stock-based compensation expense was $45,755, and was allocated $7,813 to research and development expense and $37,942 to general and administrative expense. As of March 31, 2008, there was $2,011,716 of unrecognized compensation expense related to stock-based compensation arrangements, which is expected to be recognized over a weighted average period of 1.7 years.
The following table sets forth fair value per share information, including related weighted average assumptions, used to determine stock-based compensation cost for our stock options consistent with the requirements of Statement of Financial Accounting Standards No.123 (revised 2004),Share-Based Payments(“SFAS 123R”). We use a Black-Scholes model for determining the grant date fair value of our stock option grants.
| | | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2008 | | 2007 |
| | | |
| Weighted average fair value per share of options granted | | | n/a | | | $ | 0.31 | |
| Weighted average assumptions: | | | | | | | | |
| Expected volatility | | | n/a | | | | 107.91 | |
| Expected annual dividend yield | | | n/a | | | | 0.00 | % |
| Risk-free rate of return | | | n/a | | | | 4.46 | % |
| Expected option term (years) | | | n/a | | | | 7.0 | |
Compensatory Warrants
We may, from time to time, issue stock purchase warrants to consultants or others in exchange for services. The following table summarizes our compensatory warrant activity for the three months ended March 31, 2008:
F-27
| | | | | | | | | |
| | | | | | | Weighted Average |
| | | Number of Shares | | Exercise Price |
| | | |
| Outstanding at December 31, 2007 | | | 2,700,000 | | | $ | 0.33 | |
| Granted | | | 2,700,000 | | | | 0.33 | |
| Exercised | | | — | | | | — | |
| Forfeited or Expired | | | (2,700,000 | ) | | | 0.33 | |
| | | |
| |
| Outstanding at March 31, 2008 | | | 2,700,000 | | | $ | 0.33 | |
| | | | | | | | | |
| Exercisable at March 31, 2008 | | | 1,080,000 | | | $ | 0.33 | |
Expense associated with compensatory warrants was $34,020 for three month period ending March 31, 2008, all of which was allocated to general and administrative expense. No expense was recorded for the comparable period in 2007. As of March 31, 2008, there was $102,060 of unrecognized compensation expense related to compensatory warrant arrangements, which is expected to be recognized over a weighted average period of 0.8 years.
We use a Black-Scholes model for determining the grant date fair value of our compensatory warrants. The significant assumptions we used in our fair value calculations were as follows:
| | | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2008 | | 2007 |
| | | |
| Weighted average fair value per share of options granted | | $ | 0.05 | | | | n/a | |
| Weighted average assumptions: | | | | | | | | |
| Expected volatility | | | 94.86 | % | | | n/a | |
| Expected annual dividend yield | | | 0.00 | % | | | n/a | |
| Risk-free rate of return | | | 2.01 | % | | | n/a | |
| Expected option term (years) | | | 2.5 | | | | n/a | |
Investment Warrants
In addition to outstanding stock options and compensatory warrants, as of March 31, 2008 we have a total of 51,076,504 outstanding stock purchase warrants issued to investors with exercise prices ranging from $0.07 to $0.75. Such warrants have a weighted-average exercise price of $0.22 and a weighted-average remaining contractual life of 3.0 years.
5. Commitments – Manufacturing Contracts
We have entered into manufacturing contracts with third party suppliers for the production of vaccine to be used in our Phase II human clinical trials planned for 2008. At March 31, 2008, there is approximately $846,000 of unrecorded contractual commitments associated with these arrangements, for services expected to be rendered to us during the remainder of 2008.
6. Income Taxes
Because of our historically significant net operating losses, we have not been subject to income tax since inception. We maintain deferred tax assets that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These deferred tax assets are comprised primarily of net operating loss carryforwards and also include amounts relating to nonqualified stock options and research and development credits. The net deferred tax asset has been fully offset by a valuation allowance because of the uncertainty of our future profitability and our ability to utilize the deferred tax assets. Utilization of operating losses and credits may be subject to substantial annual limitations due to ownership change provisions of Section 382 of the Internal Revenue Code. The annual limitation may result in the expiration of net operating losses and credits before utilization.
7. Receipt of NIH Grant
In September 2007, the National Institutes of Health (NIH) awarded us an Integrated Preclinical/Clinical AIDS Vaccine Development (IPCAVD) grant to support our HIV/AIDS vaccine program. The project period for the grant covers a five year period commencing October 2007, with an award of approximately $3 million per year, or $15 million in the aggregate. We will utilize this funding to further our HIV/AIDS vaccine development, optimization, production and human clinical trial testing including Phase 2 human clinical trials planned for 2008. We record revenue associated with the grant
F-28
as the related costs and expenses are incurred. During the three months ended March 31, 2008, we recorded $599,991 of revenue associated with the grant, $119,936 of which was received in April 2008 and is recorded as a receivable at March 31, 2008 in the accompanying Condensed Consolidated Balance Sheet.
8. Subsequent Event – Private Placement of Common Stock and Warrants
In April and May 2008, we sold an aggregate of 4,677,419 shares of our common stock to individual accredited investors for an aggregate purchase price of $725,000. We also issued to the investors warrants to purchase an aggregate of 5,846,774 shares of common stock at a price of $0.33 per share with a four year term.
9. Subsequent Event – Common Stock Purchase Agreement
In May 2008, we signed a common stock purchase agreement with Fusion Capital Fund II, LLC, an Illinois limited liability company (“Fusion”) which provides for the sale of up to $10 million of shares of our common stock. Concurrently with entering into the common stock purchase agreement, we entered into a registration rights agreement with Fusion. Under the registration rights agreement, we agreed to file a registration statement related to the transaction with the SEC covering the shares that have been adjusted from previously reported amountsissued or may be issued to reflectFusion under the issuance of 1,032,118common stock purchase agreement. Once the SEC has declared effective the registration statement related to the transaction, we will have the right over a 25-month period to sell our shares of common stock to Fusion from time to time in amounts between $80,000 and $1 million, depending on certain conditions as set forth in the Chairmanagreement, up to an aggregate of $10 million.
The purchase price of the Boardshares related to the $10.0 million of future funding will be based on the prevailing market prices of our shares at the time of sales without any fixed discount, and CEOwe will control the timing and amount of any sales of shares to Fusion. Fusion shall not have the right or the obligation to purchase any shares of our common stock on any business day that the purchase price of our common stock is below $0.05. The common stock purchase agreement may be terminated by us at any time at our discretion without any additional cost to us. There are no negative covenants, restrictions on future financings, penalties or liquidated damages in the agreement.
In consideration for entering into the agreement, upon execution of the
Companycommon stock purchase agreement we issued to
replaceFusion 2,480,510 shares
of our common stock as a commitment fee. Also, we agreed to issue to Fusion up to an additional 2,480,510 shares as a commitment fee, on a pro rata basis, as we receive the $10 million of future funding. We had previously issued
under200,000 shares of our common stock to Fusion (together with a
personal guarantee amountingnominal cash advance) against expenses upon execution of the related term sheet. We have reserved 37,480,510 of our authorized but unissued shares, in the aggregate, for issuance pursuant to
$1,241,741 (0.02
per share).
** Net loss and per share amounts for the
quarters ended March 31, 2000 and
September 30, 2000 have been adjusted from previously reported amounts to offsetcommon stock purchase agreement (including the
difference between the quoted market price and the proceeds from stock sales
under the private placement against additional paid in capital rather than
interest expense amounting to $1,721,939 ($0.03 per share) for the quarter ended
March 31, 2000 and $343,416 ($0.01 per share) for the quarter ended September
30, 2000.
F-28
2,480,510 unissued commitment fee shares). F-29
PART II
- -------
INFORMATION NOT REQUIRED IN PROSPECTUS
- --------------------------------------
Item
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
- -----------------------------------------------------
Other Expenses of Issuance and Distribution.
The following table sets forth the variousestimated costs and expenses of the Registrant in connection with the saleoffering described in the registration statement.
| | | | | |
| SEC registration fee | | $ | 316 | |
| Legal fees and expenses | | $ | 79,684 | * |
| Accounting fees and expenses | | $ | 5,000 | * |
| Miscellaneous | | $ | 5,000 | |
| | | | |
| | | | | |
TOTAL | | $ | 90,000 | |
| | | | |
ITEM 14. Indemnification of Directors and distributionOfficers.
Section 145 of the securities being registered hereby. All amounts are
estimated except the Securities and Exchange Commission registration fee.
Amount
------
SEC registration fee $ 890.00
Accounting fees and expenses 14,000.00
Legal fees and expenses 16,000.00
Miscellaneous fees and expenses 6,500.00
----------
Total $37,390.00
----------
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
- ---------------------------------------------------
Registrant is incorporated in the State of Illinois. Section 8.75 of the
Illinois BusinessDelaware General Corporation Act defines the powers of registrant to indemnify
officers, directors, employees and agents.
In additional to the provisions of Illinois Business Corporation Act Section
8.75, and pursuant to the power granted therein, registrant has adapted Article
XII of its Bylaws whichLaw (the “DGCL”), provides, as follows:
ARTICLE XII
- -----------
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
SECTION 1 Theamong other things, that a corporation shallmay indemnify any person who was or is a party or - ---------
is threatenthreatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the corporation’s request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with the action, suit or proceeding. The power to indemnify applies (i) if such person is successful on the merits or otherwise in defense of any action, suit or proceeding or (ii) if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The power to indemnify applies to actions brought by or in the right of the corporation as well, but only to the extent of defense expenses (including attorneys’ fees but excluding amounts paid in settlement), actually and reasonably incurred and not to any satisfaction of judgment or settlement of the claim itself, and with the further limitation that in such actions no indemnification shall be made in the event of any adjudication of negligence or misconduct in the performance of his duties to the corporation, unless a court believes that in light of all the circumstances indemnification should apply.
Our bylaws provide that, to the fullest extent permitted by the DGCL, we may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the
corporation)Company) by reason of the fact that
he is or was a directors, officer, employee or agent of the
corporation or fiduciary of any employee benefit plan maintained by the
corporation, or whoperson is or was a director, officer, employee or agent of the
corporation of a fiduciary as aforesaid,Company, or
who is or was serving at the request of the
corporationCompany as a director, officer, employee
or agent
of fiduciary of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including
attorney'sattorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by
himthe person in connection with such action, suit or proceeding if
hethe person acted in good faith and in a manner
hethe person reasonably believed to be in or not opposed to the best interests of the
corporation (or, in the case of a fiduciary, the best interests of the plan and
plan participants) and, with respect to any criminal action proceeding, had no
reasonable cause to believe his conduct was unlawful. This termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contender or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporationCompany, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe
that thisthe person’s conduct was unlawful.
SECTION 2 The corporation shallOur bylaws also provide that we may indemnify any person who was or is a party or
- --------- is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the
corporationCompany to procure a judgment in its favor by reason of the fact that
hethe person is or was a director, officer, employee or agent of the
corporation or fiduciary as aforesaid,Company, or is or was serving at the request of the
corporationCompany as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including
attorney'sattorneys’ fees) actually and reasonably incurred by
himthe person in connection with the defense or settlement of such action or suit if
hethe person acted in good faith and in a manner
hethe person reasonably believed to be in or not opposed to the best interests of the
corporation (or, in the case of a fiduciary, the best
interests of the planCompany and
plan participants), except that no
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indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation,Company unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, II-1
such person is fairly and reasonably entitled to indemnifyindemnity for such expenses aswhich the Court of Chancery or such other court shall deem proper.
SECTION 3 To the extent that a
Under our bylaws, expenses (including attorneys’ fees) incurred by an officer or director officer, employeein defending any civil, criminal, administrative or agent of a
- ---------
corporation or fiduciary as aforesaid has been successful, on the merits or
otherwise, in the defense of anyinvestigative action, suit or proceeding referred to in
proceeding sections, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorney's fees) actually and
reasonably incurred by him in connection therewith.
SECTION 4 Any indemnification under section 1 and 2 hereof (unless ordered by a
- ---------
court) shall be made by the corporation only as authorized in the specific case,
upon a determination of the director, officer, employee, agent of fiduciary is
proper on the circumstances because he has met the applicable standard of
conduct set forth in said sections. Such determination shall be made (1) by the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a quorum is
not obtained, or even if obtainable, a quorum of disinterest directors so
directs, by independent legal counsel in a written opinion, or (3) by the
shareholders.
SECTION 5 Expenses incurred in defending a civil or criminal action, suit or
- --------- proceeding may be paid by the corporationCompany in advance of the final disposition of such action, suit or proceeding as authorized by the board of directors in the
specific case, upon receipt of an undertaking by or ohon behalf of thesuch director officer, employee or agentofficer to repay such amount unlessif it shall ultimately be determined that hesuch person is not entitled to be indemnified by the corporationCompany. Such expenses (including attorneys’ fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as authorized in this Article.
SECTION 6we deem appropriate.
The indemnification and advancement of expenses provided by this Article shallour bylaws is not be deemed
- ---------
exclusive, of any other rights to which those seeking indemnification may be
entitled under any bylaws, agreement, vote of shareholders or disinterested
directors, or otherwise, both as to action in hissuch person’s official capacity and as to action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent, and shall
incur to the benefit of the heirs, executors and administrators of such person.
SECTION 7 The corporationoffice.
Our bylaws also provide that we may purchase and maintain insurance on behalf of any
- --------- person who is or was a director, officer, employee or agent of the corporation
of fiduciary,Company, or who is or was serving at the request of the corporation as a
director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this Article.
SECTION 8 In the case of a merger, the term "corporation" shall include, in
- ---------
additional to the surviving corporation, any merging corporation absorbed in a
merger, which if its separate existence had continued, would have had the power
and authority to indemnify its directors, officers and employees or agents, so
that any person who was a director, officer, employee or agent of such merging
corporation, or was serving at the request of another corporation,Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall standagainst any liability asserted against such person and incurred by such person in the same position under the
provisionsany such capacity, or arising out of this section with respect to the surviving corporationsuch person’s status as such, personwhether or not the Company would have with respectthe power to indemnify such merging ifperson against such liability. The Company maintains an insurance policy providing for indemnification of its separate existence had
continued.
SECTION 9 For the purposeofficers, directors and certain other persons against liabilities and expenses incurred by any of this Article, referenced to "other enterprises"
- ---------
shall include employee benefit plans; reference to "fines" shall include any
excise tax assessed on a person with respect to an employee benefit plan;them in certain stated proceedings and references to the phrase "serving at the request of the corporation" shall
include any service as a director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or beneficiaries. A person who acted
in good faith and in a manner he or she reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the corporation" as referred to in this Article.under certain stated conditions.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
ITEM 15. Recent Sales of Unregistered Securities.
Recent Sales of Unregistered Securities
GeoVax Labs, Inc., an Illinois corporation
In September 2006, we issued 490,332,103 shares of our common stock to the former shareholders of GeoVax, Inc. in connection with the Merger whereby GeoVax, Inc. became our wholly owned subsidiary. In January 2006, we also issued 20,000,000 shares of our common stock to Mr. Andrew J. Kandalepas, our former Chief Executive Officer and President, for services rendered in connection with the Merger.
In June 2006, we issued $2 million in convertible promissory notes to an individual accredited investor. The notes were converted into 6,666,666 shares of our common stock upon the amendment of our articles of incorporation increasing our authorized common stock to 850,000,000 shares which occurred in September 2006.
In November 2006, we issued 2,841,274 shares of our common stock to Crescent International Ltd. (“Crescent”) pursuant to a “cashless” exercise of all remaining stock purchase warrants held by Crescent. As a result of the “cashless” exercise, we withheld from the warrant exercise 2,315,139 shares valued at $0.395 per share, the fair market value of the shares on the exercise date.
In January 2007, we issued an aggregate of 1,543,210 shares of our common stock to two individual accredited investors for an aggregate purchase price of $250,000. In January 2007, we also issued 123,550 shares of our common stock to a former employee for an aggregate purchase price of $5,000 pursuant to the exercise of stock options.
In November and December 2007, we issued an aggregate of 16,857,739 shares of our common stock and warrants to purchase an aggregate of 26,733,470 shares of our common stock at $0.33 per share to 29 individual accredited investors for an aggregate purchase price of $2,612,950. We also granted these investors certain “piggyback” registration rights.
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In December 2007, we also issued 1,935,484 shares of our common stock and warrants to purchase an aggregate of 1,571,429 shares of our common stock at $0.33 per share to an institutional investor for an aggregate purchase price of $300,000. We also granted this investor certain “piggyback” registration rights.
In January and March 2008, we issued an aggregate of 300,000 shares of our common stock and a warrant to purchase 2,700,000 shares of our common stock at $0.33 per share to Equinox One Consulting, LLC (“Equinox One”) for public and financial relations services to be rendered to us during 2008. The warrant vests in installments with 1,080,000 shares already vested and 540,000 shares scheduled to vest in each of June 30, September 30, and December 31, 2008. Pursuant to our consulting agreement with Equinox One, we expect to issue 100,000 additional shares of our common stock on each of June 30 and September 30, 2008.
During April and May 2008, we sold to fifteen individual accredited investors 8,806,451 shares of our common stock and warrants to purchase an aggregate of 14,104,839 shares of common stock at an exercise price of $0.33 per share for an aggregate purchase price of $1,365,000. We also granted these investors certain “piggyback” registration rights.
On May 8, 2008, we entered into a $10.0 million common stock purchase agreement with Fusion Capital Fund II, LLC, an Illinois limited liability company. We issued to Fusion Capital 2,480,510 shares as a commitment fee. We had previously issued 200,000 shares to Fusion Capital as an expense reimbursement upon execution of the related term sheet. See “The Fusion Transaction.”
No underwriters or placement agents were used in the above transactions. We relied upon the exemptions from registration contained in Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder as to all of the transactions, as the investors were either deemed to be sophisticated with respect to the investment in the securities due to their financial condition and/or involvement in our business or were accredited investors. Restrictive legends were placed on the certificates evidencing the securities issued in all of the above transactions.
GeoVax Labs, Inc., a Delaware corporation
On June 18, 2008, GeoVax Labs, Inc., a Delaware corporation, issued approximately 743,414,825 shares of its common stock to former holders of common stock of GeoVax Labs, Inc., an Illinois corporation on a one-for-one basis. Outstanding options and warrants to acquire approximately 110,009,102 shares of common stock of the Illinois corporation were converted into the right to acquire shares of the Delaware corporation on a one-for-one basis.
The Delaware corporation relied upon SEC Rule 145(a)(2). The transaction was a statutory merger in which the securities of the Illinois corporation were exchanged for the securities of the Delaware corporation and the transaction’s sole purpose was to change the issuer’s domicile from Illinois to Delaware.
ITEM 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
| | |
| Exhibit | | |
| Number | | Description |
| 3.1 | | Certificate of Incorporation (1) |
|
| 3.2 | | Bylaws (1) |
|
| 5.1* | | Opinion of Womble Carlyle Sandridge & Rice, PLLC |
|
| 10.2** | | Employment Agreement with Andrew Kandalepas (2) |
|
| 10.3** | | Employment Agreement with Mark Reynolds (3) |
|
| 10.4** | | GeoVax Labs, Inc. 2006 Equity Incentive Plan (4) |
|
| 10.5 | | License Agreement (as amended and restated) between GeoVax, Inc. and Emory University, dated August 23, 2002 (5) |
|
| 10.6 | | Technology Sale and Patent License Agreement between GeoVax, Inc. and MFD, Inc., dated December 26, 2004 (5) |
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| | |
| Exhibit | | |
| Number | | Description |
| 10.7 | | Equipment and Ground Sublease between GeoVax, Inc. and EmTech Biotechnology Development, Inc., dated December 1, 2001, together with amendment dated August 18, 2003 (5) |
|
| 10.8 | | Equipment and Ground Sublease Amendment dated November 22, 2006 (2) |
|
| 10.9 | | Consulting Agreement and Warrant Agreement between GeoVax Labs, Inc. and Equinox One Consulting LLC (6) |
|
| 10.10** | | Employment Agreement with Robert T. McNally (7) |
|
| 10.11** | | Consulting Agreement with Donald G. Hildebrand (7) |
|
| 10.13 | | Common Stock Purchase Agreement, dated as of May 8, 2008, by and between the GeoVax Labs, Inc. and Fusion Capital Fund II, LLC. (8) |
|
| 10.14 | | Registration Rights Agreement, dated as of May 8, 2008, by and between the GeoVax Labs, Inc. and Fusion Capital Fund II, LLC (8) |
|
| 21.1 | | Subsidiaries of the Registrant (2) |
|
| 23.1* | | Consent of Porter Keadle Moore LLP, an independent registered public accounting firm |
|
| 23.2* | | Consent of Tripp, Chafin & Causey LLC, an independent registered public accounting firm |
|
| 23.3* | | Consent of Womble Carlyle Sandridge & Rice, PLLC (contained in the opinion filed as Exhibit 5.1 hereof) |
| | |
| * | | Filed herewith |
|
| ** | | Indicates a management contract or compensatory plan or arrangement |
| (1) | | Incorporated by reference to the Exhibit with the same number in the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 23, 2008. |
| (2) | | Incorporated by reference from the registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2007. |
| (3) | | Incorporated by reference from the registrant’s Form 10-Q filed May 12, 2008. |
| (4) | | Incorporated by reference from the registrant’s definitive Information Statement (Schedule 14C) filed with the Securities and Exchange Commission on August 18, 2006. |
| (5) | | Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 4, 2006. |
| (6) | | Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2008. |
| (7) | | Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 21, 2008. |
| (8) | | Incorporated by reference from the registrant’s current Report on Form 8-K filed with the Securities and Exchange Commission on May 12, 2008. |
(b) Financial Statement Schedules.
Schedule II—Valuation and Qualifying Accounts for the years ended December 31, 2007, 2006 and 2005 (unaudited) is included in the Financial Statements at page F-19.
All other financial statement schedules have been omitted because they are not applicable or not required or because the information is included elsewhere in the Consolidated Financial Statements or the Notes thereto.
ITEM 17. Undertakings.
a. The undersigned registrant hereby undertakes:
| 1. | | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
| i. | | To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; |
|
| ii. | | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, |
II-4
| | | individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and |
|
| iii. | | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
| 2. | | That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
|
| 3. | | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
|
| 4. | | That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: |
| i. | | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; |
|
| ii. | | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; |
|
| iii. | | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and |
|
| iv. | | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
|
(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of
registrantthe small business issuer pursuant to the foregoing provisions, or otherwise,
registrantthe small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the
Act and is, therefore, enforceable. In
the event that a claim for indemnification against such liabilities (other
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than the payment by registrant of expenses incurred in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the questions whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such an
issue.
Except to the extent herein above set forth, there is no charter provision,
bylaw, contract, arrangement or statute pursuant to which any director or
officer of registrant is indemnified in any manner against any liability which
he may incur in his capacity as such.
Item 15. Recent Sales of Unregistered Securities
Within the past three years, the registrant has sold the following securities
that were not registered under the Securities Act. The purchases and sales were
exempt pursuant to Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder, as transactions by an issuer not involving a public
offering, where the purchasers represented their intention to acquire the
securities for investment only, not with a view to distribution, and received or
had access to adequate information about the registrant.
1. In May 1999, the Company issued 150,000 shares to two accredited
investors, Peter Tsolinas and Ernest Kezios, in exchange for $82,500. We
undertook this transaction to raise funds for general working capital purposes.
In addition to the shares the Company issued warrants to purchase 150,000 shares
of common stock at an exercise price of $0.55 per share. The warrants are
exercisable immediately and expire in three years. The warrants were valued at
$53,250 using the Black-Scholes securities valuation model, assuming among other
things, a 6% risk free interest rate, 0% dividend yield, 5 year life and 120%
volatility. The purchase and sale were exempt pursuant to Rule 506 and
Regulation D as transactions by an issuer not involving a public offering, where
the purchases represented their intention to acquire the securities for
investment only, not with a view to distribution, and received or had access to
adequate information about the registrant, consisting of periodic reports filed
pursuant to Section 13(a) and 15 (d) of the Exchange Act
2. In May 1999, the Company issued 586,764 common shares in exchange for
$240,000 of the remaining principal of the Convertible Debentures-2001A. That
closed out all debts the Company had in relation to the Convertible Debentures.
3. On May 28, 1999 the Company signed a Stock Purchase Agreement with
Crescent International Ltd. ("Crescent"), an investment company managed by
GreenLight (Switzerland) SA, which allows the Company and obligates Crescent to
purchase shares from the Company based on terms and conditions outlined in the
agreement. We undertook this transaction to raise funds for general working
capital purposes. In total Crescent agreed to purchase up to $2,250,000 of the
common stock within the next twenty-four months. Crescent agreed to purchase
from the Company shares based on ninety percent of the daily average trading
value, which is computed by multiplying the closing bid price by the daily
volume of the Company's common stock traded average over the twenty days prior
to closing. In connection therewith the Company sold to Crescent 1,048,951
shares for $450,000 at an average price of $0.43 per share including $58,000 of
closing fees. The Company has the right to sell additional shares with an
interval of 25 business days with a minimum of $100,000 per sale and a maximum
of $500,000 based on the average daily value as described above. In addition to
the stock, Crescent received an Incentive Warrant to purchase 750,000 common
shares at a price of $0.6435 per share. The Warrants were valued at $235,500
using Black-Scholes securities valuation model assuming among other things 6%
risk free rate, 0% dividend yield, five years life and 120% volatility. Under
this agreement, on May 28, 1999 the Company sold to Crescent 350,000 shares for
$148,050 at an average price of $0.423 per share, including $2,961 of closing
fees.
4. In the third quarter of 1999, the Company issued 14,963 treasury shares
and 2,086,540 common shares to a group of eight accredited investors in exchange
for $598,817 or an average of $0.29 per share. We undertook this transaction to
raise funds for general working capital purposes. In addition to the shares the
Company issued warrants to purchase 1,651,600 shares of common stock at an
average exercise price of $0.47 per share. The warrants are exercisable
immediately and expire in three to five years. The Warrants were valued at
$443,622 using Black-Scholes securities valuation model assuming among other
things 6% risk free rate, 0% dividend yield, five years life and 120%
volatility. The purchase and sale were exempt pursuant to Rule 506 and
Regulation D as transactions by an issuer not involving a public offering, where
the purchasers represented their intention to acquire the securities for
investment only, not with a view to distribution, and received or had access to
adequate
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information about the registrant, consisting of periodic reports filed pursuant
to Section 13(a) and 15 (d) of the Exchange Act.
5. During the third quarter, the Company agreed to issue a total of
407,868 shares to satisfy certain payables in the cumulative amount of $223,825
or approximately $0.55 per share. The issuance was exempt pursuant to Section
4(2) as transactions by an issuer not involving a public offering.
6. In September 1999, a Warrant for a total of 100,000 shares that was
issued in July 1999 was exercised by James Stella at $0.53 per share. The
Company received a total of $53,000 from such exercise. We used the funds for
general working capital purposes.
7. On October 27, 1999 in connection with the Stock Purchase Agreement
signed by the Company on May 28, 1999 with Crescent, the Company sold to
Crescent 447,012 shares for $141,935 at an average price of $0.32 per share,
including $2,897 of closing fees.
8. In November 1999, the Company issued 457,650 shares to three accredited
investors, Brian Smith, Dan Schlaphohl and Paul Zeedyk, in exchange for $156,500
or $0.33 per share. We undertook this transaction to raise funds for general
working capital purposes. The purchase and sale were exempt pursuant to Rule 506
and Regulation D as transactions by an issuer not involving a public offering,
where the purchasers represented their intention to acquire the securities for
investment only, not with a view to distribution, and received or had access to
adequate information about the registrant, consisting of periodic reports filed
pursuant to Section 13(a) and 15 (d) of the Exchange Act.
9. During the third quarter of 1999 a Warrant for 302,858 shares at $0.20
was exercised by Dan Schlapkohl. The Company received a total of $60,285 for the
shares. We applied these proceeds to general working capital.
10. In November 1999, in exchange for services rendered, the Company issued
300,000 shares to Nick Fegen, a consultant. The purchase and sale were exempt
pursuant to Section 4(2) as a transaction by an issuer not involving a public
offering
11. In December 1999, the Company converted $70,000 of short-term notes
including $5,000 of interest from Jim Lekos into 350,000 shares. The purchase
and sale were exempt pursuant to Rule 506 and Regulation D as transactions by an
issuer not involving a public offering, where the purchaser represented its
intention to acquire the securities for investment only, not with a view to
distribution, and received or had access to adequate information about the
registrant, consisting of periodic reports filed pursuant to Section 13(a) and
15 (d) of the Exchange Act.
12. In December 1999, the Company issued 362,858 shares in exchange for
$72,572 from two accredited investors, Steve Notaro and Dan Schlapkohl. We
undertook this transaction to raise funds for general working capital purposes.
In addition to shares, the Company issued two Warrants for the total of 362,858
common shares to the investors with a strike price of $0.20. The Warrants were
valued at $68,637 using Black-Scholes securities valuation model assuming among
other things 6% risk free rate, 0% dividend yield, five years life and 120%
volatility. The purchase and sale were exempt pursuant to Rule 506 and
Regulation D as transactions by an issuer not involving a public offering, where
the purchasers represented their intention to acquire the securities for
investment only, not with a view to distribution, and received or had access to
adequate information about the registrant, consisting of periodic reports filed
pursuant to Section 13(a) and 15 (d) of the Exchange Act.
13. During the first and second quarter of 2000, the Company conducted a
private placement of 4,654,613 common shares and approximately 1,300,000
warrants to a group of accredited investors in exchange for approximately
$7,300,000. The proceeds were used to settle the majority of trade payables, for
day-to-day operations and to start the development of the set-top box. The
purchase and sale were exempt pursuant to Rule 506 and Regulation D as
transactions by an issuer not involving a public offering, where the purchasers
represented their intention to acquire the securities for investment only, not
with a view to distribution, and received or had access to adequate information
about the registrant, consisting of periodic reports filed pursuant to Section
13(a) and 15 (d) of the Exchange Act.
14. In January 2000, the Company issued 480,000 shares to Bulfon S.A. in
exchange for cancellation of $300,000 of customer deposits. The purchase and
sale were exempt pursuant to Section 4(2) as a transaction by an issuer not
involving a public offering.
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15. In January 2000, the Company issued warrants to Nick Fegen, an
accredited investor, for services rendered, to purchase 350,000 shares at an
exercise price of $1.00. The purchase and sale were exempt pursuant to Section
4(2) as a transaction by an issuer not involving a public offering
16. In January 2000, the Company issued 500,000 shares to Provonat
Technologies Limited for services rendered in relation to the set-top box
agreement with Estel Telecommunications S.A. The purchase and sale were exempt
pursuant to Section 4(2) as a transaction by an issuer not involving a public
offering.
17. In April 2000, the Company completed its private placement and issued
3,630,000 warrants to an investment banker, Cutter and Co., in lieu of
consulting fees. The purchase and sale were exempt pursuant to Rule 506 and
Regulation D as transactions by an issuer not involving a public offering, where
the purchaser represented its intention to acquire the securities for investment
only, not with a view to distribution, and received or had access to adequate
information about the registrant.
18. On April 26, 2000, the Company completed a common stock purchase
agreement, escrow agreement and registration rights agreement with Techrich
International Limited ("Techrich"), an accredited institutional investor. These
agreements provide a $100,000,000 equity line of credit as the Company requests
over an 18 month period, in return for common stock and warrants to be issued to
the investor. Once every 22 days, the Company may request a draw of up to
$10,000,000 of that money, subject to a maximum of 18 draws. The maximum amount
the Company actually can draw down upon each request will be determined by the
volume-weighted average daily price of the Company's common stock for the 22
trading days prior to its request and the average trading volume for the 45
trading days prior to the request. Each draw down must be for at least $250,000.
Use of a 22 day trading average was negotiated to reduce the impact of market
price fluctuations over any calendar month, which generally includes 22 trading
days. At the end of a 22-day trading period following the drawdown request, the
amount of shares is determined based on the volume-weighted average stock price
during that 22-day period in accordance with the formulas in the common stock
purchase agreement. We undertook this transaction to raise funds for general
working capital purposes.
19. On April 28, 2000, the Company filed with the Securities and Exchange
Commission a Form S-1 registration statement relating to 15,332,560 shares of
common stock issued to stockholders in private transactions, 11,958,963 shares
underlying options and warrants previously issued to employees, and 6,000,000
shares to be issued when the Company requests a drawdown under the Techrich
common stock purchase agreement.
20. On July 28, 2000, the Securities and Exchange Commission declared the
registration statement effective. Pursuant to the common stock purchase
agreement with Techrich, the Company issued to Ladenburg, Thalman, an
institutional investor, as a placement fee warrants to purchase 250,000 shares
of common stock at an exercise price of $5.481.
21. On July 31, 2000, the Company issued a drawdown notice in connection
with the common stock purchase agreement with Techrich for $5,000,000. We
undertook this transaction to raise funds for general working capital purposes.
Upon receipt of the funds, the Company issued 1,354,617 shares of common stock
and warrants to purchase 101,463 shares of common stock at exercise prices
ranging from $4.06 to $4.22.
22. In September 2000, the Company issued 73,750 stock options to certain
employees under employment agreements. At the time of issuance, the option price
was below the market price and the Company recorded $70,622 as additional
compensation expense. The purchase and sale were exempt pursuant to Section 4(2)
as transactions by an issuer not involving a public offering.
23. On October 17, 2000, the Company issued a drawdown notice in connection
with the common stock purchase agreement with Techrich for $2,000,000. We
undertook this transaction to raise funds for general working capital purposes.
Upon receipt of the funds, the Company issued 781,999 shares of common stock and
warrants to purchase 44,646 shares of common stock at exercise prices ranging
from $3.26676 to $4.4369.
24. On October 20, 2000 the Company entered into an agreement with Best
S.A. to act as its distributor/agent in Greece. On October 26, 2000 the Company
issued 1,550,000 shares of restricted stock to Best S.A. as a performance bond
to assure the Company's compliance with the Set-Top Box Agreement by and between
the Company and Estel S.A. These shares have not been included in the issued and
outstanding shares as of December
II-5
31, 2000, as Best S.A. has acknowledged that they would return the shares to the
Company upon satisfactory compliance with the Set-Top Box Agreement. The
agreement with Best S.A. requires the Company to register these shares with the
Securities and Exchange Commission during 2000. To secure performance of the
Company's obligation to register these shares, Andrew J. Kandalepas, Chairman of
the Board and CEO of the Company, granted to Best S.A. a security interest in
1,032,118 shares of Company stock owned by him.
25. In December 2000, the Company issued to Brian Smith, Mark Thompson and
Stavros Galanakis, 22,000 shares of common stock and warrants to purchase
148,265 shares of common stock at exercise prices ranging from $1.0312 to $1.25,
as payment for certain advertising and promotional expenses and consulting
services related to the establishment of an office in Europe. The purchase and
sale were exempt pursuant to Section 4(2) as a transactions by an issuer not
involving a public offering.
26. In December 2000, the Company re-priced approximately 3,012,000
warrants it had previously issued to outside consultants. The warrants were
originally issued with an exercise price ranging from $10.00 to $5.00, and were
re-priced with exercise prices ranging from $5.00 to $2.00 per share. The
re-pricing created a charge to earnings of approximately $234,000, which was
calculated using the Black-Scholes pricing model assuming 0% dividend yield,
risk free interest rate of 6%, volatility factor of 224% and an expected life of
2.6 years.
27. During the first quarter of 2001, the Company received proceeds in the
amount of $102,300 for the exercise of 210,000 warrants issued to Joe Lemberger
and Ryan Miller. Additionally, employees exercised 4,000 stock options at a
price of $.50 per share. The proceeds were used for general working capital
purposes.
28. During the second quarter of 2001, employees exercised 4,000 stock
options at a price of $.50 per share.
29. On April 3, 2001, the Company and Estel Telecommunications S.A.
cancelled the performance bond issued on October 26, 2000 and the 1,550,000
shares of restricted stock held by Best S.A. were returned to the Company. In
connection with the cancellation of the shares, Best S.A. executed the personal
guarantee of Mr. Andrew J. Kandalepas, which he had granted to secure the
performance of the Company's obligation to register the 1,550,000 shares issued
in connection with the performance bond and retained the 1,032,118 shares. The
set-top box agreement with Estel Telecommunications S.A. terminated on July 1,
2001 due to lack of performance on behalf of Estel. This transaction was entered
into on behalf of the Company and therefore the Company recorded an expense of
$1,241,741, with an offsetting entry to additional paid in capital.
30. In April 2001, the Company issued to The DeClan Group, consultants,
30,000 shares of common stock and warrants to purchase 70,000 shares of common
stock at an exercise price of $1.36 per share, as payment for certain
promotional and consulting services. In September 2001, the Company issued
additional warrants to purchase 16,666 shares of common stock at an exercise
price of $1.395 per share to finalize the arrangement with the consultants. The
purchase and sale were exempt pursuant to Section 4(2) as transactions by an
issuer not involving a public offering.
31. Effective July 1, 2001, the Company completed the acquisition of
substantially all of the assets of Suncoast Automation, Inc., a wholly owned
subsidiary of ProtoSource Corporation, pursuant to an Asset Purchase Agreement.
The purchase price was 766,058 shares of the Company's common stock valued at
approximately $1.1 million based on the closing bid price of $1.47 per share on
June 29, 2001. The purchase and sale were exempt pursuant to Section 4(2) as a
transaction by an issuer not involving a public offering.
32. During the third quarter of 2001, the Company received proceeds in the
amount of $75,000 for the exercise of 75,000 warrants by TDG Limited. Proceeds
were used for general working capital purposes.
33. On August 14, 2001 the Company issued a drawdown notice in connection
with the common stock purchase agreement with Techrich for $300,000. We
undertook this transaction to raise funds for general working capital purposes.
Upon receipt of the funds, the Company issued 258,968 shares of common stock and
warrants to purchase 22,006 shares of common stock at an exercise price of
$1.14516.
34. On September 13, 2001 the Company filed with the Securities and
Exchange Commission a Form S-3 registration statement relating to 6,964,724
shares of common stock. The shares were issued by the Company in respect of the
following: (i) 766,058 shares were issued by the Company in connection with the
acquisition of the net assets of Suncoast; (ii) 52,000 shares were issued by the
Company as payment for certain advertising and
II-6
promotional expenses and consulting services; and (iii) 6,146,666 shares
issuable by the Company to shareholders upon the exercise by them of issued and
outstanding warrants and options. On September 27, 2001, the Securities and
Exchange Commission declared the registration statement effective.
35. During the fourth quarter of 2001, employees exercised 27,600 stock
options at a price of $.89 per share.
36. In November 2001, the Company issued to Ensign Resources and Brian
Smith warrants to purchase 175,000 shares of common stock at exercise prices
ranging from $1.00 to $1.50, as payment for certain advertising and promotional
expenses. The purchase and sale were exempt pursuant to Section 4(2) as a
transaction by an issuer not involving a public offering.
37. On December 20, 2001, the Board of Directors approved the issuance of
1,032,118 shares to the Chairman of the Board and CEO of the Company to replace
the shares that Best S.A. retained under the personal guarantee. The shares were
valued at $1,241,741 based on the closing price of $1.20 on April 3, 2001. The
purchase and sale were exempt pursuant to Section 4(2) as a transaction by an
issuer not involving a public offering.
Except as set forth above, no underwriters were employed in any of the above
transactions. Appropriate legends wre affixed to the share certificates and
warrants issued in the above transactions.
II-7
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
- ----------------------------------------------------
Exhibit No. Description of Document
- --------------------------------------
*3(1) Certificate of Incorporation filed July 27, 1990, incorporated herein
by reference to exhibit 7(c)(1) of Form 8-K filed May 14, 1991.
*3(2) By-Laws as amended, incorporated herein by reference to exhibit 3(2) of
Form 10-K for the fiscal year ended December 31, 1997.
*4(1) Specimen Common Stock Certificate incorporated herein by reference to
exhibit 4(1) of Form S-18 filed June 1, 1990.
*10(1) Agreement and Plan of Reorganization incorporated herein by reference
to exhibit 7(c) of Form 8-K filed April 4, 1991.
*10(2) Plan and Agreement of Merger incorporated herein by reference to
exhibit 7(c)(1) of Form 8-K filed May 14, 1991.
*10(3) Computer Technology License Agreement dated November 12, 1997, between
Phoenix Technology, Inc. and Dauphin Technology, Inc. included as an
exhibit to Form S-1 filed march 17, 1998, incorporated herein by
reference.
*10(4) License Agreement dated May 3, 1996, between Microsoft Corporation and
Dauphin Technology, Inc. included as an exhibit to Form S-1 filed March
17, 1998, incorporated herein by reference.
*10(5) Equity line of credit agreement by and between Techrich International
Limited and Dauphin Technology, Inc. dated April 12, 2000 including
Common Stock Purchase Agreement, Registration Rights Agreement, Escrow
Agreement and Form of a stock Purchase Warrant included as an exhibit
to Form 8-K filed on April 20, 2000 incorporated herein by reference.
*10(6) Amendment No. 1 to Common Stock Purchase Agreement dated July 10, 2000
between Dauphin Technology, Inc. and Techrich International Limited.
*10(7) Asset Purchase Agreement, by and among the Company, ADD Acquisition
Corp., T & B Design, Inc. (f/k/a Advanced Digital Designs, Inc.),
Advanced Technologies, Inc., 937 Plum Grove Road Partnership, the
Stockholders of T & B Design, Inc. and Advanced Technologies, Inc. and
the partners of 937 Plum Grove Road Partnership, dated August 18, 2000
included as an exhibit to Form 8-K/A filed on September 25, 2000
incorporated herein by reference.
*10(8) Asset Purchase Agreement, by and among the Company, Suncoast
Acquisition Corp., ProtoSource Corporation and Suncoast Automation,
Inc. dated July 1, 2001 included as an exhibit to Form 8-K filed on
July 14, 2001 incorporated herein by reference.
*10(9) Securities Purchase Agreement, by and between the Company and Crescent
International Ltd. dated September 28, 2001 including Registration
Rights Agreement and Form of Stock Purchase Warrant included as an
exhibit to Form 8-K filed on October 12, 2001 incorporated herein by
reference.
24(1) Consent of Grant Thornton LLP., independent public accountants.
24(2) Consent of Rieck and Crotty, P.C.
* Previously filed or incorporated by reference.
II-8
Item 17. UNDERTAKINGS
- ----------------------
(A) Subject to the terms and conditions of Section 15(d) of the Securities
--------------------------------------------------------------------------
Exchange Act of 1934, the undersigned Company hereby undertakes to file
-------------------------------------
with the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant
to authority conferred in the section.
(B) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, post-effective amendment to this registration statement:
(i) To include any Prospectus required by Section 10(a) of
the Securities Act of 1993;
(ii) To disclose in the Prospectus any change in the
offering price at which any registering shareholders subject
to the requirement of a Pricing Amendment are offering their
registered securities for sale;
(iii) To reflect in the Prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the
registration statement;
(iv) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That for the purpose of determining any liability under the
Securities Act of 1933 each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(C) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Company pursuant to the forgoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the
Companysmall business issuer of expenses incurred or paid by a director, officer or controlling person of the
Companysmall business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the
Companysmall business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the
Securities Act
of 1933 and will be governed by the final
adjustmentadjudication of such issue.
II-9
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Palatine
andAtlanta, State of Illinois,Georgia, on the 24th27th day of April, 2002.
DAUPHIN TECHNOLOGY, INC.
By: /s/ Andrew J. Kandalepas
------------------------
Andrew J. Kandalepas, June 2008.
| | | | |
| GEOVAX LABS, INC.
| |
| By: | /s/ Robert T. McNally Ph.D. | |
| | Robert T. McNally Ph.D. | |
| | President and Chief Executive Officer of
GeoVax Labs, Inc., a Delaware corporation | |
|
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert T. McNally and Mark W. Reynolds, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead in any and all capacities, to sign any or all amendments to this Registration Statement on Form S-1 (including post-effective amendments), and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirementrequirements of the Securities Act of 1933, as amended,
this registration statementRegistration Statement has been duly signed by the following persons in the capacitycapacities and on the dates indicated. SIGNATURE TITLE DATE
/s/ Andrew J. Kandalepas Chairman of the Board/President/ April 24, 2002
- ------------------------
Andrew J. Kandalepas Chief Executive Officer
/s/ Harry L. Lukens, Jr. Chief Financial Officer/ April 24, 2002
- ------------------------
Harry L. Lukens, Jr. Assistant Secretary
/s/ Christopher L. Geier Executive Vice President April 24, 2002
- ------------------------
Christopher L. Geier
/s/ Jeffrey Goldberg Secretary/Director April 24, 2002
- --------------------
Jeffrey Goldberg
/s/ Gary E. Soiney Director April 24, 2002
- ------------------
Gary E. Soiney
/s/ Mary Ellen W. Conti Director April 24, 2002
- -----------------------
Mary Ellen W. Conti
| | | | |
| Name | | Title | | Date |
|
| /s/ Donald G. Hildebrand | | Director | | June 27, 2008 |
| | | | |
| | | | |
| /s/ Andrew J. Kandalepas | | Director | | June 27, 2008 |
| | | | |
| | | | |
| /s/ Dean G. Kollintzas | | Director | | June 27, 2008 |
| | | | |
| | | | |
| /s/ Robert T. McNally | | Director | | June 27, 2008 |
| | President & Chief Executive Officer
(Principal Executive Officer) | | |
| | | | |
| /s/ Mark W. Reynolds | | Chief Financial Officer | | June 27, 2008 |
| | (Principal Financial and Accounting Officer) | | |
| | | | |
| /s/ Harriet L. Robinson | | Director | | June 27, 2008 |
| | | | |
| | | | |
| /s/ John N. Spencer, Jr. | | Director | | June 27, 2008 |
| | | | |
II-6