EXHIBIT 99.3
ACCESS ONCOLOGY, INC. AND
SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2003
.
.
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ACCESS ONCOLOGY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 2003
Consolidated Balance Sheet 2
Consolidated Statement of Operations 3
Consolidated Statement of Stockholders' Equity 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6-18
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
ACCESS Oncology, Inc.
We have audited the consolidated balance sheet of ACCESS Oncology, Inc. and
Subsidiaries (the "Company") as of December 31, 2003, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2003, and the results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ DELOITTE & TOUCHE LLP
April 6, 2004
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ACCESS ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 102,644
Accounts receivable, net of allowance of $8,000 84,250
Prepaid expenses and other current assets 232,918
------------
Total current assets 419,812
PROPERTY AND EQUIPMENT--Net 164,809
INTANGIBLE ASSETS--Net 22,627
SECURITY DEPOSITS 87,253
------------
TOTAL ASSETS $ 694,501
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,055,472
Accrued expenses 286,391
Deferred compensation to officers 434,780
Deferred revenue 543,400
Notes payable and accrued interest 6,601,237
------------
Total current liabilities 8,921,280
OTHER LIABILITIES 70,784
------------
Total liabilities 8,992,064
------------
COMMITMENTS AND CONTINGENCIES
(Note 10)
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock Series A, $.001 par--4,000,000 shares
authorized; 3,129,998 issued and outstanding 3,130
Convertible preferred stock Series B, $.001 par--900,000 shares authorized;
837,500 issued and outstanding 838
Preferred stock--undesignated, $.001 par--5,100,000 shares authorized, 0
issued and outstanding -
Common stock, $.001 par--25,000,000 shares authorized,
10,649,387 shares issued and outstanding 10,649
Additional paid-in capital 10,644,921
Deferred compensation (255,420)
Accumulated deficit (18,701,681)
------------
Total stockholders' deficit (8,297,563)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 694,501
============
See notes to consolidated financial statements.
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ACCESS ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
REVENUES:
Service revenue $ 709,062
Other revenue 76,587
-----------
Total revenues 785,649
-----------
OPERATING EXPENSES:
Cost of services 849,914
Research and development 1,331,335
Sales and marketing 15,078
General and administrative 445,551
Stock based compensation 400,769
Depreciation and amortization 120,317
-----------
3,162,964
-----------
OPERATING LOSS (2,377,315)
INTEREST EXPENSE-Net (627,563)
-----------
LOSS FROM CONTINUING OPERATIONS (3,004,878)
LOSS FROM DISCONTINUED OPERATIONS (108,474)
-----------
NET LOSS $(3,113,352)
===========
See notes to consolidated financial statements.
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ACCESS ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2003
PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B COMMON STOCK ADDITIONAL
----------------- ---------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
BALANCES--JANUARY 1, 2003 3,129,998 $ 3,130 837,500 $ 838 10,421,258 $10,421 $10,606,915
Stock options granted - - - - - - (40,992)
Vesting of restricted common stock on December 31
at $0.20 per share - - - - 228,129 228 45,398
Warrants issued - - - - - - 33,600
Amortization of deferred compensation - - - - - - -
Net loss - - - - - - -
--------- ------- -------- ------ ---------- ------- -----------
BALANCES--DECEMBER 31, 2003 3,129,998 $ 3,130 837,500 $ 838 10,649,387 $10,649 $10,644,921
========= ======= ======== ====== ========== ======= ===========
DEFERRED ACCUMULATED
COMPENSATION DEFICIT TOTAL
BALANCES--JANUARY 1, 2003 $ (697,181) $(15,588,329) $ (5,664,206)
Stock options granted 40,992 - -
Vesting of restricted common stock on December 31
at $0.20 per share - - 45,626
Warrants issued - - 33,600
Amortization of deferred compensation 400,769 - 400,769
Net loss - (3,113,352) (3,113,352)
------------ ------------ ------------
BALANCES--DECEMBER 31, 2003 $ (255,420) $(18,701,681) $ (8,297,563)
============ ============ ============
See notes to consolidated financial statements.
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ACCESS ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(3,113,352)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss from discontinued operations 108,474
Depreciation and amortization 120,317
Stock based compensation 400,769
Accretion of warrants and deferred
financing costs 79,226
Change in assets and liabilities, net of effects of
discontinued operations:
Accounts receivable (73,250)
Prepaid expenses and other current assets (141,777)
Security deposits 18,600
Accounts payable 127,178
Accrued expenses 97,490
Deferred compensation to officers 84,780
Deferred revenue 467,250
Other liabilities (51,036)
Accrued interest on notes payable 595,064
-----------
Net cash used in operating activities (1,280,267)
-----------
CASH FLOWS FROM FINANCING
ACTIVITIES - Proceeds from notes payable 750,000
-----------
NET CASH USED IN DISCONTINUED OPERATIONS (181,144)
-----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (711,411)
CASH AND CASH EQUIVALENTS--
Beginning of period 814,055
-----------
CASH AND CASH EQUIVALENTS--
End of period $ 102,644
===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOWS INFORMATION:
Cash paid for income taxes $ 7,749
===========
See notes to consolidated financial statements.
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ACCESS ONCOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2003
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
BUSINESS--ACCESS Oncology, Inc. and Subsidiaries (the "Company") is a
biopharmaceutical company focused on acquiring, developing and
marketing novel therapeutics for cancer and related conditions. The
Company is building a portfolio of proprietary anti-cancer product
candidates primarily by in-licensing and acquiring clinical-stage
product candidates from emerging biotechnology companies that are
seeking a clinical development and marketing partner. In addition to
developing its own cancer product candidates, the Company provides
clinical trial services to other companies that develop and market
cancer products. The Company carries out its operations through the
following wholly owned internally developed subsidiaries: AOI
Pharmaceuticals, Inc. ("AOIP") and AOI Pharma, Inc. ("AOIPH"), which
seek to acquire or in-license anti-cancer product candidates, and
Online Collaborative Oncology Group, Inc. ("OCOG"), which provides
clinical trial management and site recruitment services.
The Company's operations to date have resulted in significant operating
losses and negative cash flows. As shown in the consolidated financial
statements, during the year ended December 31, 2003, the Company
incurred a net operating loss from continuing operations of $3,004,878
and a net loss of $3,113,352. On January 8, 2004, the Company entered
into a definitive merger agreement to be acquired by a wholly-owned
subsidiary of Keryx Biopharmaceuticals, Inc. ("Keryx"), a related
party. This merger was completed on February 5, 2004. The Company is
the surviving corporation and became a wholly-owned subsidiary of
Keryx.
BASIS OF PRESENTATION--The consolidated financial statements include
the accounts of the Company and its wholly owned internally-developed
subsidiaries. The Company's continuing operations consist primarily of
three subsidiaries: AOIP, AOIPH and OCOG. These consolidated financial
statements also include the assets and liabilities and operating
results of businesses that have been discontinued, which amounts are
separately classified. The Company's divested operations include the
businesses of AOI Communications, Inc. ("AOIC") and Cancer
Education.com, Inc. ("CE"), which are wholly-owned subsidiaries whose
assets were transferred to a related party in April 2003 (see Notes 11
and 12). All intercompany accounts and transactions have been
eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES--The preparation of the financial statements in
accordance with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses at the date of the financial
statements. Actual results could differ from those estimates. Some of
the more significant estimates include allowances for doubtful
accounts, depreciation and amortization of long-lived assets, valuation
of common stock and deferred tax asset valuation allowance. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash on
hand and cash invested in short-term financial instruments with a
maturity of three months or less from the date of purchase.
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PROPERTY AND EQUIPMENT--Property and equipment is stated at cost.
Depreciation and amortization is computed on the straight-line method
based on the following estimated useful lives when assets are placed
into service:
Computer and communications equipment 5 years
Computer software 5 years
Conference equipment 5 years
Furniture and fixtures 7 years
Expenditures for maintenance and repairs that do not materially extend
the useful lives of the respective assets are charged to expense as
incurred. The cost and accumulated depreciation of assets retired or
sold are removed from the respective accounts and any gain or loss is
recognized in operations.
IMPAIRMENT OF LONG-LIVED ASSETS--The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances
indicate that their carrying amount may not be recoverable. Impairment
losses are recognized when a long-lived asset's carrying value exceeds
the expected undiscounted cash flows related to that asset. The amount
of the impairment loss is the difference between the carrying value and
the fair market value of the asset. The fair market value of an asset
is determined based upon discounted cash flows.
INTANGIBLE ASSETS--Intangible assets include investigator contracts,
clinical study management service contracts, and various business
files, which are being amortized on a straight-line basis over periods
ranging from 2 to 4 years. The Company reviews its intangible assets
for impairment.
DEFERRED REVENUE--Deferred revenue is incurred when the Company
receives a deposit or prepayment for services to be performed at a
later date. Revenue is recognized as the services are provided.
REVENUE RECOGNITION--Revenues consist of clinical trial management and
site recruitment services. Revenues from providing these services are
recognized as the services are provided. As of December 31, 2003, no
revenue has been recognized by AOIP and AOIPH.
COST OF SERVICES--Cost of services consist of all costs specifically
associated with client programs such as salary, benefits paid to
personnel, payments to third-party vendors and systems and other
support facilities associated with delivering services to the Company's
clients. Cost of services are recognized as services are performed.
INCOME TAXES--Deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax basis of
assets and liabilities measured using enacted tax rates. Valuation
allowances are established when necessary to reduce deferred income tax
assets to the amount expected to be realized.
STOCK BASED COMPENSATION--The Company accounts for stock-based employee
compensation using the intrinsic value method of APB Opinion No. 25,
("APB 25") "Accounting for Stock Issued to Employees," and complies
with the disclosure provision of SFAS No. 123, "Accounting for
Stock-Based Compensation," and the amendments of SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure."
The Company accounts for stock-based compensation issued to
non-employees in accordance with the provisions of SFAS No. 123.
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If the Company had elected to follow the fair value method of
accounting for stock options in accordance with SFAS No. 123, stock
options would be valued at the date of the grant and compensation cost
would be recognized ratably over the vesting period. The Company's net
loss would have been increased to the pro forma amount indicated below:
NET LOSS:
As reported $ (3,113,352)
Pro forma (3,164,085)
The Company's calculations were made using the Black-Scholes option
pricing model, which is more fully described in Note 9.
RESEARCH AND DEVELOPMENT COSTS--Research and development costs are
expensed as incurred.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS--The carrying amount of the
Company's cash and cash equivalents, accounts receivable, prepaid
expenses and other current assets, accounts payable, accrued expenses,
deferred revenue and notes payable approximates fair market value
because of the short maturity of those instruments.
RECENT ACCOUNTING PRONOUNCEMENTS - In November 2002, the FASB issued
FIN No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others,
which addresses the disclosure to be made by a guarantor in its interim
and annual financial statements about its obligations under guarantees.
FIN 45 is effective for guarantees issued or modified starting January
1, 2003. The Company does not enter into such transactions. Therefore
the adoption of this standard did not impact its consolidated financial
position, results of operations, or disclosure requirements.
In January 2003 and revised in December 2003, the FASB issued FIN No.
46, "Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51," and an amendment to FIN 46
entitled FASB Interpretation No. 46 (revised December 2003)
"Consolidation of Variable Interest Entities ("FIN 46R"). FIN 46R
requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46R will be applied by the Company to those entities that
are considered variable interest entities as of March 31, 2004. The
Company believes that the provisions of FIN 46R will not have any
impact on the Company's consolidated financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This statement establishes standards for how an issuer
classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that
embody obligations for the issuer are required to be classified as
liabilities. This Statement shall be for the first fiscal period
beginning after December 15, 2003. The Company believes that the
provisions of FASB No. 150 will not have any impact on the Company's
consolidated financial position or results of operations.
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3. PROPERTY AND EQUIPMENT--NET
At December 31, 2003, property and equipment consists of the following:
Computer and communications equipment $ 137,407
Computer software 79,557
Conference equipment 135,995
Furnitures and fixtures 68,877
---------
421,836
Less accumulated depreciation and amortization (257,028)
---------
$ 164,809
=========
Depreciation expense amounted to $82,430 for the year ended December
31, 2003. During the year ended December 31, 2003, the Company
wrote-off certain computer and communications equipment and furniture
and fixtures which were associated with its discontinued medical
marketing business, which amounted to $34,823. This loss is included in
discontinued operations in the accompanying consolidated financial
statements (See Note 11).
4. INTANGIBLE ASSETS
On April 9, 2002, the Company completed an asset purchase agreement
with a physician practice management company pursuant to which the
Company acquired certain clinical research property and equipment
(included in respective property and equipment categories above) as
well as certain intangible assets for total consideration of $135,307
in cash. The intangible assets acquired included certain separable
intangible assets including investigator contracts, clinical study
management service contracts, and various business files. All
intangible assets acquired were determined to have finite useful lives,
as outlined by SFAS No. 142, "Goodwill and Other Intangible Assets."
The intangible assets acquired were valued at $92,427 and are being
amortized on a straight-line basis over their estimated useful lives,
which range from 2 to 4 years. At December 31, 2003, accumulated
amortization on intangible assets was $69,800. Amortization expense
amounted to $39,886 for the year ended December 31, 2003. The remaining
amortization expense of $22,627 will be recorded in the year ended
December 31, 2004.
5. NOTES PAYABLE
On January 15, 2002, the Company issued and sold to 12 purchasers,
promissory notes in the aggregate principal amount of $3,125,000. In
consideration for entering into the promissory notes, the Company also
issued to the purchasers warrants to purchase up to 468,750 shares of
its common stock at an exercise price of $5.50 per share. The warrants
had a value of approximately $445,000, of which the remaining
unamortized portion of approximately $18,000 was expensed as interest
expense in 2003. The promissory notes have an annual interest rate of
8% and are payable on the earlier of (a) five business days following
the closing of a sale of equity securities of the Company in a public
offering of the Company's securities in which gross proceeds exceed
$10,000,000 and (b) January 15, 2003 (the "Maturity Date"). On the
Maturity Date, the Company was entitled to, and did, extend the
Maturity Date for up to one year with an annual interest rate of 10%.
The Notes were due January 15, 2004. These notes were repaid subsequent
to the Company's merger with Keryx (see Note 1). At December 31, 2003,
accrued interest was $573,438 and is included in notes payable and
accrued interest in the accompanying consolidated balance sheet.
Paramount Capital, a related party, acted as a finder with respect to
certain investors and received a finder's fee of $192,500. As part of
the finder's fee, the Company issued warrants to purchase an aggregate
of 41,250 shares of its common stock. The exercise price of these
warrants is $6.05 per share. A director who is a greater than 5%
shareholder (herein
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referred to as the "Same Director") had guaranteed the principal of,
and accrued interest on, the promissory notes in the event that the
Company failed to pay such payments promptly when due, following any
permitted extension. The Company had agreed to indemnify the director
for any liability or damages arising under the guarantee of the
promissory notes, including the repayment of the principal of, and the
accrued interest on, the promissory notes. The Company's Chairman of
the Board had also guaranteed a portion of the Same Director's guaranty
of the promissory notes. The Company had agreed to indemnify the
Chairman of the Board for any liability or damages arising under his
guarantee, including any liability relating to the repayment of the
principal of, and the accrued interest on, the promissory notes. The
Company sold $175,000 and $200,000 of promissory notes and issued
26,250 and 30,000 warrants to purchase common stock to the wife of the
Chairman of the Board and to the Chief Executive Officer, respectively.
On February 1, 2002, the Company issued and sold to 18 purchasers
promissory notes in the aggregate principal amount of $1,800,000. In
consideration for entering into the promissory notes, the Company also
issued to the purchasers warrants to purchase up to 270,000 shares of
its common stock with an exercise price of $5.50 per share. The
warrants had a value of approximately $256,000, of which the remaining
unamortized portion of approximately $21,000 was expensed as interest
expense in 2003. The promissory notes have an annual interest rate of
8% and are payable on the earlier of (a) five business days following
the closing of a sale of equity securities of the Company in a public
offering of the Company's securities in which gross proceeds exceed
$10,000,000 and (b) February 1, 2003 (the "Maturity Date"). On the
Maturity Date, the Company was entitled to, and did, extend the
Maturity Date for up to one year with an annual interest rate of 10%.
The Notes are due February 1, 2004. These notes were repaid subsequent
to the Company's merger with Keryx (see Note 1). At December 31, 2003,
accrued interest was $322,200 and is included in notes payable and
accrued interest in the accompanying consolidated balance sheet.
Paramount Capital, a related party, acted as a finder with respect to
certain investors and received a finder's fee of $108,500. As part of
the finder's fee, the Company issued warrants to purchase an aggregate
of 23,250 shares of its common stock. The exercise price of these
warrants is $6.05 per share. The Same Director had guaranteed the
principal of, and accrued interest on, the promissory notes in the
event that the Company failed to pay such payments promptly when due,
following any permitted extension. The Company had agreed to indemnify
the director for any liability or damages arising under the guarantee
of the promissory notes, including the repayment of the principal of,
and the accrued interest on, the promissory notes. The Chairman of the
Board had also guaranteed a portion of the Same Director's guaranty of
the promissory notes. The Company had agreed to indemnify the Chairman
of the Board for any liability or damages arising under his guarantee,
including any liability relating to the repayment of the principal and
the accrued interest on the promissory notes.
In March 2003, the Company issued and sold a total of $400,000 of
promissory notes and issued a total of 60,000 warrants to purchase
common stock with an exercise price of $0.25 per share to the Chairman
of the Board, the Chief Executive Officer, and the Same Director. The
warrants have a value of $33,600, which will be expensed over the life
of the promissory notes. During 2003, the Company recorded an interest
charge of approximately $30,519 related to the value assigned to the
warrants on the debt. An additional interest charge of $3,081 will be
recorded during 2004. The promissory notes have an annual interest rate
of 10% and are payable on the earlier of (a) five business days
following the closing of a sale of equity securities of the Company in
a public offering of the Company's securities in which gross proceeds
exceed $10,000,000 and (b) February 1, 2004 (the "Maturity Date").
These notes were repaid subsequent to the Company's merger with Keryx
(see Note 1). At December 31, 2003, accrued interest was $31,667 and is
included in notes payable and accrued interest in the accompanying
consolidated balance sheet.
- 10 -
As part of the letter of intent signed between the Company and Keryx
(see Note 12) in December 2003, the Company issued and sold to Keryx, a
promissory note in the principal amount of $350,000. The promissory
note has an annual interest rate of 10% and is payable, together with
unpaid interest, on the earlier of (a) the closing of a merger
transaction between the Company and Keryx and (b) 30 days following the
termination of the letter of intent. At December 31, 2003, accrued
interest was $2,014 and is included in notes payable and accrued
interest in the accompanying consolidated balance sheet. This
promissory note was assumed by Keryx as part of the Company's merger
with Keryx.
6. DEFERRED COMPENSATION TO OFFICERS
Two officers of the Company have elected to defer their bonus
compensation for 2002 and 2001, which totaled $350,000. In addition,
during 2003, these two officers elected to defer a portion of their
salary totaling $84,780. Such amounts have been included in deferred
compensation to officers in the accompanying consolidated balance
sheet. The amounts due for deferred compensation are non-interest
bearing with no repayment terms and the officers have agreed not to
demand payment until the Company completes a significant public or
private offering of stock or other alternative means of financing. The
amounts due were paid subsequent to the Company's merger with Keryx
(see Note 1).
7. STOCKHOLDERS' EQUITY
COMMON STOCK--The Company is authorized to issue 25,000,000 shares of
Common Stock with a par value of $.001 per share.
On May 1999, the Company issued 7,720,000 shares of common stock to the
founders of the Company for $7,720 in cash.
On July 1999, the Company issued 2,245,000 shares of common stock to
the principal stockholders for $1,122,500 in cash.
RESTRICTED STOCK--On January 31, 2001, the Company granted 912,516
options to purchase common stock to the President (and currently chief
executive officer) of the Company. The options, exercisable at $0.20
per share, were scheduled to be vested over four years, with 25%
vesting on December 31, 2001 and thereafter in equal installments over
the next three years through December 31, 2004. The fair market value
of the Company's stock on January 31, 2001 was estimated to be
approximately $0.81 per share. Accordingly, the Company recorded a
deferred compensation charge of $556,635 on the date of issuance with a
corresponding credit to additional paid-in capital. On December 20,
2001, prior to any initial vesting, the Company permitted the option
holder to exercise the options for a total price of $182,503. The
options were converted to restricted stock whereby the Company has the
ability to purchase the unvested restricted stock at $0.20 per share at
any time until December 31, 2004 if the officer ceases to be an
employee of the Company (the "Purchase Option"). The restricted stock
vests and, accordingly, the Purchase Option terminates along the same
schedule as the original option issuance. At December 31, 2003, a total
of 684,387 shares of common stock are vested in accordance with the
restricted stock agreement and accordingly, have been recorded as
common stock. At December 31, 2003, the Company has a liability of
$45,626, which is included in other liabilities in the accompanying
consolidated balance sheet, for the remaining dollar value of the
unvested shares. The Company has the right to assign the Purchase
Option to one or more persons or entities. If the officer's employment
is terminated under certain circumstances, then the officer will
receive one additional year of vesting of the restricted stock;
provided, however, that the employment is not terminated through a
change of control (as defined in the agreement), which will result in
immediate vesting of the restricted stock and the Purchase Option will
expire. The Company recorded $139,159 of noncash compensation related
to the vested restricted stock in the year ended December 31, 2003. The
remaining restricted
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stock vested, and accordingly the Purchase Option expired, upon the
completion of the Company's merger with Keryx.
PREFERRED STOCK--The Company is authorized to issue 10,000,000 shares
of preferred stock with a par value of $.001, of which 4,000,000 shares
are designated as Series A Convertible Preferred Stock ("Series A");
900,000 shares are designated as Series B Convertible Preferred Stock
("Series B"); and 5,100,000 shares of undesignated Preferred Stock.
On March 31, 2000, the Company issued 3,129,998 shares of Series A in
exchange for $4,593,654 in cash, net of expense. On January 31, 2001,
the Company issued 837,500 shares of Series B for $1,624,697 in cash,
net of expense.
The Series A and Series B are convertible: (1) at the option of the
holder or (2) automatically upon: (a) the vote of holders of at least
50% of the Series or (b) completion of a firmly underwritten public
offering of common stock by the Company with net cash proceeds to the
Company in excess of $10,000,000.
The conversion price of the Series A and Series B is subject to a
weighted average antidilution adjustment in the event that the Company
issues additional shares (other than: (i) Common Stock issuable upon
the exercise or conversion of options, warrants, or preferred stock
outstanding as of the Series A and Series B issue dates; (ii) Common
Stock or options, issuable to employees, consultants, directors, or
scientific advisory board members of the Company, which are approved by
the Board of Directors of the Company; (iii) any securities issued upon
exercise of the Company's Stock Purchase Warrants issued to finders in
connection with the issuance of the Series A and any securities issued
upon conversion of said securities; and (iv) the Series A and Series B
and all securities issued upon conversion of each) at a purchase price
less than the applicable purchase price. The conversion price of the
Series A and Series B will also be adjusted proportionally upon
standard events, as defined in the agreements.
At any time after the first anniversary of the original issuance of the
Series A and Series B, the Company has the option to redeem each at
110% of the initial purchase price plus accrued and unpaid dividends.
Any such redemption can be of all or any part of outstanding shares.
Any partial redemption would be made on a pro rata basis among the
holders.
In the event of a liquidation, dissolution or winding up of the
Company, the holders of Series A and Series B would be entitled to
payment of the initial purchase price of the Series A and Series B,
plus accrued and unpaid dividends thereon, prior to any distributions
to holders of the Company's Common Stock.
Upon the liquidation or sale of the Company or any redemption of Series
A and Series B, the rights of the holders of Series A and Series B to
convert such shares terminate at the close of business on: (a) in the
case of liquidation of the Company, the day next preceding the date
fixed for the payment of any amounts distributable on liquidation to
the holders of such series or (b) in the case of redemption of Series A
or Series B, the day preceding the date fixed for the payment of any
amounts distributable on redemption to the holders of such series, or,
if such payment is not made when due, the date such payment is actually
made.
Holders of Series A and Series B have voting rights and vote together
with the holders of Common Stock as a single class on all matters
coming before the Company's stockholders. Each share of Series A and
Series B entitles its holder to cast a number of votes equal to the
number of whole shares of Common Stock into which each share is
convertible.
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Consent of the holders of at least 50% of the Series A or Series B,
voting as a separate class, is required for any action which: (i)
alters or changes the rights, preferences or privileges of the Series A
or Series B; (ii) increases or decreases (other than by conversion) the
authorized number of shares of each Series; (iii) creates any new class
or series of shares having preference over the Series A or Series B
with respect to dividends and liquidation; (iv) repurchases or
otherwise acquires Series A or Series B shares other than pursuant to
the Certificate of Incorporation.
The Company paid cash finders fees to Paramount Capital, Inc., a
related party, in connection with the sale of Series A and Series B.
The Same Director of the Company is the Chairman and the sole
shareholder in Paramount Capital, Inc. The finders fees for the Series
A and Series B were $77,000 and $47,250, respectively. The finders fees
have been recorded as a reduction to additional paid in capital. In
addition, other costs of structuring the Series A and Series B
transactions, such as legal fees, were $24,343 and $3,053,
respectively, and were recorded as a reduction to additional paid in
capital. See Note 8 related to warrants issued as finders fees to
Paramount Capital, Inc. in connection with the sale of Series A and
Series B.
8. WARRANTS
In connection with the sale of Series A and Series B, Paramount
Capital, Inc., a related party, acted as a finder with respect to
certain investors and received a finders fee. Included as part of the
finders fee, the Company issued warrants to purchase an aggregate of
36,667 shares of Series A and 16,875 shares of Series B at exercise
prices of $1.65 and $2.20 per share, respectively. Both warrants are
exercisable upon issuance for five years, through March 2005 and
January 2006, respectively. The shares may be issued through a cash
payment or through a cashless exercise and the warrant price is
adjustable if the Company declares a dividend. These warrants were
provided as a finders fee for services in connection with the issuance
of preferred stock and did not result in an adjustment to additional
paid in capital. Through December 31, 2003, there have been no
exercises.
In connection with the sale of promissory notes, Paramount Capital,
Inc., a related party, acted as a finder with respect to certain
investors and received a finders fee. Included as part of the finders
fee, the Company issued warrants to purchase an aggregate of 41,250 and
23,250 shares of common stock at an exercise price of $6.05 per share.
The warrants are exercisable upon issuance for five years, through
January 2006 and February 2006, respectively. The shares may be issued
through a cash payment or through a cashless exercise and the warrant
price is adjustable if the Company declares a dividend. These warrants
were provided as a finders fee for services in connection with the
issuance of promissory notes and did not result in an adjustment to
additional paid in capital. Through December 31, 2003, there have been
no exercises.
9. STOCK OPTION PLAN
2000 EQUITY INCENTIVE PLAN--Effective August 2000, the Company adopted
the 2000 Equity Incentive Plan (the "Plan"). The Plan, as amended,
reserved approximately 4,000,000 shares of common stock for issuance
upon the exercise of options. Options granted under the Plan will
expire not more than ten years from the date of grant. The Company has
243,732 shares available for grant at December 31, 2003.
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A summary of the Company's stock option plans is presented below:
NUMBER WEIGHTED
OF EXPIRATION AVERAGE
OPTIONS DATE EXERCISE PRICE
--------- ---------- --------------
Options outstanding at January 1, 2003 2,893,753 2010-2011 $ 0.35
Granted -
Exercised -
Cancelled (50,001) 2010-2012 $ 1.31
---------
Options outstanding at December 31, 2003 2,843,752 $ 0.33
=========
Historically, the Company has issued options below fair market value to
employees and non-employees. During the year ended December 31, 2003,
the Company has not granted any options to either employees or
non-employees. The noncash compensation expense for the year ended
December 31, 2003, as a result of historical option grants, was
$261,610.
The following table summarizes information about fixed-price options
outstanding at December 31, 2003.
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------- ----------- ----------- -------- ----------- ---------
$0.10 - $0.20 2,555,439 6.87 $0.16 2,367,859 $0.15
$0.50 - $3.03 288,313 8.15 $1.87 145,356 $1.84
The Company estimates the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing model based on the
following assumptions as of December 31, 2003: (a) expected dividend
yield of 0% (b) risk-free interest rate of 3.95%; (c) expected life of
five years; and (d) volatility of 80%.
Data summarizing options exercisable and weighted average fair value of
options granted at December 31, 2003 is shown below:
Options exercisable at end of period 2,513,215
Weighted average exercise price $ 0.25
Weighted average fair value of options
granted during the period n/a
Weighted average remaining contractual life 6.91
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10. COMMITMENTS AND CONTINGENCIES
LEASES--The Company leases its facilities and equipment under various
operating leases, which expire at various dates through December 31,
2007. Future minimum rental payments, required under operating leases,
are as follows:
YEARS ENDING
DECEMBER 31,
------------
2004 $ 244,531
2005 234,968
2006 98,242
2007 810
----------
$ 578,551
==========
In February 2003, the Company entered into an office sharing agreement
with Keryx, a related party, whereby the Company provides access to and
use of a certain portion of its leased space in New York for a fixed
percentage of total monthly cost of such space. The office sharing
agreement can be terminated by either party with 90 days written
notice. The table above does not assume savings from Keryx's payments
pursuant to this agreement.
Rent expense charged to operations was $91,536 for the year ended
December 31, 2003.
INSURANCE--The Company is insured with respect to its clinical trial
operations on a claims-made basis. Management is not aware of any
claims against the Company with respect to its clinical trials
operations that might have a material impact on the Company's
consolidated financial statements.
EMPLOYMENT AGREEMENTS--The Company has entered into employment
agreements with an initial term of four years with an automatic renewal
for two additional years with two officers of the Company. One of the
employment agreements was terminated in December 2002 with no further
obligations due from the Company under the agreement other than the
remaining deferred compensation accrued as of the termination date (see
Note 6). The remaining officer is entitled to a base salary of $200,000
per year with certain incentives at the discretion of management or
based upon certain milestones. Future minimum salary payments under the
terms of this agreement as of January 1, 2004 are $200,000 for the year
ending December 31, 2004. Pursuant to the remaining agreement, the
remaining executive agreed to certain confidentiality and non-compete
provisions.
LICENSING AGREEMENTS--In October 2000, the Company entered into a
worldwide, exclusive commercial sub-license agreement with Procept,
Inc., a wholly-owned subsidiary of Paligent, Inc. ("Paligent") relating
to the development and marketing of O6-BG. Under the O6-BG license
agreement, the Company has assumed responsibility for the development
and marketing of O6-BG and will pay Paligent certain milestone payments
totaling approximately $2 million and royalties on net sales of O6-BG.
$75,000 was paid to Paligent for milestone payments in the year ended
December 31, 2003 (for a liability which was recorded in the year ended
December 31, 2002). At December 31, 2003, there are no amounts due to
Paligent. If the Company fails to meet its future obligations under the
license agreement, Paligent may terminate the agreement upon notice to
the Company, subject to the Company's opportunity to cure any such
breach.
In December 2001, the Company entered into an exclusive commercial
sub-license agreement with Prescient NeuroPharma Inc. ("Prescient")
relating to the development and marketing of AVLB. The
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AVLB license agreement is worldwide, except for the Far East. Under the
license agreement, the Company has assumed responsibility for the
development and marketing of AVLB and will pay Prescient initial and
early milestone payments totaling $1.25 million. $500,000 was paid in
the year ended December 31, 2001 and was immediately expensed (as
research and development). At the Company's option, a significant
portion of the initial payments can be applied to purchase equity in
Prescient common stock at a premium to the market price at the time of
such purchases. In addition, the AVLB license agreement provides for
the Company to make development milestone payments totaling $17.5
million and royalties on net sales of AVLB. At the Company's option, a
portion of the milestone payments may be in the form of purchases of
Prescient common stock at a premium to the market price at the time of
such purchases. No milestone payments have been paid through December
31, 2003. No liability or accrual has been recorded at December 31,
2003. If the Company fails to meet its obligations under the
collaboration, Prescient may terminate the agreement upon notice to the
Company, subject to the Company's opportunity to cure any such breach.
In September 2002, the Company entered into an exclusive commercial
license agreement with Zentaris AG ("Zentaris") relating to the
development and marketing of Perifosine. The Perifosine license
agreement is for the United States and its protectorates, Canada and
Mexico. Under the license agreement, the Company has assumed
responsibility for the development and marketing of Perifosine and will
pay Zentaris upfront and milestone payments totaling $18.75 million and
royalties on net sales of Perifosine. $250,000 was paid in each of the
years ended December 31, 2003 and 2002 and each was immediately
expensed (as research and development). No liability or accrual has
been recorded at December 31, 2003. If the Company fails to meet its
obligations under the collaboration, Zentaris may terminate the
agreement upon notice to the Company, subject to the Company's
opportunity to cure any such breach.
11. DISCONTINUED OPERATIONS
The Company's discontinued operations include AOIC, which provided
medical marketing, communication and education services, and CE, which
provided information about cancer through a web site. Net loss from
discontinued operations was $108,474 for the year ended December 31,
2003, which includes charges recorded for the impairment of assets
included in discontinued operations (see Note 3).
12. RELATED PARTY TRANSACTIONS
As part of the issuance and sale of promissory notes in March 2003, the
Company issued and sold a total of $400,000 of promissory notes and
issued a total of 60,000 warrants to purchase common stock to the
Chairman of the Board, the Chief Executive Officer, and the Same
Director (see Note 5).
In February 2003, the Company entered into an office sharing agreement
with Keryx whereby the Company provides access to and use of a certain
portion of its leased space in New York for a fixed percentage of total
monthly cost of such space. The office sharing agreement can be
terminated by either party with 90 days written notice. In addition,
Keryx reimbursed the Company for certain payments made to vendors in
2003 that performed services on Keryx's behalf. Keryx agreed to
reimburse the Company for the salaries and related facility costs of
two of the Company's employees. Such reimbursements amounted to
$210,441, and are included as a reduction to research and development
costs in the accompanying statement of operations.
In April 2003, the Company transferred the assets of AOIC and CE to AOI
Communications, LP ("LP"), a related party, for no consideration. In
addition, the Company has agreed, through a service agreement with LP,
to provide certain payroll and benefit services to LP, and grant LP
access to and use of the Stamford and Exton offices (the "Business
Offices"), in return for a percentage of pre-tax net profits, if any,
of LP for the calendar years ending 2003 and 2004. LP is responsible
for all fees and expenses
- 16 -
associated with the payroll services and the operation of the Business
Offices, including without limitation, salaries, payroll taxes, rent,
utilities, and telecommunications charges. The Company recognized
revenue of $76,587 in the year ended December 31, 2003 pursuant to this
agreement, which has been included in other revenue in the accompanying
statement of operation. At December 31, 2003, $26,587 was due to the
Company and was included in prepaid expenses and other current assets
in the accompanying consolidated balance sheet. Such amount was paid
subsequent to December 31, 2003.
On January 8, 2004, the Company entered into a definitive merger
agreement to be acquired by Keryx through the merger of a wholly-owned
subsidiary of Keryx with and into the Company. As part of the letter of
intent signed between the parties in December 2003, the Company issued
and sold to Keryx, a promissory note in the principal amount of
$350,000. The promissory note has an annual interest rate of 10% and is
payable, together with unpaid interest, on the earlier of (a) the
closing of a merger transaction between the Company and Keryx and (b)
30 days following the termination of the letter of intent. This merger
was completed on February 5, 2004. The Company is the surviving
corporation and has become a wholly-owned subsidiary of Keryx.
13. INCOME TAXES
There was no net provision for income taxes for the year ended December
31, 2003. The Company has a deferred tax asset of $6,360,483 at
December 31, 2003, which has resulted primarily from net tax operating
loss benefit carryforwards and certain expenses and up front payments
on license agreements, which are currently not deductible. Current or
future ownership changes may limit the future utilization of these net
operating loss carryforwards in accordance with IRS code section 382. A
full valuation allowance has been established to offset the deferred
tax asset, since, based on the weight of available evidence, it is more
likely than not that all of the deferred tax assets will not be
realized.
Deferred income taxes reflect the estimated future tax effects
attributable to (i) temporary differences between the carrying amount
for financial reporting purposes and the tax basis of assets and
liabilities, and (ii) carryforwards. The deferred tax assets and
liabilities at December 31, 2003 are summarized below:
Deferred tax assets $ 6,360,483
Current--
Allowance for doubtful accounts 3,200
Non-current:
Depreciation and amortization 5,736
Deferred compensation 60,000
Net operating loss carry forwards 5,656,574
Research and development credit 89,773
Other 167,500
Up-front payments on license agreements 377,700
-----------
Deferred tax assets 6,360,483
Valuation allowance (6,360,483)
-----------
Net deferred tax assets $ -
===========
The Company has net operating loss carryforwards for federal and state
income tax purposes of approximately $14.1 million at December 31, 2003
which will expire between 2019 and 2023.
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14. CONCENTRATION OF RISK
Revenues from two customers represented 84% and 10% of service revenue
for the year ended December 31, 2003. Accounts receivable from four
customers represented 36%, 28%, 18% and 18% of accounts receivable at
December 31, 2003.
******
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