RHOMED INCORPORATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1995, 1994 AND 1993
---- ---- ----
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Report of Independent Public Accountants
To the Board of Directors and Shareholders of
RhoMed Incorporated:
We have audited the accompanying balance sheets of RHOMED INCORPORATED (a New
Mexico corporation in the development stage) as of August 31, 1995 and 1994,
and the related statements of operations, shareholders' deficit and cash flows
for each of the three years in the period ended August 31, 1995, and for the
period from inception (January 28, 1986) to August 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of RhoMed Incorporated as of
August 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended August 31, 1995, and for the
period from inception to August 31, 1995, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company was organized and
commenced operations in 1986 and remains in the development stage with
government grants representing the majority of its revenues to date. As
discussed in Note 1, the Company has experienced operating losses in each year
since its inception and, as of August 31, 1995, had a deficit accumulated
during the development stage of $4,235,059. The Company expects to incur
additional operating losses over the next several years and expects cumulative
losses to increase as the Company's research and development and clinical
testing efforts continue and expand. In view of the fact that research and
development, clinical testing and regulatory approvals will take a significant
period of time, the Company will require substantial additional financing.
These factors raise substantial doubt about the Company's ability to continue
as a going concern. Realization of the investment in property, equipment and
intangibles is dependent upon the success of future operations and the
Company's ability to raise additional capital. Ultimately, the Company's
ability to achieve profitable operations is dependent in large part on
regulatory approvals of its products, entering into agreements for product
development and commercialization and making the transition to a manufacturing
or licensing company. Management's plans with regard to these matters are also
discussed in Note 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 be necessary should
the Company be unable to continue as going concern.
/s/ Authur Andersen LLP
Albuquerque, New Mexico
October 30, 1995
(except with respect to the matters discussed
in Note 14 as to which the date is November 27, 1995)
RHOMED INCORPORATED
(A Development Stage Company)
Balance Sheets
August 31, 1995 and 1994
1995 1994
----- ----
ASSETS
------
CURRENT ASSETS:
Cash $ 474,018 $ 222,405
Accounts receivable 4,505 5,795
Accounts receivable, employees 1,121 2,388
Prepaid expenses and other 19,752 14,546
---------- ---------
Total current assets 499,396 245,134
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $176,611 and $114,447 as of August 31,
1995 and 1994, respectively (Notes 2 and 4) 134,368 192,238
INTANGIBLES, net of accumulated amortization of $68,938
and $45,155 as of August 31, 1995 and 1994,
respectively (Notes 5 and 6) 319,965 277,596
---------- ---------
$ 953,729 $ 714,968
========== =========
The accompanying notes to financial statements are an integral part of these
balance sheets.
- 3 -
RHOMED INCORPORATED
(A Development Stage Company)
Balance Sheets
August 31, 1995 and 1994
-Continued-
LIABILITIES AND SHAREHOLDERS' DEFICIT 1995 1994
- -------------------------------------
----------- -----------
CURRENT LIABILITIES:
Accounts payable $ 305,857 $ 141,113
Accrued compensation owed to employees (Note 3) 171,290 170,597
Accrued expenses 112,747 72,786
Notes payable, related party (Note 3) 23,286 -
Current portion of long-term financing (Note 6) 105,000 123,545
Senior bridge notes, including related party
transactions of $100,000 as of August 31, 1995
(Note 7) 1,000,000 -
----------- -----------
Total current liabilities 1,718,180 508,041
LONG-TERM FINANCING, including accrued interest of
$285,614 and $166,472 as of August 31, 1995 and
1994, respectively (Note 6) 1,972,677 1,542,927
CONVERTIBLE NOTES PAYABLE TO SHAREHOLDERS,
including accrued interest of $29,312 and $21,312
as ofAugust 31, 1995 and 1994, respectively (Note 8) 109,312 101,312
----------- -----------
3,800,169 2,152,280
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' DEFICIT (Notes 1, 3, 6, 7, 8, 9 and 10):
Preferred stock, no par value, 10,000,000 and
5,000,000 shares authorized as of August 31, 1995
and 1994, respectively; 4,000,000 shares
subscribed as of August 31, 1995 - -
Preferred stock subscribed (Note 3) 4,000 -
Preferred stock receivable (4,000) -
Common stock, no par value, 40,000,000 and
15,000,000 shares authorized as of
August 31, 1995 and 1994,respectively;
issued and outstanding 6,922,069 and
6,562,467 shares as of August 31, 1995 and
1994, respectively 1,177,786 1,158,883
Common stock earned but not issued 110,833 -
Paid-in capital from common stock warrants 100,000 -
Deficit accumulated during development stage (4,235,059) (2,596,195)
----------- -----------
(2,846,440) (1,437,312)
----------- -----------
$ 953,729 $ 714,968
=========== ===========
The accompanying notes to financial statements are an integral part of these
balance sheets.
- 4 -
RHOMED INCORPORATED
(A Development Stage Company)
Statements of Operations
For the Period from Inception (January 28, 1986)
Through August 31, 1995 and for the Years Ended
August 31, 1995, 1994 and 1993
Inception
through
1995 1995 1994 1993
---------- ----------- ------------ ----------
REVENUES:
Grants and contracts (Note 11) $2,860,512 $ - $ 50,289 $ 329,976
License fees and royalties (Note 12) 334,296 64,296 50,000 187,000
Sales 272,276 33,606 47,559 67,390
----------- ----------- ------------ ----------
Total revenues 3,467,084 97,902 147,848 584,366
----------- ----------- ------------ ----------
EXPENSES:
Research and development
(Notes 2 and 11) 3,526,512 619,354 584,941 524,312
General and administrative (Note 9) 3,652,618 776,291 939,155 607,621
----------- ----------- ------------ ----------
Total expenses 7,179,130 1,395,645 1,524,096 1,131,933
----------- ----------- ------------ ----------
OTHER INCOME (EXPENSES):
Other income 60,865 2,744 16,561 21,461
Interest expense (583,878) (343,865) (185,268) (27,753)
----------- ----------- ------------ ----------
Total other expenses, net (523,013) (341,121) (168,707) (6,292)
----------- ----------- ------------ ----------
NET LOSS $(4,235,059) $(1,638,864) $ (1,544,955) $ (553,859)
=========== =========== ============ ==========
Weighted average number of common
shares outstanding 5,356,560 6,717,161 6,540,445 5,943,300
=========== =========== ============ ==========
LOSS PER COMMON SHARE $ (0.79) $ (0.24) $ (0.24) $ (0.09)
=========== =========== ============ ==========
The accompanying notes to financial statements are an
integral part of these statements.
- 5 -
RHOMED INCORPORATED
(A Development Stage Company)
Statements of Shareholders' Deficit
For the Period from Inception (January 28, 1986)
Through August 31, 1995
-------------------------------------
Common Stock
-------------------------------------
Paid-in Deficit
Capital from Accumulated
Common Preferred Stock During
Earned but Stock --------------- Development
Shares Amount not Issued Warrants Subscriptions Receivable Stage Total
--------- ------------ ---------- ------------ -------------- --------- ------------- ------
Balance at inception - $ - $ - $ - $ - $ - $ - $ -
Issuance of shares from
inception 5,670,747 326,647 - - - - - 326,647
Net loss from inception - - - - - - (497,381) (497,381)
--------- ------------ ---------- ----------- ---------- --------- ------------- -----------
Balance, August 31, 1992 5,670,747 326,647 - - - - (497,381) (170,734)
Issuance of shares 658,634 576,370 - - - - - 576,370
Shares earned but not issued - - 28,125 - - - - 28,125
Issuance of options - 17,089 - - - - - 17,089
Net loss - - - - - - (553,859) (553,859)
--------- ------------ ---------- ----------- ---------- --------- ------------- -----------
Balance, August 31, 1993 6,329,381 920,106 28,125 - - - (1,051,240) (103,009)
Issuance of shares 233,086 223,327 (28,125) - - - - 195,202
Issuance of options - 15,450 - - - - - 15,450
Net loss - - - - - - (1,544,955) (1,544,955)
--------- ------------ ---------- ----------- ---------- --------- ------------- -----------
Balance, August 31, 1994 6,562,467 1,158,883 - - - - (2,596,195) (1,437,312)
Issuance of shares 359,602 10,203 - - - - - 10,203
Common stock earned but not
issued - - 110,833 - - - - 110,833
Issuance of options - 8,700 - - - - - 8,700
Paid-in capital from common
stock warrants - - - 100,000 - - - 100,000
Preferred stock subscriptions - - - - 4,000 (4,000) - -
Net loss - - - - - - (1,638,864) (1,638,864)
--------- ------------ ---------- ----------- ---------- --------- ------------- ------------
Balance, August 31, 1995 6,922,069 $1,177,786 $ 110,833 $ 100,000 $ 4,000 $ (4,000) $(4,235,059) $ (2,846,440)
========= ============ ========== =========== ========== ========= ============= ===========
-6-
RHOMED INCORPORATED
(A Development Stage Company)
Statements of Cash Flows
For the Period from Inception (January 28, 1986)
Through August 31, 1995 and for the
Years Ended August 31, 1995, 1994 and 1993
Inception
through
1995 1995 1994 1993
--------------- ---------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,235,059) $(1,638,864) $(1,544,955) $ (553,859)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 240,569 85,947 80,523 28,183
Interest expense on related-party debt 46,720 8,000 8,000 8,000
Accrued interest on long-term financing 502,658 320,709 169,438 12,511
Accrued interest on short-term financing 7,936 7,936 - -
Equity and notes payable issued for expenses 121,900 10,350 15,450 49,894
Settlement with consultant (28,731) - - -
Changes in certain operating assets and liabilities:
Accounts receivable (4,505) 1,290 1,190 71,183
Accounts receivable, employees (1,121) 1,267 (2,388) -
Prepaid expenses and other (19,752) (5,206) 13,257 (16,292)
Intangibles (383,023) (66,152) (73,383) (95,730)
Accounts payable 304,957 164,744 67,269 8,893
Accrued expenses owed to employees 187,838 10,551 (4,444) (28,773)
Accrued expenses 141,478 39,961 9,825 4,234
Unearned revenue - - - (17,700)
Other payables - - - (4,000)
----------- ----------- ----------- -----------
Net cash used for operating activities (3,118,135) (1,059,467) (1,260,218) (533,456)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (308,652) (4,294) (133,714) (116,283)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable, related party (286,650) (286,650) - -
Payments on convertible notes payable and
long-term financing (125,061) (92,384) (15,477) -
Proceeds from notes payable, related party 302,000 302,000 - -
Proceeds from senior bridge notes payable 1,000,000 1,000,000 - -
Proceeds from convertible notes payable and
long-term financing 1,951,327 292,063 500,000 1,000,000
Proceeds from paid-in capital from common stock warrants 100,000 100,000 - -
Proceeds from common stock and stock option issuances,
net 959,189 345 191,812 568,390
----------- ----------- ----------- -----------
Net cash provided by financing activities 3,900,805 1,315,374 676,335 1,568,390
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 474,018 251,613 (717,597) 918,651
CASH, beginning of period - 222,405 940,002 21,351
----------- ----------- ----------- -----------
CASH, end of period $474,018 $474,018 $ 222,405 $ 940,002
=========== =========== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
- 7 -
RHOMED INCORPORATED
(A Development Stage Company)
Statements of Cash Flows - Continued
For the Period from Inception (January 28, 1986)
Through August 31, 1995 and for the
Years Ended August 31, 1995, 1994 and 1993
Inception
through
1995 1995 1994 1993
------------ ------------- ------------- ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 28,029 $ 28,029 $ - $ -
============ ============= ============= =============
NON-CASH TRANSACTION:
Settlement of accounts payable with equipment $ 900 $ - $ 900 $ -
============ ============= ============= =============
NON-CASH STOCK ACTIVITY:
Conversion of loans from employees to common stock $ 74,187 $ - $ - $ -
============ ============= ============= =============
Conversion of note payable to common stock $ 16,000 $ - $ - $ -
============ ============= ============= =============
Common stock issued for equipment $ 2,327 $ - $ - $ -
============ ============= ============= =============
Common stock issued for expenses (included above) $ 111,185 $ 10,350 $ 15,450 $ 49,894
============ ============= ============= =============
Common stock issued for accrued salaries and bonuses $ 16,548 $ 9,858 $ 3,390 $ 3,300
============ ============= ============= =============
Accrued interest payable in common stock $ 109,183 $ 109,183 $ - $ -
============ ============= ============= =============
The accompanying notes to financial statements are an integral part of these
statements.
- 8 -
RHOMED INCORPORATED
(A Development Stage Company)
Notes to Financial Statements
For the Period from Inception (January 28, 1986)
Through August 31, 1995 and for the Years Ended
August 31, 1995, 1994 and 1993
(1) ORGANIZATION ACTIVITIES AND RISK FACTORS:
RhoMed Incorporated (the "Company" or "RhoMed") was incorporated
under the laws of the State of New Mexico on January 28, 1986, for the
purposes of conducting research, development, manufacture and marketing of
pharmaceuticals, diagnostic devices and diagnostic agents and related
substances.
During fiscal year 1995, the Company encountered serious liquidity
and working capital deficiencies and, as a result, effective April 1995, the
Company sold for nominal consideration a majority ownership to The Castle
Group Ltd. ("Castle") in exchange for financing (see Note 3).
The Company has funded its research and development activities to
date primarily from the proceeds of equity and debt offerings, loans from
shareholders, financing involving sale and license back of intellectual
property, and from research and development grants and contracts with agencies
of the Federal government and the New Mexico Research and Development
Institute (see Note 11). Although incorporated in January, 1986, the Company
remains in the development stage, as it does not yet derive any significant
revenues from the sale of products.
Since its inception, RhoMed has devoted substantially all of its
efforts and resources to research and development of its technology. The
Company has experienced operating losses in each year since its inception and,
as of August 31, 1995, had a deficit accumulated during the development stage
of $4,235,059. The Company expects to incur additional operating losses over
the next several years and expects cumulative losses to increase as the
Company's research and development and clinical testing efforts continue and
expand. In view of the fact that research and development, clinical testing
and regulatory approvals will take a significant period of time, the Company
will require
-9-
substantial additional financing. Realization of the investment in property
and equipment and patents is dependent upon the success of future operations
and the Company's ability to raise additional capital. The accompanying
financial statements do not include any adjustment that might result from the
outcome of this uncertainty.
While the Company has been substantially funded in its development
work through grants and contracts with agencies of the Federal government and
State of New Mexico, and intends to continue to pursue such grants and
contracts in the future, the Company anticipates additional capital will be
raised through stock sales and financing arrangements. Ultimately, the
Company's ability to achieve profitable operations is dependent in large part
on entering into agreements for product development and commercialization,
obtaining regulatory approvals of its products, and making the transition to a
manufacturing or licensing company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounting Basis -- The financial books and records of the Company
are maintained on the accrual basis of accounting. As a development stage
enterprise, cumulative results of operations from inception are presented.
Cash -- For purposes of presenting cash flows, the Company considers
cash as amounts on hand, on deposit in financial institutions and overnight
investments.
Property and Equipment -- Equipment and office furniture are stated
at cost, net of accumulated depreciation. Depreciation is recognized using an
accelerated method over the estimated useful lives of 5 years for equipment, 7
years for office furniture, and over the term of the lease for leasehold
improvements. Maintenance and repairs are expensed as incurred while
expenditures that extend the useful life of an asset are capitalized. Assets
purchased or leased for use on certain grants and contracts which revert to
the granting or contracting entity are not capitalized by the Company.
Patents -- Patents represent the external costs capitalized to
successfully obtain a patent registration. All internal costs to obtain and
develop the patents have been expensed. Patents are included as intangible
assets in the accompanying financial statements and are stated at cost, net of
- 10 -
accumulated amortization. Amortization is recognized using the straight-line
method over the estimated patent lives ranging up to 17 years. Unsuccessful
patent costs are expensed when so determined by management.
Research and Development Costs -- The costs of research and
development activities are expensed as incurred.
Stock Options and Warrants -- Most common stock options have been
issued at exercise prices greater than, or equal to, their fair market value
at the date granted. Accordingly, no value has been assigned to these
instruments. Certain stock options were issued in fiscal years 1995, 1994 and
1993 under the nonqualified stock option plan (see Note 10) at an exercise
price below market value. Stock warrants have been issued with nominal
exercise prices (see Notes 6, 7 and 10). The difference between the exercise
price and the market value of these securities has been included in general
and administrative expense in fiscal years 1995, 1994 and 1993, and as an
addition to equity.
Income Taxes -- On September 1, 1993, the Company adopted Statement
of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income
Taxes." The adoption of FAS 109 changed the Company's method of accounting for
income taxes from the deferred method (APB 11) to an asset and liability
approach. Previously the Company deferred the past tax effects of timing
differences between financial reporting and taxable income. The asset and
liability approach requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of other assets and
liabilities. The effect of the adoption of FAS 109 was minimal due to net
operating loss carryforwards.
Loss per Common Share -- Loss per common share is calculated based
upon the weighted average number of shares of common stock outstanding during
each year. All options and warrants were excluded in the calculation of
weighted average shares outstanding since their inclusion would have had an
antidilutive effect.
Financial Statement Presentation -- Certain amounts in the
accompanying financial statements and notes have been reclassified to conform
to the 1995 presentation.
- 11 -
(3) RELATED PARTY TRANSACTIONS:
Accrued Compensation -- At August 31, 1995 and 1994, the Company
owed employees approximately $171,000 for accrued and unpaid compensation and
related benefits. These amounts do not accrue interest and are included in
accrued compensation in the accompanying financial statements. Such amounts
are to be paid when the Company generates adequate liquidity to do so. During
fiscal years 1995, 1994 and 1993, $9,858, $3,390 and $3,300, respectively, of
accrued salaries and bonuses were converted to common stock at $.70, $1.00 and
$.75 per share, respectively.
Castle Transaction -- During fiscal year 1995, the Company
encountered serious liquidity and working capital deficiencies and, as a
result, effective April 1995, the Company entered into a letter of intent with
Castle, pursuant to which Castle agreed to arrange for a line of credit of up
to $300,000 to finance ongoing operations, Castle agreed to arrange for future
financings, and the Company agreed to sell to Castle, for nominal
consideration, 4,000,000 shares of Series A Preferred Stock convertible to a
maximum of 10,132,859 shares of common stock, which represents a majority
ownership of the Company. Pursuant to the letter of intent, the Company
entered into a line of credit agreement with Castle, effective April 20, 1995,
under which Castle provided a line of credit of up to $300,000 to fund
ordinary research and operating expenses of the Company, which agreement
expires on the earlier of the raising of $750,000 of additional financing or
April 20, 1996. All amounts borrowed under the line of credit agreement
accrued interest at the Prime Rate of NatWest Bank USA plus 2% (10.75% at
August 31, 1995). The Company had borrowed up to the maximum under the line of
credit, and at August 31, 1995, had $23,286 outstanding. The average interest
rate for the period was 10.90%, and the average balance outstanding was
$191,549. All amounts under the line of credit were repaid effective September
15, 1995 from the proceeds of the Senior Bridge Note and Class A Warrant
offering (see Note 7).
On July 28, 1995, the Corporation's Board of Directors, consisting
of Buck A. Rhodes, Michael S. Weiss and Carl Spana, approved an offering of
Senior Bridge Notes and Class A Warrants (the "Offering") (see Note 7).
Because two of the directors, Michael S. Weiss and Carl Spana (the "Interested
Directors"), could be deemed to have a direct or indirect interest in a
transaction (the "Conflict Of Interest Transaction") contemplated under
certain terms of the Offering, and therefore a conflict of interest with the
Company, the transaction was ratified by disinterested shareholders on
- 12 -
August 15, 1995. Michael S. Weiss is Vice President of the placement agent for
the offering, and General Counsel of Castle, an entity with a principal having
ownership in the placement agent. Carl Spana is Vice President of Castle.
These Interested Directors may benefit from the payment of commissions and
expenses, and the issuance of warrants, to the placement agent. To the extent
that the Company sold Units to affiliates and/or customers of the placement
agent, the Interested Directors could benefit indirectly.
On October 25, 1995, the purchase of Series A Preferred Stock by
designees of Castle was completed. The majority holder of Series A Preferred
Stock and Buck A. Rhodes, President of the Company, have agreed to enter into
a voting agreement, incorporating provisions of the letter of intent relating
to election of directors, and providing that each will vote such that of the
three directors of the Company, two directors designated by the majority
holder of Series A Preferred Stock and one designated by Buck A. Rhodes will
be elected. The voting agreement continues, unless terminated by mutual
agreement, until the earlier of completion of an underwriting in which gross
proceeds are anticipated to exceed $5,000,000, common stock of the Company (or
securities received in exchange for Common Stock of the Company) trades on a
national securities exchange or on the National Association of Securities
Dealers, Inc. Automated Quotations System ("NASDAQ") or on the OTC Electronic
Bulletin Board, or until the common stock obtainable upon conversion of the
Series A Preferred Stock is less than 40% of the total of issued common stock
and common stock obtainable upon conversion.
Other Transactions -- On July 28, 1995 the Company authorized the
issuance of options for 1,000 shares of common stock, at the then fair market
value, for each month commencing May 1, 1995 in which the salary of any
officer was accrued or unpaid. At August 31, 1995, the Company was obligated
to issue options to purchase an aggregate of 12,000 shares.
On March 29, 1995, the Company issued 337,590 shares of common stock
to Robert A. Stern, Vice President Corporate Finance of the Company, in
consideration of services rendered to the Company.
On September 15, 1992, the Company entered into a consulting
agreement with an individual for six months of part-time services relating to
corporate partnering and funding, and for
- 13 -
serving as a corporate officer for the same period. Compensation was
contingent on the completion of certain transactions, one of which was
completed on November 2, 1992. Pursuant to this agreement, the individual was
paid $5,000 during fiscal year 1993 and received 37,500 shares of Company
common stock subsequent to August 31, 1993. These amounts were recorded as
general and administrative expenses in fiscal year 1993; the stock is included
in the accompanying financial statements as earned but not issued, at August
31, 1993. During fiscal year 1994, shares were issued in settlement of this
agreement. After the agreement terminated, the individual remained as an
officer of the Company.
The President and major shareholder of the Company had loaned the
Company various sums under loan agreements, some of which provided for
conversion of the loan amounts, including accrued interest, to common stock of
the Company. Pursuant to a loan conversion agreement effective August 31,
1991, outstanding loan balances of $33,847, including accrued interest, were
converted to 169,236 shares of common stock at a rate of $.20 per share. In
addition, the President of the Company purchased 13,660 common stock shares at
$.50 per share in fiscal 1991.
In May 1987, the mother of the President of the Company loaned the
Company $20,000. Effective August 31, 1991, under the terms of the loan
agreement, the principal amount due together with accrued interest of $8,255
were converted to common stock of the Company at $.05 per share.
There have been certain transactions between the Company and certain
related parties which have resulted in the exchange of assets or services for
equity securities.
- 14 -
(4) PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at August 31:
1995 1994
------------- -------------
Office equipment $ 183,322 $ 182,213
Laboratory equipment 69,989 66,804
Leasehold improvements 57,668 57,668
------------- -------------
Property and equipment at cost 310,979 306,685
Less: Accumulated depreciation 176,611 114,447
------------- -------------
$ 134,368 $ 192,238
============= =============
(5) INTANGIBLES:
The Company has obtained certain United States (U.S.) patents and
corresponding international applications have been issued or are pending on a
majority of issued U.S. patents. The Company has applications pending for 18
additional U.S. patents, the majority of which have pending international
counterparts in selected countries.
- 15 -
The following table presents the Company's patents including, as
noted, certain patents licensed by the Company:
U.S. Patent
No. Date Issued Title
- ----------- ----------- -----
4,424,200 Licensed Method for Radiolabeling Proteins with Technetium-99m (interest of
University of New Mexico licensed)
4,940,670 July 10, 1990 Method for Compounding and Testing Patient Specific Monoclonal Antibodies
and Monoclonal Antibody Fragments for In Vivo Use
5,078,985 January 7, 1992 Radiolabeling Antibodies and Other Proteins with Technetium or Rhenium by
Regulated Reduction
5,102,990 April 7, 1992 Direct Radiolabeling of Antibodies and Other Proteins with Technetium or
Rhenium
5,250,417 October 5, 1993 Method for Acrosome Reaction Assay
5,277,893 January 11, 1994 Direct Radiolabeling of Substrates Containing Monosulfides or Disulfide
Bonds with Radionuclides
5,277,892 January 11, 1994 In Vivo Lymphocyte Tagging
5,346,687 September 13, 1994 Direct Radiolabeling of Antibody Against Stage Specific Embryonic Antigen
for Diagnostic Imaging
5,399,338 March 21, 1995 Enhancement of Abnormal Tissue Uptake of Antibodies, Tumor-Specific Agents
or Conjugates Thereof for Diagnostic Imaging or Therapy (jointly owned with
the University of New Mexico)
5,443,816 August 22, 1995 Peptide-Metal Ion Pharmaceutical Preparation and Method
5,460,785 October 24, 1995 Direct Labeling of Antibodies and Other Protein with Metal Ions
The Company has assigned its interest in several patents to secure
long-term financing (see Note 6).
A certain European patent is the subject of opposition proceedings.
The Company's license to a certain issued U.S. patent is subject to a
non-competition agreement in the area of abscess imaging; the Company's
President receives royalties from the University of New Mexico related to this
patent.
Effective June 7, 1995, a settlement regarding an interference
between the Company's U.S. radiolabeling process patents Nos. 5,078,985 and
5,102,990 and a third party's application for a patent was approved by the
Board of Patent Appeals and Interferences of the United States Patent and
Trademark Office. Pursuant to the settlement, judgment was entered on the
ground of no interference- in-fact, with a declaration that the Company is
entitled to certain claims in reissue applications
- 16 -
corresponding to the Company's process patents at issue, and declaring that
the third party is entitled to certain claims in its patent application.
(6) LONG-TERM FINANCING:
The Company has a long-term financing agreement with Aberlyn Holding
Co., Inc., and its affiliates (collectively "Aberlyn"). Aberlyn has, in a
series of transactions, loaned to the Company approximately $1,800,000 secured
by certain of the Company's patents, property and equipment. Certain accrued
interest has been included as principal in refinancings. Certain fees and
costs related to the borrowings have been deferred as intangible assets and
are being amortized over the remaining terms of the arrangement using the
effective interest method.
The Company is obligated, at August 31, 1995, to monthly payments of
$5,000 from September 1, 1995 through May 1, 1996; $20,000 from June 1, 1996
through May 1, 1997; and $91,695 from June 1, 1997 through May 1, 1999 to
Aberlyn. Payments through May 1, 1997 will be applied to principal only;
interest will be accrued during this period at an annual effective rate of 15%
and paid in the Company's common stock, with certain registration rights, at a
price per share to be negotiated. The agreement requires the accrual of
certain interest as payable before it is earned; therefore, at any time before
the scheduled payoff, the recorded long-term liability will be less than the
total amount payable to settle the obligation.
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Scheduled principal payments on the long-term financing through
fiscal year 1999 at August 31, 1995 are as follows:
Years ending August 31,
1996 $ 105,000
1997 340,680
1998 718,043
1999 628,340
------------
Total principal payments 1,792,063
Accrued interest 285,614
$ 2,077,677
Aberlyn also has the right to receive warrants with certain
registration rights to purchase 730,023 shares of the Company's common stock
at initial exercise prices from $.75 to $1.45 per share, which exercise prices
are subject to adjustment on each sale of common stock at a price lower than
the initial exercise price, and to purchase 200,000 shares at an exercise
price to be negotiated. The warrants expire at various dates from July 15,
2000 through November 16, 2001.
(7) SENIOR BRIDGE NOTES:
As discussed further in Note 3, "Castle Transaction," the Company
encountered serious liquidity and working capital deficiencies in fiscal year
1995 which resulted in the Company entering into financing transactions with
Castle. One such transaction included a placement, for which an affiliate of
Castle served as placement agent, with certain capital investors. On July 28,
1995, the Board of Directors authorized an offering of up to 40 units at
$25,000 per unit, with each unit consisting of a $25,000 face amount Senior
Bridge Note and a Class A Warrant to purchase 75,000 shares of common stock,
no par value, of the Company at an exercise price of $.01 per share. The
nominal exercise price for the warrants reflects the seriously troubled
financial condition of the Company on the date of the transaction. The Senior
Bridge Notes bear interest at 1% per month, and are payable one year from the
date of issuance. The warrants terminate ten years from the date of issuance,
have certain registration rights, and are subject to adjustment in certain
circumstances,
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including a stock split of, stock dividend on, or a subdivision, combination
or recapitalization of, the common stock. Four units were purchased by
investment funds for which an officer and principal of Castle have investment
authority.
Paramount Capital, Inc., an entity with a principal having an
ownership interest in Castle (see Note 3), served as placement agent for the
offering. As placement agent, Paramount Capital, Inc. received a cash
commission equal to 6% of the gross proceeds from the sale of the units, a
non-accountable expense allowance equal to 3% of gross proceeds, and
underwriter's warrants, at an exercise price of $.01 per share, equal to 15%
of the warrants issued in the offering. The nominal exercise price for the
warrants reflects the seriously troubled financial condition of the Company on
the date of the transaction. As of September 22, 1995, all units had been
sold, and the offering was terminated. Net proceeds to the Company were
approximately $907,000 after payment of the placement agent's fees and
expenses ($90,000) and offering expenses (approximately $3,000).
(8) CONVERTIBLE NOTES PAYABLE TO SHAREHOLDERS:
At August 31, 1995 and 1994, convertible notes payable to
shareholders consist of four ten-year convertible notes totaling $80,000 with
interest accrued thereon. These notes were issued as part of a combined stock
and debt offering during fiscal year 1992 (see Note 10). Each convertible note
is a promissory note from the Company to the purchaser in the face amount of
$20,000, bearing interest at 10% per year, accruing annually. Principal and
interest on the convertible notes becomes due and payable on the earlier of
(a) July 31, 2002, or (b) 30 days after the Company receives net proceeds from
a public offering of its common stock of at least $5,000,000, or (c) 30 days
after the end of a fiscal year in which, as reflected on the Company's audited
financial statements, the Company has net assets of at least $5,000,000 or net
income of at least $5,000,000. For a period of five years from closing, the
convertible notes may be converted into common stock on the basis of one share
of stock for each $1.50 of principal and accrued interest. Conversion may be
accelerated, and is lost if not exercised, in the event of notice of
prepayment or notice of consolidation, merger or sale of the assets of the
Company.
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(9) COMMITMENTS AND CONTINGENCIES:
Leases -- The Company leases its facilities and the majority of its
equipment under noncancellable operating leases. The lease on the current
facility expires June 30, 1996, with an option to renew for a three-year term.
Minimum future annual lease payments at August 31, 1995, for all
noncancellable operating lease agreements, are approximately $58,000 in fiscal
year 1996. Certain of these leases have been personally guaranteed by one or
more officers of the Company.
Product Liability -- The testing, marketing and sale of human health
care products entails an inherent risk of allegations of product liability.
The Company does not currently have product liability insurance coverage. The
Company intends to seek product liability insurance if, and when, its products
are commercialized.
Commitments -- On October 1, 1993, the Company entered into a
one-year employment contract with Jeffrey Garwin, Ph.D., M.D., for which a
portion of the compensation was 250 shares of stock per month, and options for
3,000 shares of Company common stock at $.85, with 250 options vesting each
month of employment. On January 6, 1995, the Company extended the contract for
one year on similar terms, with options at $.60 per share. Effective January
1, 1995, the Company entered into a consulting agreement with James E. Smith,
Ph.D., a consultant in the radiopharmaceutical industry. Under this agreement,
70% of the compensation is paid in common stock at an agreed valuation of $.70
per share.
Warrants -- At August 31, 1995, a common stock purchase warrant was
outstanding, which was issued to a consulting firm as payment for services
rendered, for 6,000 shares of common stock at a price of $.50 per share which
expires June 30, 1997.
(10) SHAREHOLDERS' DEFICIT:
Authorized Shares -- The original authorized capital of the Company,
500,000 common stock shares with a $.01 par value, was increased by Articles
of Amendment filed October 29, 1987 to 10,000,000 common stock shares with no
par value. With the increase in authorized capital, issued common stock of the
Company was split on an eight-for-one basis. On February 23, 1994, the
- 20 -
shareholders approved the authorization of 5,000,000 additional shares of
common stock, to 15,000,000 total, and 5,000,000 shares of preferred stock,
with no par value. The Board of Directors was given the authority to set the
terms (callability, convertibility, voting, cumulative dividend rate) of any
preferred stock issue.
Pursuant to the Castle transaction (see Note 3), on April 20, 1995,
the Company filed an Amended Certificate of Designation setting forth the
voting powers, preferences and rights of the series of preferred stock
designated as Series A Preferred Stock. The Amended Certificate of Designation
designates 4,000,000 shares of preferred stock as Series A Preferred Stock,
provides dividends at the rate declared for common stock, provides limited
liquidation rights, grants voting rights with common stock on an as-if
converted basis and provides for conversion to common stock.
By Articles of Amendment approved by the shareholders on August 15,
1995 and filed September 12, 1995, the Company amended its Articles of
Incorporation to increase its authorized capital to 40,000,000 common stock
shares with no par value, and 10,000,000 preferred stock shares with no par
value.
Stock Transactions (see Note 3) -- The Company commenced a private
offering of preferred stock in fiscal year 1994, and a private offering of
units consisting of common stock and common stock warrants in fiscal year
1995, both of which were terminated without having raised the minimum required
for closing. Stock issuance costs incurred in connection with both offerings
were expensed to operations in the fiscal year in which such costs were
incurred.
On February 26, 1993, the Company issued a private offering
memorandum for the sale of securities, consisting of units of 10,000 shares of
the Company's no par value common stock for $10,000 per unit ($1.00 per
share). These securities, which were not registered and on which no sales
commissions or fees were paid, were offered under the exemptions provided by
Section 3(b) and Rules 501-503 and 505 of the Act. The Company sold 58.4 units
for approximately $577,000, net of offering costs. This offering ended
November 9, 1993.
On September 10, 1992, the Company commenced a private offering of
20 units to be sold for $25,000 per unit. Each unit consisted of 33,333 shares
of the Company's no par value common
- 21 -
stock ($.75 per share). These securities were offered by a private offering
memorandum under the exemption provided by Section 3(b) and Rules 501-503 and
505 of the Act, and were not registered under the Act. This offering, on which
no sales commissions or fees were paid, ended during February 1993. The
Company sold eight units for approximately $191,000, net of offering costs.
On December 9, 1991, the Company issued a private offering
memorandum for the sale of units consisting of 26,289 shares of common stock
and a $20,000 note convertible into the Company's common stock (see Note 8).
Four units were sold for $25,000 per unit. These securities were not
registered under the Securities Act of 1933 ("Act") and were offered under the
exemption provided by Section 3(b) and Rules 501-504 of that Act. This
offering ended July 31, 1992.
Stock Option Plans -- Prior to August 15, 1995 the Company had two
stock option plans: (1) an employee incentive stock option plan, for which, at
August 31, 1995, 750,000 shares were reserved, and for which options for
654,750 shares were granted and outstanding at August 31, 1995, at option
prices ranging from $.35 to $1.00 per share, expiring at various dates through
March 29, 2005; and (2) a nonqualified stock option plan, for which, at August
31, 1995, 1,250,000 shares of stock were reserved, and for which options for
1,247,079 shares were granted and outstanding at August 31, 1995, at option
prices ranging from $.30 to $1.00 per share, expiring at various dates through
June 30, 2005. No options have been exercised since inception.
- 22 -
Information related to stock option activity under these plans for
the period from inception to August 31, 1995 is as follows:
Incentive Stock Options Nonqualified Stock Options
------------------------------- --------------------------------
Number Number
of Shares Price per Share of Shares Price per Share
----------- ------------------ ----------- -----------------
Balance at inception - $ - - $ -
Granted 193,000 .50 597,100 .425- .50
Terminated 20,000 .50 - -
------------ ------------- ----------- -------------
Outstanding, August 31, 1992 173,000 .50 597,100 .425- .50
Granted - - 142,229 .85- 1.00
------------ ------------- ----------- -------------
Outstanding, August 31, 1993 173,000 .50 739,329 .425- 1.00
Granted 455,750 1.00 313,850 .85- 1.00
Terminated 37,000 1.00 2,500 1.00
------------ ------------- ----------- -------------
Outstanding, August 31, 1994 591,750 .50- 1.00 1,050,679 .425- 1.00
Granted 99,000 .35 196,400 .30- 1.00
Terminated 36,000 1.00 - -
------------ ------------- ----------- -------------
Outstanding, August 31, 1995 654,750 $ .35- $ 1.00 1,247,079 $ .30- $1.00
============ ============= =========== =============
Exercisable, August 31, 1995 484,563 $ .35- $ 1.00 1,187,079 $ .30- $1.00
============ ============= =========== =============
Effective July 28, 1995, and ratified by the shareholders on August
15, 1995, the Company adopted two new stock option plans, the 1995 Employee
Incentive Stock Option Plan and the 1995 Nonqualified Stock Option Plan
(together, the "1995 Stock Option Plans"). The 1995 Employee Incentive Stock
Option Plan is a qualifying "incentive stock option" plan under the Internal
Revenue Code. There are 2,000,000 shares of common stock reserved for each of
the 1995 Stock Option Plans. At August 31, 1995, no options have been granted
under the 1995 Stock Option Plans, but the Company was obligated to issue
options to officers to purchase 12,000 shares (see Note 3).
During fiscal year 1993, a policy was adopted, subject to annual
review by the Board of Directors, to annually grant outside directors and the
Chairman of the Scientific Advisory Board options to purchase 15,000 shares of
Company common stock and to annually grant members of the Scientific Advisory
Board options to purchase 5,000 shares of Company common stock.
- 23 -
(11) GRANTS, CONTRACTS AND ROYALTIES:
Under a contract with the New Mexico Research and Development
Institute to develop products for medical research and diagnostic imaging, the
State of New Mexico earns a 2% royalty on gross revenues for products
developed under the contract and manufactured in New Mexico, and a 5% royalty
on products manufactured outside New Mexico, subject to maximum repayment
limits over specified time frames. Royalty expense for all agreements for the
years ended August 31, 1995, 1994 and 1993, was $8,502, $33,094 and $25,271,
respectively. These amounts are included in research and development expenses.
Under Federal grants and contracts, there are no royalties or other forms of
repayment; however, in certain limited circumstances the government can
acquire rights to technology which is not being commercially exploited.
The Company applies for and has received grants and contracts under
the Small Business Innovative Research (SBIR) program, and for other
appropriate Federally funded grants and contracts. Since the Company's
inception, Federally or state funded grants and contracts revenue have
approximated $2,526,000. Most contract costs, including indirect costs, are
subject to audit and adjustment by negotiation between the Company and
government representatives.
The Company also engages in contract development work with private
sector companies, both foreign and domestic. From inception to August 31,
1995, contract revenues from private sector companies have approximated
$335,000.
(12) LICENSING AGREEMENTS:
The Company entered into a letter of intent, effective December 20,
1994, with Sorin Biomedica S.p.A. of Italy ("Sorin") regarding European
manufacturing, marketing and distribution of the Company's LeuTec-M product
for diagnostic imaging of infections and inflammation ("the product").
Pursuant to the letter of intent, the Company will grant Sorin an exclusive
license to make and sell the product in certain European countries, and Sorin
will pay the Company a royalty on net sales of the product. In addition, Sorin
will serve as an alternate contract manufacturing site for the product.
- 24 -
The Company entered into a license agreement effective November 2,
1992, with Sterling Winthrop, Inc., a major pharmaceutical company, under
which the Company granted a non-exclusive license to certain patented
radiolabeling technology for imaging uses, and granted an option to acquire a
license on similar terms for therapeutic uses. The license agreement is
renewable annually and provides for certain license fee payments to the
Company, together with milestone payments on product development, and
percentage of sales production royalties. During fiscal years 1995, 1994 and
1993, the Company received $50,000, $50,000 and $125,000, respectively, in
royalties and option payments. During fiscal year 1994, this license agreement
was assigned to Burroughs Wellcome Co., a major pharmaceutical company, in
conjunction with the purchase of certain assets of Sterling Winthrop, Inc. by
Burroughs Wellcome Co. Concurrently with entering into the license agreement,
the Company entered into a development agreement, which expired December 31,
1993, with Sterling Winthrop, Inc., under which the Company performed
specified product development services for $125,000, of which $25,000 and
$100,000 are included in grant and contract revenues for fiscal years 1994 and
1993, respectively.
The Company entered into a license agreement effective May 1, 1992,
with Rougier Bio-Tech Limited, a foreign biotechnology concern, under which
the Company has granted an exclusive license to certain patented radiolabeling
technology for a defined field-of-use. The agreement, which is for the life of
the patents and is renewable annually, provides for license fee payments to
the Company, and percentage of sales production royalties with a minimum
annual royalty. Under this agreement, $7,500 and $12,000 of royalties and fees
were received in fiscal years 1995 and 1993, respectively.
(13) INCOME TAXES:
The Company has had no income tax expense or benefit since inception
because of operating losses. Prior to the change in ownership (see Note 3),
the Company had approximately $4,203,000 of net operating loss available for
carryforward to potentially offset any future taxable income. However, under
provisions of the Internal Revenue Code, the change in majority ownership may
severely limit or eliminate any net operating loss carryforwards after the
date of ownership change. Thus, the Company may not be able to utilize any or
all net operating loss carryforwards in any given year and may not be able to
realize the benefit of any or all of the Company's net operating
- 25 -
loss carryforwards in the future. Income tax returns for the year ended August
31, 1994 have not been filed as of October 30, 1995; however, management
believes that since there is no tax liability there will be no material
adverse effect on the Company.
(14) SUBSEQUENT EVENTS:
On November 27, 1995, the Board of Directors ratified an employment
agreement (the "Agreement") with Edward J. Quilty ("Quilty") to serve as Chief
Executive Officer of the Company. Pursuant to the Agreement, the Company
agreed to grant Quilty an option to acquire such number of shares of common
stock as equal a 10% fully diluted equity interest in the Company at an
exercise price of $0.01 per share, which option vests in 36 equal increments
on each of the first 36 monthly anniversaries of the commencement of Quilty's
employment with the Company, and may be accelerated or terminated in part on
the happening of certain events (the "Initial Option"). The Agreement further
provides an anti-dilutive option, pursuant to which Quilty will be issued an
option to acquire the number of shares that, when aggregated with the shares
issuable pursuant to the Initial Option, equal not less than 3.75% of the
shares of common stock of the Company. The Agreement is for an initial period
of one year, with automatic one year extensions, and provides that, on certain
termination events, shares that would otherwise have vested in the
twelve-month period following termination vest and are exercisable upon
termination, and also provides for specified termination pay.
On November 27, 1995, the Board of Directors authorized an offering
of up to 7.5 units at $100,000 per unit, with each unit consisting of a
$100,000 face amount Series B Senior Bridge Note and a Class B Warrant to
purchase 100,000 shares of common stock, no par value, of the Company at an
exercise price of the lesser of (a) $.25 per share and (b) 50% of the price
per share of common stock in a subsequent equity offering of the Company's
common stock in which gross proceeds exceed $2,500,000. The Series B Senior
Bridge Notes bear interest at 1% per month, and are payable at the earlier of
(a) five days following the closing of an equity offering of the Company's
securities in which gross proceeds exceed $2,500,000 and (b) twelve months
from the date of issuance. The warrants terminate five years from the date of
issuance, have certain registration rights, and are subject to adjustment in
certain circumstances, including a stock split of, stock dividend on, or a
subdivision, combination or recapitalization of, the common stock. Paramount
Capital, Inc., an entity with a principal having an ownership interest in
Castle (see Note 3), will serve as placement agent for the
- 26 -
offering. As placement agent, Paramount Capital, Inc. will receive a cash
commission equal to 9% of the gross proceeds from the sale of the units, a
non-accountable expense allowance equal to 4% of gross proceeds, and
underwriter's warrants, at an exercise price of $.30 per share, equal to 5% of
the warrants issued in the offering.
- 27 -