UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): June 4, 2004
SPORTAN UNITED INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
TEXAS
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(State or other jurisdiction of incorporation)
000-25513 760333165
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(Commission File Number) (I.R.S. Employer Identification No.)
18205 Burkhardt Rd., Tomball Texas, 77377
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(Address of principal executive offices, including zip code)
(281) 290-6655
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(Registrant's telephone number, including area code)
FORWARD LOOKING STATEMENTS
This 8-K contains forward-looking statements. These statements relate to
future events or future financial performance and involve known and unknown
risks, uncertainties and other factors that may cause Sportan United Industries,
Inc.'s ("Company" or "Sportan") or its industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
the forward-looking statements.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events
or results may differ materially.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance or achievements. Moreover, neither the
Company nor any other person assumes responsibility for the accuracy and
completeness of these forward-looking statements. The Company is under no duty
to update any of the forward-looking statements after the date of this report to
conform its prior statements to actual results.
Further, this report contains forward looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act that involve substantial risks and uncertainties. Such statements include,
without limitation, all statements as to expectation or belief and statements as
to our future results of operations, the progress of any research, product
development and clinical programs, the need for, and timing of, additional
capital and capital expenditures, partnering prospects, the protection of and
the need for additional intellectual property rights, effects of regulations,
the need for additional facilities and potential market opportunities.. Our
actual results may vary materially from those contained in such forward-looking
statements because of risks to which we are subject, such as failure to obtain a
corporate partner or partners to support the development of our stem cell
programs, risks of delays in, or adverse results from, our research, development
and clinical testing programs, obsolescence of our technology, lack of available
funding, competition from third parties, intellectual property rights of third
parties, failure of our collaborators to perform, regulatory constraints,
litigation and other risks to which we are subject.
ITEM 1. CHANGES IN CONTROL OF REGISTRANT.
On June 4, 2004 we closed on a transaction acquiring all the common stock
of PharmaFrontiers Corporation, a Texas corporation ("PharmaFrontiers"),
pursuant to a stock agreement by and among the Company, PharmaFrontiers and the
stockholders of PharmaFrontiers (the "Stock Transaction"). As a result of the
Stock Transaction, PharmaFrontiers became a wholly-owned subsidiary of the
Company, through which operations will be conducted. References herein to the
Company include PharmaFrontiers.
As a result of the closing of the Stock Transaction, we issued an aggregate
of 6,386,439 shares of our common stock to the former shareholders of
PharmaFrontiers (in exchange for all of the outstanding capital stock of
PharmaFrontiers), resulting in the former shareholders of PharmaFrontiers owning
approximately 86% of the issued and outstanding Company common stock.
Additionally, Jason Otteson resigned as the director and sole officer, and
Warren Lau was appointed as director to fill the vacancy of Mr. Otteson and was
also appointed to serve as chief executive officer, chief operating officer,
president and treasurer. Wayne Fritzsche was appointed vice president of
corporate development and William Rouse was appointed chief financial officer,
vice president of operations and administration and secretary.
OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
NAME: AGE: POSITION:
Warren C. Lau 50 Director, Chief Operating Officer, Chief
Executive Officer, President and Treasurer
Wayne Fritzsche 55 Vice President of Corporate Development
William Rouse 56 Chief Financial Officer, Vice President of
Operations and Administration, and Secretary
Dewayne R. Deslatte 34 Director
Warren C. Lau has served as a director, chief operating officer, president
and treasurer since June 2004. Mr. Lau served as chief executive officer of
PharmaFrontiers from January 2003 to May 2004. Mr. Lau was the co-founder of
Biokeys Pharmaceuticals, Inc., and served as its president, chief executive
officer and director from June 1996 until October 2002. From November 1997 to
September 1998, Mr. Lau served as a director of Immune Complex Corporation and
Synthetic Genetics, Inc., both privately held biotechnology companies. Mr. Lau
has negotiated patent and technology license agreements with The University of
Texas M. D. Anderson Cancer Center (1996), New York University (1998), The
University of Southern California (2000), and The National Institutes of Health
(2002). Mr. Lau studied violin performance at the Southern Methodist University
Meadows School of the Arts while concurrently completing all undergraduate
Pre-Med prerequisites.
R. Wayne Fritzsche has served as our vice president of corporate
development since June 2004. Presently, Mr. Fritzsche serves as director for
three private companies in the healthcare industry and as chairman of the board
of Boston Biomedica. From October 2000 until November 2002, Mr. Fritzsche served
as executive vice president of BioQuest. From October 1994 until July 2000, Mr.
Fritzsche served as executive vice president, vice president of corporate
development and director of Nobex Corporation. Mr. Fritzsche has been a founder
or part of the founding group of 12 healthcare companies, and has been a board
member of 18 healthcare firms. Mr. Fritzsche has a B.A. in Literature, a B.S. in
Chemistry and an MBA from the University of San Diego.
William Rouse has served as our chief financial officer and secretary since
June 2004. For the past five years Mr. Rouse has served as a consultant serving
positions such as executive vice president of sales and marketing, broker,
bankruptcy consultant, interim president and interim chief operating officer.
Prior to work as a consultant, Mr. Rouse was the chief marketing officer of
Futorian, Stratford, Simmons & Stratolounger. Mr. Rouse has a B.S. in
Industrial Engineering from Texas A&M University.
Dwayne Deslatte, RN has served as a member of the Company's Board of
Directors since March 2004. Mr. Deslatte is a Registered Nurse who since April
2001 has worked in general surgery with Texas Children's Hospital, and from
January 2000 until April 2001 has worked in orthopedics at St. Joseph's
Hospital. Mr. Deslatte received his B.S. in Nursing, cum laude, from Texas
Women's University and his B.A. in History from Texas A&M University. While at
Texas A&M University, Mr. Deslatte served in the Corps of Cadets for four years.
BOARD COMPOSITION
Our board of directors currently consists of two (2) members. Each of our
directors is elected annually at our annual meeting. There are no family
relationships between any of our officers and directors. The board of directors
has not established any committees but plans to establish an audit committee,
compensation committee, nominating and governance committee and a bioethics
committee in the near future. The Company does not have an audit committee
financial expert serving on its board of directors.
DIRECTOR COMPENSATION
Mr. Deslatte received 30,000 shares of Company common stock for
compensation for serving as director of the Company. In addition, Mr. Deslatte
is compensated for ordinary and necessary expenses incurred in attending any
board of directors meeting.
Mr. Lau entered into a director's agreement in April 2004 to help protect
the Company's intellectual property, proprietary information and goodwill,
received 20,000 shares of Company common stock upon execution of the agreement,
and will receive $5,000 annually for each year he serves as director. Further,
Mr. Lau will be compensated for expenses in attending and participating in
meetings of the board of directors. The director's agreement contains
confidentiality, non-compete/no-hire, assignment of inventions and conflict of
interest provisions consistent with his fiduciary duty obligations owed to the
Company.
EXECUTIVE COMPENSATION
The following table contains compensation data for our named executive
officers who received total annual salary and bonus for the fiscal years ended
September 30, 2003, 2002 and 2001 in excess of $100,000. Mr. Otteson is the only
executive who earned in excess of $100,000 during the last three calendar years.
Mr. Otteson served as the Company's chief executive officer until his
resignation in May 2004 when Mr. Lau was appointed the Company's chief executive
officer. Mr. Lau has not received any compensation from the Company in the three
prior fiscal years.
Summary Compensation Table
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LONG TERM
COMPENSATION
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ANNUAL COMPENSATION AWARDS
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Securities
Name and Salary Bonus Underlying
Principal Position Year ($) ($) Options / SARs (#)
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Jason G. Otteson, $ 102,000
Chief Executive 2003
Officer
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2002 $ 102,000 24,000
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2001 $ 102,000
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OPTION GRANTS
There were no option grants to any named executive officer during the last
fiscal year. There are options outstanding held by various employees to
purchase 31,700 shares of common stock at prices ranging from $37.50 to $71.50
per share, the last of which expire in 2011.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
Shares
Acquired Number of Unexercised Value of Unexercised
on Value Securities Underlying Options In-the- Money
Exercise Realized at FY-End Options at FY-End
Name (#) ($) (#) ($) (1)
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Exercisable Unexercisable Exercisable Unexercisable
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Jason Otteson -- -- -- -- -- --
LONG TERM INCENTIVE PLANS
In March 1999, Sportan adopted its 1999 Stock Option Plan (the "Plan").
The terms of the Plan can be found in previous Act filings. No awards were made
to a named executive in the last completed fiscal year under this Plan.
EMPLOYMENT AGREEMENTS
Mr. Lau's employment agreement provides for an annual salary of $98,000 and
is effective through January 2007, and shall automatically be extended until
January 2010 unless a written notice of discontinuation has been received by Lau
or the Company. The agreement provides for an annual bonus to be determined
from time to time by the board of directors. Mr. Lau's agreement contains
non-compete, non-solicit, and non-disclosure provisions consistent with his
fiduciary duty obligations owed to the Company. Additionally, Mr. Lau signed an
assignment of inventions agreement where Mr. Lau acknowledges that any invention
discovered by him during his employment with the Company shall be the property
of the Company.
Mr. Fritzsche was issued 231,500 shares of Company common stock upon
execution of his employment agreement. Mr. Fritzsche's agreement does not
provide for an annual salary and is effective through April 2007. Mr. Fritzsche
has the right to purchase in April 2006 200,000 shares of Company common stock
at a price per share equal to 80% of the then current market value, and in April
2007 another right to purchase 200,000 shares of Company common stock at a price
per share equal to 80% of the then current market value. Mr. Fritzsche's
agreement contains confidentiality, non-compete, non-solicit, assignment of
inventions and conflict of interest provisions consistent with his fiduciary
duty obligations owed to the Company.
William C. Rouse's employment agreement provides for an annual salary of
$55,000 and expires in April 2005. Upon signing the employment agreement, Mr.
Rouse purchased 150,000 shares of Company common stock for nominal
consideration. Additionally, Mr. Rouse was issued an option to purchase 100,000
shares of Company common stock at a price per share that is 80% of the then
current market value which vests upon the earlier of: (1) the acquisition of
more than 50% of the common stock of Company by an acquirer at a total market
value exceeding two hundred fifty million dollars, or (2) a financing of Company
with one time proceeds of at least ten million dollars which values the then
outstanding Company common stock at one hundred million dollars or more. Mr.
Rouse's agreement contains confidentiality, non-compete, non-solicit, assignment
of inventions and conflict of interest provisions consistent with his fiduciary
duty obligations owed to the Company.
CERTAIN TRANSACTIONS
In December 2003, Jason Otteson exchanged $448,667 of outstanding
indebtedness with the Company for a convertible note payable in the amount of
$12,500, which he later converted into 250,000 shares of Company common stock in
February 2004. Mr. Otteson owns an additional 71,820 shares of Company common
stock for which he paid nominal consideration.
The Company borrowed $36,000 from Mr. Jarkesy bearing interest at 12% per
annum, $11,000 of which matures in October 2004 and $25,000 of which matures in
November 2004. Mr. Jarkesy acquired 500,000 shares of Company common stock in
July 2003 in consideration for $50,000. Mr. Jarkesy received 1,012,500 shares
of Company common stock in the Stock Transaction in exchange for his shares of
PharmaFrontiers common stock purchased for nominal consideration.
William Lau received 1,298,748 shares of Company common stock in the Stock
Transaction in exchange for his PharmaFrontiers common stock purchased for
nominal consideration.
Dwayne Deslatte received 30,000 shares of Company common stock in exchange
for services as a director of the Company in May 2004.
Wayne Fritzsche received his 500,000 shares of Company common stock in the
Stock Transaction in exchange for his PharmaFrontiers common stock purchased for
nominal consideration.
William Rouse received his 150,000 shares of Company common stock in the
Stock Transaction in exchange for his PharmaFrontiers common stock purchased for
nominal consideration.
Brewer & Pritchard, P.C. received 70,000 shares of Company common stock in
December 2003 in exchange for services rendered and received 230,000 shares of
Company common stock in the Stock Transaction purchased for nominal
consideration.
The University of Chicago ("University") received 187,688 shares of Company
common stock in February 2004 as partial consideration for granting a License to
the Company. Upon the successful rescue of diabetic mice by implantation of
insulin producing cells generated from peripheral monocyte derived cells, the
University will receive another 187,688 shares of Company common stock.
Additionally, the University has anti-dilution rights which rights, as well as
other terms of the License, are discussed in Item 5 of this Form 8-K.
In April 2004, Mr. Jeffrey H. Adduci and Mr. Robert H. Gow agreed to serve
as directors of PharmaFrontiers, our subsidiary. In May 2004, Mr. Michael
Redman agreed to serve as a director of PharmaFrontiers. To help protect
PharmaFrontiers' intellectual property, proprietary information and goodwill,
the directors of our subsidiary agreed to enter into separate agreements with
PharmaFrontiers. The agreements are substantially similar and include
confidentiality, non-compete/no-hire, assignment of inventions and conflict of
interest provisions consistent with their fiduciary duty obligations owed to
PharmaFrontiers. The agreement does not contain a termination or expiration
clause. Compensation under each agreement is different for each director. Mr.
Adduci received 20,000 shares of Company common stock for signing the agreement
and will receive a $5,000 annual payment. Mr. Gow received 80,000 shares of
Company common stock for signing the agreement and will receive a $1,000 monthly
payment. Mr. Redman received 80,000 shares of Company common stock for signing
the agreement. All directors are compensated for ordinary and necessary
expenses incurred in attending any board of directors meeting.
PRINCIPAL STOCKHOLDERS
We have 7,416,838 shares of common stock issued and outstanding as of the
date hereof. The following table sets forth, as of such date, information with
respect to shares beneficially owned by:
- each person who is known by us to be the beneficial owner of more than
5% of our outstanding shares of common stock;
- each of our directors;
- each of our named executive officers; and
- all of our directors and executive officers as a group.
Beneficial ownership has been determined in accordance with Rule 13d-3 of
the Exchange Act. Under this rule, shares may be deemed to be beneficially owned
by more than one person (if, for example, persons share the power to vote or the
power to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire shares
(for example, upon exercise of an option) within 60 days of the date of this
table. In computing the percentage ownership of any person, the amount of shares
includes the amount of shares beneficially owned by the person by reason of
these acquisition rights. As a result, the percentage of outstanding shares of
any person does not necessarily reflect the person's actual voting power.
To our knowledge, except as indicated in the footnotes to this table and
pursuant to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them.
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NAME AND ADDRESS OF BENEFICIAL NUMBER OF SHARES BENEFICIALLY PERCENTAGE OF OUTSTANDING SHARES
OWNER OWNED
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George Jarkesy 1,512,500 20.39%
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Warren C. Lau 1,298,748 17.51%
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Wayne Fritzsche 500,000 6.74%
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Jason G. Otteson 321,820 4.34%
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Dwayne Deslatte 30,000 0.4%
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Directors and Executive Officers as 1,978,478 26.68%
a Group (4 persons)
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Mr. Lau, Fritzsche and Deslatte's, business address is the same as our
principal executive office. Mr. Otteson's business address is 3170 Old Houston
Road, Huntsville, TX 77340.
DESCRIPTION OF SECURITIES
General
We are authorized to issue 50,000,000 shares of common stock, $.05 par
value, and 10,000,000 shares of preferred stock, $.001 par value.
Common stock
As of June 1, 2004 there were 7,416,838 shares of common stock issued and
outstanding that were held of record by approximately 143 shareholders.
The holders of common stock are entitled to one vote per share with respect
to all matters required by law to be submitted to stockholders. The holders of
common stock have the sole right to vote, except as otherwise provided by law or
by our certificate of incorporation, including provisions governing any
preferred stock. The common stock does not have any cumulative voting,
preemptive, subscription or conversion rights. Election of directors and other
general stockholder action requires the affirmative vote of a majority of shares
represented at a meeting in which a quorum is represented. The outstanding
shares of common stock are validly issued, fully paid and non-assessable.
Subject to the rights of any outstanding shares of preferred stock, the
holders of common stock are entitled to receive dividends, if declared by our
board of directors out of funds legally available. In the event of liquidation,
dissolution or winding up of the affairs of the Company, the holders of common
stock are entitled to share ratably in all assets remaining available for
distribution to them after payment or provision for all liabilities and any
preferential liquidation rights of any preferred stock then outstanding.
Preferred stock
As of June 1, 2004 there were no shares of preferred stock issued and
outstanding.
Our board of directors has the authority, without action by our
stockholders, to designate and issue preferred stock in one or more series. Our
board of directors may also designate the rights, preferences, and privileges of
each series of preferred stock, any or all of which may be greater than the
rights of the common stock. It is not possible to state the actual effect of
the issuance of any shares of preferred stock on the rights of holders of the
common stock until the board of directors determines the specific rights of the
holders of the preferred stock. However, these effects might include:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; and
- delaying or preventing a change in control of the Company without
further action by the stockholders.
Transfer agent
The transfer agent and registrar for our common stock is American Register
& Transfer.
Disclosure Of Commission Position On Indemnification For Securities Act
Liabilities
Texas law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. Our articles of
incorporation limit the liability of directors to Sportan or its stockholders to
the fullest extent permitted by Texas law. Specifically, directors will not be
personally liable for monetary damages for breach of a director's fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the company or its stockholders, (ii) for acts or omissions not in
good faith that constitute a breach of duty of the director to the company or an
act or omission which involves intentional misconduct or a knowing violation of
law, (iii) for an act or omission for which the liability of a director is
expressly provided by an applicable statute, or (iv) for any transaction from
which the director received an improper personal benefit, whether the benefit
resulted from an action taken within the scope of the director's office.
The inclusion of this provision in the articles of incorporation may have
the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited the company and its
stockholders.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Act") may be permitted to directors, officers and controlling persons
as provided in the foregoing provisions, or otherwise, we have been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Act and is unenforceable.
In the event that a claim for indemnification against such liabilities,
other than the payment by us of expenses incurred or paid by a director, officer
or controlling person in the successful defense of any action, suit or
proceeding, is asserted by a director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
Shares Eligible for Future Sale
Of the 7,416,838 shares of common stock outstanding, a total of 6,389,439
shares were issued in the Stock Transaction and are "restricted securities"
subject to the resale limitations of Rule 144. Of the 6,386,439 shares issued
in the Stock Transaction, a total of 3,941,248 are subject to a lock-up
agreement that precludes any sales prior to June 4, 2005 and, thereafter, limits
sales of up to an aggregate of 492,656 shares of Company common stock per 90-day
period. This lock-up shall terminate if the last sales price of the Company
common stock is at or above $10.00 per share for 10 out of 20 consecutive days,
or upon a "change of control" transaction. Of the 1,030,399 shares of Company
common stock that were outstanding prior to the Stock Transaction, a total of
891,820 of these shares are subject to another lock-up agreement effective May
2004 that limits sales up to an aggregate of 74,319 shares of Company common
stock per 90-day period. This lock-up agreement restriction shall terminate
if the last sales price of the Company common stock is at or above $10.00 per
share for 10 out of 20 consecutive days commencing from the date of the Stock
Transaction, or upon a "change of control" transaction.
George Jarkesy and Brewer & Pritchard, P.C. executed separate registration
rights agreements in May 2004 which agreements provided for a demand
registration right to cause the Company to use its best efforts to register the
resale of Company common stock by means of a registration pursuant to the
Securities Act of 1933, as amended, within 90 days of receiving notice of demand
from Jarkesy and Brewer & Pritchard, P.C.
In general, restricted securities may be sold pursuant to Rule 144 after
they have been fully paid for and beneficially owned for one year and the shares
are sold in brokers' transactions or to market makers in an amount per quarter
not to exceed the greater of 1% of the number of shares of common stock then
outstanding or the average weekly trading volume for a four-week prior to such
sale.
The Company is unable to estimate the number of shares to be sold in the
future by its stockholders, since this will depend upon the market price for the
common stock, the personal circumstance of the sellers and other factors.
Previously, there has been a limited market for the common stock and the sale of
a substantially number of
shares on the market may significantly reduce the market price.
RECENT SALES OF UNREGISTERED SECURITIES
All of the following transactions were completed pursuant to Section 4(2)
of the Act. With respect to issuances made pursuant to Section 4(2) of the Act,
the transactions did not involve any public offering and were sold to a limited
group of persons. Each recipient either received adequate information about the
Company or had access, through employment or other relationships, to such
information, and the Company determined that each recipient had such knowledge
and experience in financial and business matters that they were able to evaluate
the merits and risks of an investment in the Company.
All sales of the Company's securities were made by officers of the Company
who received no commission or other remuneration for the solicitation of any
person in connection with the respective sales of securities described above.
The recipients of securities represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions.
In June 2004, the Company issued 6,386,439 shares of its common stock to 37
accredited investors in connection with the Stock Transaction in which the
Company acquired all of the capital stock of PharmaFrontiers.
In May 2004, one individual was issued 30,000 shares of Company common
stock and another individual was issued 3,000 shares of Company common stock.
In April 2004, a creditor agreed to discharge $41,199 of outstanding
indebtedness for 3,000 shares of Company common stock.
In the quarter ending December 31, 2003, several creditors agreed to
discharge debt with the Company in exchange for 80,600 shares of common stock
and $8,696 in cash.
In December 2003, Brewer & Pritchard, P.C., an accredited investor, agreed
to forgive debt with the Company in exchange for 70,000 shares of Company common
stock.
In December 2003, a creditor agreed to discharge $448,667 of outstanding
debt with the Company for a convertible note payable in the amount of $12,500,
which he later converted into 250,000 shares of Company common stock in February
2004.
In July 2003, the Company sold 500,000 shares of common stock to an
individual for $50,000.
In June 2003, the Company converted 2,144,006 shares of convertible
preferred stock (and accrued and unpaid interest) into 46,440 shares of common
stock.
In September 2001, the Company issued options to purchase 3,800 shares of
Company common stock at an exercise price of $70.00 per share to 6 employees for
services rendered.
In July 2001, the Company issued options to purchase 15,000 shares of
Company common stock to the former chief executive officer at an exercise price
of $71.50 per share for services rendered.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Inapplicable.
ITEM 3. BANKRUPTCY OR RECEIVERSHIP
Inapplicable.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Inapplicable.
ITEM 5. OTHER EVENTS.
OUR BUSINESS
OVERVIEW
We have recently entered the biotechnology industry, specifically the
research and development of adult pluripotent stem cells derived from adult
human peripheral blood. Initially, our business strategy will be focused on
raising capital in order to (i) open and operate a blood cell bank, (ii) open
and operate a research and development facility, and (iii) collaborate with
various third parties including, but not limited to, sublicenses, licenses and
patents related to research and development of cellular therapies using adult
pluripotent stem cells.
We believe that further research and development of adult pluripotent stem
cells from adult human peripheral blood could improve many conditions and
diseases affecting humans. Ideally, we plan to produce or create, either through
our own research and development or in collaboration with third parties,
acceptable product(s) to be sold to end line users.
ORGANIZATIONAL HISTORY
The Company was incorporated in Texas in 1986 and initially competed in the
sports trading card and memorabilia business. In 1999, management concluded that
the trading card business was providing insufficient growth and subsequently
sold the sports trading cards and supplies segment of its business. During the
last five years, the Company ventured into the novelty and memorabilia
merchandise field. At that time, the Company began to focus on internet
fulfillment of products in the sports marketplace. In February 2002, we reduced
our operations due to the decline in demand for outsourced internet fulfillment
companies, and to stabilize our financial condition. We also began searching for
opportunities for merger related growth prospects. In May 2004, we entered the
biotechnology industry, specifically the research and development of adult
pluripotent stem cells derived from adult human peripheral blood, by acquiring
all of the capital stock of PharmaFrontiers.
THE BACKGROUND AND ADVANTAGES OF STEM CELLS
GENERAL OVERVIEW
Cells are the basic unit of the tissues that comprise the human body.
Human tissues make up all of the systems in the body, such as neuronal tissue
(brain) or cardiac tissue (heart). Each type of tissue has a functional use to
the human body. For example, integumentary tissue (skin) provides protection
for the body from the elements while hepatic tissue (liver) allows the body to
filter blood.
Stem cells are non-specialized cells that have not yet differentiated into
specific cells with a particular function in the human body. These
non-specialized cells are able to continue to divide and regenerate for periods
of time through cell division. These stem cells also have the property of being
able to differentiate into the specialized cells that make up the individual
tissues of the body, such as pancreatic (pancreas) tissue that produces insulin.
Every human begins life when a single cell, the zygote, is formed after
fertilization. After fertilization, the zygote divides and forms two cells.
This process continues several times, two cells dividing into two more and so
on. About five days after conception, a tiny ball of cells has formed, this is
known as the blastocyst. Inside the blastocyst are two types of cells, the
trophoblast and the inner cell mass. The inner cells are known as embryonic
stem cells. These cells have a "blank slate" and can be differentiated into any
cell type in the human body. These stem cells are therefore called pluripotent
stem cells. These embryonic stem cells are the cells over which a great deal of
ethical and scientific controversy has ensued, leading up to President Bush's
September 2001 ban on Federal Funding for any new embryonic stem cell lines.
In addition to the stem cells formed within the blastocyst, stem cells are
also found within various tissues that make up the body. For example, bone
marrow stem cells are found within the marrow of the bone and they give
rise to all of the specialized blood cell types. These cell types carry the
name adult stem cells. Adult stem cells are usually programmed to form
different cell types of their own tissue, and carry the name mutlipotent, or
able to create several different types of cells but all within the same type of
tissue. Scientists have identified adult stem cells in many of the body's
organs. Adult stem cells that are found in the bone marrow include
hematopoietic stem cells, endothelial stem cells, and mesenchymal stem cells.
Hematopoietic stem cells form blood, endothelial stem cells form the vascular
system (veins and arteries), and mesenchymal stem cells form muscle, fat,
cartilage, bone, and fibroblasts.
A third source for obtaining stem cells has been through collecting those
that reside in the umbilical cord blood of a newborn baby. The umbilical cord
is the tissue that ties a baby to the mother within the womb. After the baby is
born amounts of blood can be collected from the umbilical cord and cryofrozen.
The drawback to these cells is that they are unable to be cultured indefinitely
in the laboratory.
THE USE OF STEM CELLS
Stem cells can be utilized in several different therapeutic modalities.
Some modalities are proven therapies, while some merely hold out promise for the
future.
One of the major potential benefits of stem cell research is to discover
the process by which stem cells differentiate. It is known that genes control
the ways in which differentiation is turned on and off by cells. Achieving an
understanding of the controls within the cell that turn on and off the
proliferation of one normal regular cell into a tumor of useless abnormal cells
could hold great promise. So by understanding the intricate triggers that allow
a stem cell to differentiate into different types of functioning cells, the
opportunity exists to understand mechanisms that cause cancer or birth defects.
The use of stem cells to test drugs is another area that holds promise. By
being able to reproduce large numbers of differentiated stem cells, a company
can have an available proving ground for new drugs. The lab grown tissues would
allow for measuring drug toxicity on differentiated cells.
Last is the potential of actually generating cells and tissues that could
be transplanted into the body to regenerate tissues damaged by disease,
infection, injury, and other factors.
ETHICAL IMPLICATIONS
The phrase "stem cell" came to prominence in the summer of 2001 as a debate
regarding the ethical/moral dilemmas inherent to the use of embryonic stem
cells. At issue was the Federal funding for the creation of embryonic stem cell
lines. World opinion was heavily focused upon the issue, with the Vatican,
Right to Life organizations, prominent synagogues in the United States, and the
scientific community taking positions. The Roman Catholic Church was
steadfastly against any embryonic stem cell use or development, including the
use of already developed stem cell lines. On August 9, 2001 President George W.
Bush addressed the nation and approved Federal funding for the up to 60 existing
lines of human embryo stem cell lines available. Within his address the
President pointed out that other sources such as umbilical stem cells and adult
stem cells offer promise. Our use of pluripotent stems cells from the adult
donation of blood, therefore, sidesteps the entire issue raised by the use of
embryonic stem cells.
HISTORICAL USE OF ADULT STEM CELLS
For the last 40 years adult stem cells have been successfully used as a
treatment for cancer, especially cancers such as leukemia, lymphoma, and several
inherited disorders of the blood. This type of treatment is known as Bone
Marrow Transplant (BMT). A patient who has leukemia has a disease of the blood
cells wherein the blood cells do not function properly. When this occurs stem
cells can be harvested from the patient's own body using a technique called
leukapheresis, or harvested from the bone marrow of a matched donor. A special
catheter is placed into the patient and medications are given that encourage the
bone marrow to release bone marrow into the blood stream. The stem cells are
then taken from the bloodstream. At this point the patient undergoes high doses
of radiation and/or chemotherapy. This destroys the patient's abnormal blood
cells and kills the cancerous cells. The stem cells are then reintroduced into
the body to restart the bone marrow and allow the bone marrow to begin
production of a healthy system of blood cells. This procedure can be very
painful for the patient and difficult to collect. We believe isolating stem
cells from peripheral blood would revolutionize treatment using adult
pluripotent
stem cells.
IMPORTANCE OF ADULT PLURIPOTENT STEM CELLS
We believe that adult pluripotent stem cells may be suitable for use in
treating a wide variety of disorders and diseases, and possibly in ameliorating
a symptom associated with one or more of those diseases or disorders. Further,
this technology may eventually offer researchers a practical alternative to the
use of embryonic stem cells for research, drug discovery, and transplantation.
Because of the cell's ability to be frozen, thawed, and then expanded, the
cells may be harvested from any individuals wishing to store these cells for
potential later use. Several companies currently offer a service like this to
expectant parents who may choose to bank their newborn's umbilical cord blood
which contains stem cell-like cells. We believe that this market may have
opportunity for growth.
Specifically, we believe that upon further research and development, adult
pluripotent stem cells may be useful in the treatment of numerous disease and
conditions, including, but not limited to the following:
- Heart attack or heart transplant
- Stroke
- Parkinson's disease
- Diabetes
- Liver disease
- Viral hepatitis
- Cirrhosis
- Arthritis
We do not currently have the capabilities to research, develop, and
commercialize the potential uses of adult pluripotent stem cells. However, we
intend to either expand our capabilities or enter into partnership with third
parties that will enable the Company to develop product(s) or process(es) to be
sold to end line users
OUR CURRENT TECHNOLOGY
We have the exclusive, worldwide rights to technology developed at Argonne
National Laboratory, a U.S. Department of Energy Laboratory operated by the
University of Chicago ("Argonne"), related to the discovery of adult
pluripotent stem cells in adult human peripheral blood (the "License"). The
License, dated February 2004, is between the University of Chicago
("University") and PharmaFrontiers. The material terms of the License include:
RIGHTS TO PATENT APPLICATIONS
The License grants exclusive, worldwide rights to the following patent
applications in the field of cell therapy for treatment of human diseases: (1)
US patent application - 10/704,110, title "Human stem cell materials and
methods," and (2) PCT application -US03/35538 (the "Patent Applications"). The
Patent Applications are related to technology including, but not limited, to the
following:
1. Methods and/or processes that enable scientists to obtain adult
pluripotent stems from adult human peripheral blood ;
2. Adult pluripotent stem cells, themselves;
3. Methods and/or processes for separating, propogating and
differentiating adult pluripotent stem cells into specific stem
cell types;
4. Methods and/or processes for which adult pluripotent stem cells
may be used to treat a wide variety of diseases;
5. The use of adult pluripotent stem cells for the purpose of drug
development and drug toxicology studies; and
6. Methods and/or processes for cryofreezing and then "banking"
adult pluripotent stem cells for future use by a patient.
EQUITY INTEREST PROVIDED TO THE UNIVERSITY PURSUANT TO THE LICENSE
The Company has agreed to grant the University additional shares of common
stock, if and when the Company has reached certain scientific objectives in the
development of the technology included in the License. At this time, it is
uncertain if and when the objectives will occur, but the Company does not
believe such objectives will occur in the next year
CYTONET GMBH & CO. KG SUBLICENSE
The Company has agreed to grant a sublicense to Cytonet GmbH& Co. KG
(Cytonet) in at least two fields of use (the "Cytonet Sublicense"). We have
agreed to use our best efforts to enter into the Cytonet Sublicense within six
(6) months after contact with Cytonet. If a sublicense is not granted to
Cytonet within six (6) months after the beginning of negotiations, the
University has the right to amend the license to exclude the fields of (a)
generation of hepatocytes and endothelial cells for the treatment of hepatic
disorders, and (b) generation of cardiomyocytes and endothelial cells for the
treatment of cardiac disorders. If the University elects to amend the License
as stated, the University will have 120 days to enter into a sublicense with
Cytonet, or the License will be amended to reflect those fields being
re-included in the License. The Company began negotiations with Cytonet in
March 2004 and believes that the Company will enter into the Cytonet Sublicense
in accordance with the License.
REQUIRED RESEARCH AND DEVELOPMENT EXPENDITURES
The Company must meet diligence requirements with respect to expenditures
on research and development. The Company must expend at least $2,000,000 within
two (2) years of the execution of the License and at least an additional
$4,000,000 within four (4) years of the execution of the License, half of each
amount may be expended by sublicensees. Failure to meet the above criteria may
result in the License being amended to restrict the grant to only: (a) an
exclusive license in two cell therapy areas, and (b) a non-exclusive license in
the remaining cell areas. If an amendment is not made within the thirty days,
the University will have the right to terminate the agreement.
REQUIRED DISCLOSURE REGARDING FUTURE FINANCINGS
The Company is required to notify the University upon the close of each
financing completed by the Company and to provide the University with an updated
capitalization table.
MARKETING AND ADVERTISING
The Company has agreed not to use the University or Argonne's name in any
commercial activity, press release, marking, advertising or sales brochures
except with prior written consent, which consent may be granted or withheld in
such party's sole discretion. Further, the Company has agreed to prohibit its
sublicensees and affiliates from using the name of the University, Argonne, The
Department of Energy and/or the U.S. Government in a commercial activity without
the prior written consent of the University. The Company has received permission
to use such names in this filing, as well as all future filings.
TERMINATION
The License sets forth several material conditions and/or requirements that
the Company must achieve. If the Company is unsuccessful in achieving such
conditions and/or requirements, the License may be terminated. Specifically, we
will be in default if we fail to do the following:
1. Failure to timely make royalties, patent costs, or other costs;
2. Failure to sell a product or method based on the licensed technology
by February 2010;
3. Failure to issue equity interest when appropriate; and
4. Failure to expend appropriate funds on research and development.
BUSINESS STRATEGY
Currently, the Company is in the process of establishing itself in the
biotechnology field. We need to raise capital in order to further establish
ourselves in the biotechnology field. The additional capital will be used to
(i) create a blood cell bank; (ii) create an in-house research and development
facility; and (iii) enter into various third party agreements.
BLOOD CELL BANKING. The Company plans on creating a blood cell bank that
will cryofreeze and store an individual's blood until such time that the patient
needs their stem cells. We believe that an opportunity exists in the marketing
and collection of stem cells for private individuals for use in the future.
Such private individuals may be able to benefit from stem cell therapies
currently in development.
The Company's strategy is to open a blood cell bank within a year; however,
there is no guarantee that such operation will be completed within the year. We
will need to raise additional capital in order to finance the initial cost of
setting up the blood cell bank, however at this time, we are unable to estimate
such cost.
IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY. We plan to open a laboratory
and employ qualified scientist to research and develop cellular therapies. Our
goal is to eventually produce a product that will be sold to consumers.
Initially, we plan to focus our research and development on a few of the
potential areas of licensed technology, but we have not yet determined which of
these areas our focus will be on. Further we plan to sell adult pluripotent
stem cells created at our laboratory to various third party research facilities
and companies.
Although we plan to open the laboratory within the next year, we do not
believe we will produce a product within the next few years nor can we quantify
the costs required to open and operate a laboratory. In order to open the
laboratory and employ scientists we will need to raise additional capital and
there is no guarantee that even with such additional capital we will be able to
open the laboratory.
THIRD PARTY ARRANGEMENTS AND ACQUIRING OTHER LICENSEES AND PATENTS. We
plan to expand our presence in the biotechnology industry by sublicensing some
of our rights to the licensed technology to research organizations and other
third parties and acquiring other licenses and patents. We currently do not
have any sublicenses but are in discussions with several third parties.
Additionally, we are continuously looking for opportunities to acquire
additional licenses or patents that will benefit and/or broaden our focus on
adult pluripotent stem cells therapies.
We believe that by sublicensing some of the rights to the licensed
technology to research organizations and other third parties, the Company will
be able to more fully realize the potential that lies in the use of the licensed
technology. Our goal is to eventually create various commercially available
products that can be sold to end line users or other research facilities.
In order to seek out viable third party candidates, we will need additional
capital. However, even with the additional capital, there is no guarantee that
we will find third party candidates that meet our criteria or that we will be
able to reach an agreement with such third parties.
COMPETITION
The development of therapeutic agents for human disease is intensely
competitive. Major pharmaceutical companies currently offer a number of
pharmaceutical products to treat heart attack, stroke, Parkinson's disease,
diabetes, liver diseases, arthritis and other diseases for which our
technologies may be applicable. Many pharmaceutical and biotechnology companies
are investigating new drugs and therapeutic approaches for the same purposes,
which may achieve new efficacy profiles, extend the therapeutic window for such
products, alter the prognosis of these diseases, or prevent their onset. We
believe that our products, when and if successfully developed, will compete with
these products principally on the basis of improved and extended efficacy and
safety and their overall economic benefit to the health care system. We expect
competition to increase. We believe that our most significant competitors will
be fully integrated pharmaceutical companies and more established biotechnology
companies. Smaller companies may also be significant competitors, particularly
through collaborative arrangements with large pharmaceutical or biotechnology
companies. Some of our main competitors include Aastrom Biosciences, Geron,
Gamida-Cell Ltd, Stem Cells Inc., Cellerant Therapeutics, and Osiris
Therapeutics. Many of these competitors have significant products in
development that could be competitive with our potential products.
Our competitive position will be determined in part by the products or
therapies that are produced from our technology. Our competitive position also
depends upon its ability to attract and retain qualified personnel, obtain
patent protection or otherwise develop or license proprietary products or
processes, secure sufficient capital resources to complete product development
and regulatory processes, to build a marketing and sales organization, and to
build or obtain large-scale manufacturing facilities.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
We believe that proprietary protection of inventions related to adult
pluripotent stem cells will be critical to our future business. As of May 13,
2004, we have rights to the Patent Applications. We understand the importance
of confidentiality and protection of its intellectual property. We rely upon
trade-secret protection for its confidential and proprietary information and
takes active measures to control access to that information. The Company
currently has non-disclosure agreements will all its employees.
GOVERNMENT REGULATION
Our research and development activities and the future manufacturing and
marketing of our potential products are, and will continue to be, subject to
regulation for safety and efficacy by numerous governmental authorities in the
United States and other countries.
In the United States, pharmaceuticals, biologicals and medical devices are
subject to rigorous Food and Drug Administration, or FDA, regulation. The
Federal Food, Drug and Cosmetic Act, as amended, and the Public Health Service
Act, as amended, the regulations promulgated there under, and other Federal and
state statutes and regulations govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, export, record keeping,
approval, marketing, advertising and promotion of our potential products.
Product development and approval within this regulatory framework takes a number
of years and involves significant uncertainty combined with the expenditure of
substantial resources.
FDA APPROVAL
The steps required before our potential products may be marketed in the
United States include:
STEPS AND CONSIDERATIONS:
1. PRECLINICAL LABORATORY AND ANIMAL TESTS.
Preclinical tests include laboratory evaluation of the product and animal
studies in specific disease models to assess the potential safety and efficacy
of the product and our formulation as well as the quality and consistency of the
manufacturing process.
2. SUBMISSION TO THE FDA OF AN APPLICATION FOR AN INVESTIGATIONAL NEW DRUG
EXEMPTION, OR IND, WHICH MUST BECOME EFFECTIVE BEFORE U.S. HUMAN CLINICAL TRIALS
MAY COMMENCE.
The results of the preclinical tests are submitted to the FDA as part of an
IND, and the IND becomes effective 30 days following its receipt by the FDA, as
long as there are no questions, requests for delay or objections from the FDA.
3. ADEQUATE AND WELL-CONTROLLED HUMAN CLINICAL TRIALS TO ESTABLISH THE
SAFETY AND EFFICACY OF THE PRODUCT.
Clinical trials involve the evaluation of the product in healthy volunteers
or, as may be the case with our potential products, in a small number of
patients under the supervision of a qualified physician. Clinical trials are
conducted in accordance with protocols that detail the objectives of the study,
the parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Any product administered in a U.S. clinical trial must be
manufactured in accordance with clinical Good Manufacturing Practices, or GMP,
determined by the FDA. Each protocol is submitted to the FDA as part of the IND.
The protocol for each clinical study must be approved by an independent
Institutional Review Board, or IRB, at the institution at which the study is
conducted and the informed consent of all participants must be obtained. The IRB
will consider, among other things, the existing information on the product,
ethical factors, the safety of human subjects, the potential benefits of the
therapy and the possible liability of the institution.
Clinical development is traditionally conducted in three sequential phases,
which may overlap:
In Phase I, products are typically introduced into healthy human subjects
or into selected patient populations to test for adverse reactions, dosage
tolerance, absorption and distribution, metabolism, excretion and clinical
pharmacology.
Phase II involves studies in a limited patient population to (i) determine
the efficacy of the product for specific targeted indications and populations,
(ii) determine optimal dosage and dosage tolerance and (iii) identify possible
adverse effects and safety risks. When a dose is chosen and a candidate product
is found to be effective and to have an acceptable safety profile in Phase II
evaluations, Phase III trials begin.
Phase III trials are undertaken to conclusively demonstrate clinical
efficacy and to test further for safety within an expanded patient population,
generally at multiple study sites.
The FDA continually reviews the clinical trial plans and results and may
suggest changes or may require discontinuance of the trials at any time if
significant safety issues arise.
4. SUBMISSION TO THE FDA OF MARKETING AUTHORIZATION APPLICATIONS.
The results of the preclinical studies and clinical studies are submitted
to the FDA in the form of marketing approval authorization applications.
5. FDA APPROVAL OF THE APPLICATION(S) PRIOR TO ANY COMMERCIAL SALE OR
SHIPMENT OF THE DRUG. BIOLOGIC PRODUCT MANUFACTURING ESTABLISHMENTS LOCATED IN
CERTAIN STATES ALSO MAY BE SUBJECT TO SEPARATE REGULATORY AND LICENSING
REQUIREMENT.
The testing and approval process will require substantial time, effort and
expense. The time for approval is affected by a number of factors, including
relative risks and benefits demonstrated in clinical trials, the availability of
alternative treatments and the severity of the disease. Additional animal
studies or clinical trials may be requested during the FDA review period, which
might add to that time.
After FDA approval for the product, the manufacturing and the initial
indications, further clinical trials may be required to gain approval for the
use of the product for additional indications. The FDA may also require unusual
or restrictive post-marketing testing and surveillance to monitor for adverse
effects, which could involve significant expense, or may elect to grant only
conditional approvals.
FDA MANUFACTURING REQUIREMENTS
Among the conditions for product licensure is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to the FDA's current good manufacturing practice (GMP) requirement. Even after
product licensure approval, the manufacturer must comply with GMP on a
continuing basis, and what constitutes GMP may change as the state of the art of
manufacturing changes. Domestic manufacturing facilities are subject to regular
FDA inspections for GMP compliance, which are normally held at least every two
years. Foreign manufacturing facilities are subject to periodic FDA inspections
or inspections by the foreign regulatory authorities with reciprocal inspection
agreements with the FDA. Domestic manufacturing facilities may also be subject
to inspection by foreign authorities.
ORPHAN DRUG ACT
The Orphan Drug Act provides incentives to drug manufacturers to develop
and manufacture drugs for the treatment of diseases or conditions that affect
fewer than 200,000 individuals in the United States. Orphan drug status can also
be sought for treatments for diseases or conditions that affect more than
200,000 individuals in the United States if the sponsor does not realistically
anticipate its product becoming profitable from sales in the United States. We
may apply for orphan drug status for certain of our therapies. Under the Orphan
Drug Act, a manufacturer of a designated orphan product can seek tax benefits,
and the holder of the first FDA approval of a designated orphan product will be
granted a seven-year period of marketing exclusivity in the United States for
that product for the orphan indication. While the marketing exclusivity of an
orphan drug would prevent other sponsors from obtaining approval of the same
compound for the same indication, it would not prevent other types of products
from being approved for the same use including, in some cases, slight variations
on the originally designated orphan product.
PROPOSED FDA REGULATIONS
The FDA has published a "Proposed Approach to Regulation of Cellular and
Tissue-Based Products" which relates to the use of human cells. As part of this
approach, the FDA has published final rules for registration
of establishments that engage in the recovery, screening, testing, processing,
storage or distribution of human cells, tissues, and cellular and tissue-based
products, and for the listing of such products. These products specifically
include stem cells that are progenitors of blood cells; however, the FDA makes
no explicit statement regarding the inclusion of other types of stem cells. In
addition, the FDA has published proposed rules for making suitability
determinations for donors of cells and tissue and for current good tissue
practice for manufacturers using them. We cannot now determine the full effects
of this regulatory initiative, including precisely how it may affect the clarity
of regulatory obligations and the extent of regulatory burdens associated with
pluripotent stem cell research (for stem cells that give rise to various tissue
types, including blood), and the manufacture and marketing of stem cell
products.
OTHER REGULATIONS
In addition to safety regulations enforced by the FDA, we are also subject
to regulations under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act and other present and potential
future foreign, Federal, state and local regulations.
Outside the United States, we will be subject to regulations that govern
the import of drug products from the United States or other manufacturing sites
and foreign regulatory requirements governing human clinical trials and
marketing approval for our products. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursements vary widely from
country to country. In particular, the European Union, or EU, is revising its
regulatory approach to high tech products, and representatives from the United
States, Japan and the EU are in the process of harmonizing and making more
uniform the regulations for the registration of pharmaceutical products in these
three markets.
Reimbursement and Health Care Cost Control
Reimbursement for the costs of treatments and products such as ours from
government health administration authorities, private health insurers and others
both in the United States and abroad is a key element in the success of new
health care products. Significant uncertainty exists as to the reimbursement
status of newly approved health care products.
The revenues and profitability of some health care-related companies have
been affected by the continuing efforts of governmental and third party payers
to contain or reduce the cost of health care through various means. Payers are
increasingly attempting to limit both coverage and the level of reimbursement
for new therapeutic products approved for marketing by the FDA, and are
refusing, in some cases, to provide any coverage for uses of approved products
for disease indications for which the FDA has not granted marketing approval.
For example, in certain foreign markets, pricing or profitability of
prescription pharmaceuticals is subject to government control. In the United
States, there have been a number of Federal and state proposals to implement
government control over health care costs.
RESEARCH AND DEVELOPMENT
The Company has not performed research and development during its last two
fiscal years. However, we do anticipate incurring substantial research and
development cost in 2004 and future years.
EMPLOYEES
As of June 1, 2004, the Company has three full time employees: Warren Lau,
William Rouse and Wayne Fritzsche. We believe that our relations with our
employees are good. We currently have employment agreements for each of these
employees.
INSURANCE
The Company does not have any insurance coverage to cover losses or risks
incurred in the ordinary course of business. We intend to obtain insurance
customary in our industry.
FACILITIES
The Company's current headquarters are located at 10211 Silver Leaf Lane,
Tomball, Texas 77375. The Company does not currently pay rent on this space.
The Company is currently in the process of locating and leasing a larger office
facility in Houston, Texas.
RISK FACTORS
Our business, financial condition and results of operations could be materially
adversely affected if any of these risks materialized, which could result in the
trading price of our common stock to decline.
WE HAVE A HISTORY OF OPERATING LOSSES AND DO NOT EXPECT TO BE PROFITABLE IN THE
NEAR FUTURE.
The Company has not generated any profits since its inception, has no
source of revenues, and has incurred significant operating losses.
Furthermore, due to the nature of the biotechnology industry, we do not expect
to generate revenue until future years. As we begin to develop our business
strategy, we expect our expenses to increase substantially in the next few
years. These expenses will include the research and development (which
includes the cost of opening a laboratory and the cost associated with hiring
qualified personnel); the cost associated with the blood cell bank; the costs
associated with negotiation and compliance with any future sublicenses and other
third party arrangements; and the cost associated with acquiring other
intellectual property.
FAILURE TO RAISE ADDITIONAL CAPITAL WILL PREVENT US FROM IMPLEMENTING OUR
BUSINESS STRATEGY.
The Company needs to obtain significant additional capital resources
through equity and debt financings, grants and collaborative research
arrangements. As of March 31, 2004, the Company currently has nominal assets in
cash and cash equivalents. The Company's current burn rate is approximately
$40,000 per month. We plan to use our best efforts to obtain debt and equity
financing in order to support our current operations and business strategies.
There is no assurance that we will raise the funds necessary to meet our
short-term (and long-term) working capital needs.
The Company believes that we will need a minimum of $500,000 to fund our
nominal operations for the balance of fiscal 2004. This money will not be used
to setup the blood cell bank, research and development, or for negotiating or
entering into any other third party agreements. Failure to obtain such funding
could severally impact the operations of the Company. Notwithstanding the
foregoing, our goal is to raise sufficient funds during 2004.
Further, the Company believes that we will need to raise substantial
capital to fund our business strategy for the balance of fiscal 2004. At this
time, we are unable to estimate the amount of additional capital that will be
required to fund our business strategy. This money will be used to setup the
blood cell bank, to locate, create, and/or acquire a laboratory, to hire
qualified scientist and other personnel, and to locate potential third parties
for sublicensing or other third party agreements, and/or for acquiring
additional intellectual property. Failure to obtain such funding could adversely
affect the business strategy of the Company.
WE MAY BE UNABLE TO OPEN A BLOOD CELL BANK FACILITY, EVEN IF WE HAVE SUFFICIENT
CAPITAL.
We currently do not own or operate a blood cell bank facility. To our
knowledge no other companies are freezing and storing pluripotent stem cells in
the manner in which we plan to implement. We may not be able to locate a
facility and/or personnel for the blood cell bank. Further, we may be unable to
convince HMO's, insurance companies and private individual of the potential
benefit in cryofreezing an individual's blood for use in the future. The
failure to operate the blood cell bank facility, may adversely affect our
business strategy because we believe the operation of the blood cell bank will
provide awareness and attention about us to the public.
OUR TECHNOLOGY IS IN THE EARLY STAGES OF DEVELOPMENT AND WE MAY BE UNABLE TO
DEVELOP COMMERCIALLY ACCEPTABLE PRODUCTS, EVEN IF WE HAVE SUFFICIENT CAPITAL.
Our stem cell technology is in the early stages and has not yet led to the
development of any product, nor do we see the development of any product within
the next few years. The Company may not be able to develop any products, to
obtain regulatory approvals, to enter clinical trials, or to commercialize any
products. Any product using stem cell technology may fail to survive and
persist in the desired location, provide the intended therapeutic benefits,
properly integrate into existing tissue in the desired manner, or achieve
therapeutic benefits equal to or better than the standard of treatment at the
time of testing.
WE MAY BE UNABLE TO OPEN OUR OWN RESEARCH FACILITIES AND/OR HIRE SUFFICIENT
PERSONNEL, EVEN IF WE HAVE SUFFICIENT CAPITAL.
We currently do not have the ability to internally develop any technology.
The Company anticipates opening its own research facilities to develop adult
pluripotent stem cellular therapies. However, we may be unable to locate,
create, and/or acquire a laboratory, acceptable to us. Further, we currently do
not have a scientific staff, and in order to utilize our technology, we will
need to attract and retain qualified scientific personnel. We may not be able
to attract and retain the personnel we need on acceptable terms given the
competition for experienced personnel among pharmaceutical, biotechnology and
healthcare companies, universities and research institutions.
WE MAY BE UNABLE TO OBTAIN SUBLICENSES AND OTHER THIRD PARTY AGREEMENTS, EVEN IF
WE HAVE SUFFICIENT CAPITAL.
We have not entered into any third party agreements and or sublicenses. In
order to successfully develop and commercialize our technology, we may need to
enter into a wide variety of arrangements with corporate sponsors,
pharmaceutical companies, universities, research groups and others. The Company
is currently engaged in discussions regarding such arrangements. However, we
have not reached any agreement and may fail to obtain such agreement acceptable
to us.
OUR MANAGEMENT IS CURRENTLY UNPROVEN.
The Company has a limited history of operations under the management and
control of the new officers and directors of the Company. We believe that the
combined skill, education and experience of the new management team will be
successful in is endeavors, there is no guarantee that the new management team
will be successful.
WE BELIEVE OUR COMPETITION INCLUDES FULLY INTEGRATED PHARMACEUTICAL COMPANIES
THAT HAVE SIGNIFICANT ADVANTAGES OVER US.
The market for therapeutic stem cell products is very competitive. We
expect that our most significant competitors will be fully integrated
pharmaceutical companies and more established biotechnology companies, such as
Stem Cells, Inc., Aastrom Biosciences, Gamida-Cell Ltd., and Geron. These
companies are developing stem cell-based products, and they have significantly
greater capital resources and expertise in research and development,
manufacturing, testing, obtaining regulatory approvals and marketing than we
currently do. Many of these potential competitors are further in the process to
create products to be approved or developed, and also operate large, well-funded
research and development programs.
THE LICENSE IS OUR PRIMARY ASSET, AND A DEFAULT OF THE LICENSE WILL MATERIALLY
AFFECT OUR BUSINESS STRATEGY.
The License sets forth several material conditions and/or requirements that
the Company must achieve. If the Company is unsuccessful in achieving such
conditions and/or requirements, the License may be terminated. If there is such
a default in the License, we will lose our primary asset. Specifically, we will
be in default if we fail to do the following:
- Failure to timely make royalties, patent costs, or other costs;
- Failure to sell a product or method based on the licensed technology
by February 2010;
- Failure to issue stock when appropriate; and
- Failure to expend appropriate funds on research and development.
IF WE ARE UNABLE TO OBTAIN FUTURE PATENTS AND OTHER PROPRIETARY RIGHTS OUR
OPERATIONS WILL BE SIGNIFICANTLY HARMED.
The Patent Applications.
Our ability to compete effectively is dependent upon on obtaining patent
protection relating to adult pluripotent stem cells. The patent positions of
pharmaceutical and biotechnology companies, including ours, are uncertain and
involve complex and evolving legal and factual questions. The coverage sought in
a patent application can be denied or significantly reduced before or after the
patent is issued. Consequently, we do not know whether the Patent Applications
will result in the issuance of patents, or if any future patents will provide
significant protection or commercial advantage or will be circumvented by
others. Since patent applications are secret until the applications are
published (usually eighteen months after the earliest effective filing date),
and since publication of
discoveries in the scientific or patent literature often lags behind actual
discoveries, we cannot be certain that Argonne was the first to make the
inventions covered by the Patent Applications or that the Patent Applications
were the first to be filed for such inventions. There can be no assurance that
patents will issue from the Patent Applications or, if issued, that such patents
will be of commercial benefit to us, afford us adequate protection from
competing products, or not be challenged or declared invalid.
Patent Protection.
In the event that a third party has also filed a patent application
relating to inventions in the Patent Applications, we may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office to determine priority of the inventions, which could result in
substantial uncertainties and cost for us, even if the eventual outcome is
favorable to us. There can be no assurance that any patents, if issued, would be
held valid by a court of competent jurisdiction.
A number of pharmaceutical, biotechnology and other companies,
universities and research institutions have filed patent applications or have
been issued patents relating to cell therapy, stem cells and other technologies
potentially relevant to or required by our expected products. We cannot predict
which, if any, of such applications will issue as patents or the claims that
might be allowed. We are aware that a number of companies have filed
applications relating to stem cells. We are also aware of a number of patent
applications and patents claiming use of genetically modified cells to treat
disease, disorder or injury.
If third party patents or patent applications contain claims infringed by
the licensed technology and such claims or claims in issued patents are
ultimately determined to be valid, there can be no assurance that we would be
able to obtain licenses to these patents at a reasonable cost, if at all, or be
able to develop or obtain alternative technology. If we are unable to obtain
such licenses at a reasonable cost, we may not be able to develop certain
products commercially. There can be no assurance that we will not be obliged to
defend ourselves in court against allegations of infringement of third party
patents. Patent litigation is very expensive and could consume substantial
resources and create significant uncertainties. An adverse outcome in such a
suit could subject us to significant liabilities to third parties, require
disputed rights to be licensed from third parties, or require us to cease using
such technology.
RESTRICTIVE AND EXTENSIVE GOVERNMENT REGULATION COULD SLOW OR HINDER OUR
PRODUCTION OF A CELLULAR THERAPY THAT CAN BE SOLD TO END LINE USERS.
The research and development of stem cell therapies is subject to and restricted
by extensive regulation by governmental authorities in the United States and
other Countries. The process of obtaining U.S. Food and Drug Administration and
other necessary regulatory approvals is lengthy, expensive and uncertain. Thus,
we may fail to obtain the necessary approvals to continue our research and
development, which would hinder our ability to manufacture or market any future
profitable product.
OUR STOCK PRICE IS HIGHLY VOLATILE.
The market price of our common stock has fluctuated and may continue to
fluctuate. These fluctuations may be exaggerated since the trading volume of
our common stock is volatile. These fluctuations may or may not be based upon
any business or operating results. Our common stock may experience similar or
even more dramatic price and volume fluctuations.
OUR "BLANK CHECK" PREFERRED STOCK COULD BE ISSUED TO PREVENT A BUSINESS
COMBINATION NOT DESIRED BY MANAGEMENT OR OUR CURRENT MAJORITY SHAREHOLDERS.
Our articles of incorporation authorize the issuance of "blank check"
preferred stock with designations, rights and preferences as may be determined
by our board of directors without shareholder approval. Our preferred stock
could be utilized as a method of discouraging, delaying, or preventing a change
in our control and as a method of preventing shareholders from receiving a
premium for their shares in connection with a change of control.
WE ARE UNLIKELY TO PAY DIVIDENDS ON OUR COMMON STOCK.
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. While our dividend policy will be based on our operating
results and capital needs, we anticipate that all earnings, if any, will be
retained to finance our future operations.
MARKET PRICE INFORMATION AND DIVIDEND POLICY
Our common stock trades on the OTC Bulletin Board. The market for our
common stock is limited, sporadic, and highly volatile. The following table
sets forth the approximate high and low closing sales prices for our common
stock for the last two fiscal years. The quotations reflect inter-dealer
prices, without retail markups, markdowns, or commissions and may not represent
actual transactions.
High Low
-------------
YEAR 2003
Quarter ended December 31 $1.50 $0.30
Quarter ended September 30 1.50 0.25
Quarter ended June 30 1.50 0.25
Quarter ended March 31 1.50 0.25
YEAR 2002
Quarter ended December 31 $1.50 $1.50
Quarter ended September 30 2.50 2.50
Quarter ended June 30 0.00 0.00
Quarter ended March 31 2.50 2.50
As of June 1, 2004, we had 107 stockholders of record. To date, we have never
declared or paid any cash dividends nor do we expect to pay any dividends in the
near future. Our current policy is to retain earnings, if any, to provide funds
for operating and expansion of our business. This policy will be reviewed by
our board of directors from time to time in light of our earnings and financial
position.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
In June 2004, Sportan completed the Stock Transaction, where Sportan
issued an aggregate of 6,386,439 of its shares of common stock to the former
shareholders of PharmaFrontiers (in exchange for all of the outstanding capital
stock of PharmaFrontiers), resulting in the former shareholders of
PharmaFrontiers owning approximately 86% of the issued and outstanding Company
common stock. PharmaFrontiers became a wholly-owned subsidiary of the Company,
through which operations will be conducted. From an accounting standpoint,
PharmaFrontiers is deemed the acquirer in a reverse merger whereby
PharmaFrontiers is deemed the survivor of the merger. The combined company will
pursue PharmaFrontiers' business model and strategy by competing in the
biotechnology industry, specifically the research and development of adult
pluripotent stem cells derived from adult human peripheral blood.
PharmaFrontiers has not generated any profits since its inception in
January 2003, has no source of revenues, and has incurred significant operating
losses. As of December 31, 2003, it generated $126,003 in losses. Due to the
nature of the biotechnology industry, we do not expect to generate revenue until
future years, and we expect expenses to increase substantially in the next few
years.
The discussion in the "Results of Operation" below relate only to
PharmaFrontiers. Please review Sportan's prior Exchange Act filings for a
discussion of its last result of operations.
RESULTS OF OPERATIONS
Inception to March 31, 2004.
Net Sales. We recorded no sales from inception to March 31, 2004.
Additionally, we do not foresee any sales in the current fiscal year. As of the
date hereof, we have not developed any products or methods from the technology
described under the License. We make no assurances that any product or method
will be ever developed and later
sold. Under the License, we are allowed to sublicense to third parties and
receive royalty income. As of the date hereof, we have not sublicensed our
technology. We make no assurances that we will sublicense our technology.
General and Administrative Expenses. Our general and administrative expenses
was $593,213 from inception to March 31, 2004. We anticipate our general and
administrative expenses to increase in the future.
Net loss. The Company had a net loss from inception to March 31, 2004 of
$669,031.
LIQUIDITY
At March 31, 2004, the Company had available cash of approximately $61,000.
The Company's current burn rate is approximately $40,000 per month. We believe
that we will need to raise a minimum of $250,000 to meet our working capital
needs for the balance of the 2004 calendar year. We anticipate our monthly cash
burn to increase as we implement our business strategy and we will need to raise
additional working capital during 2004 to fund our business strategy. The
Company does not have any income from operations nor do we expect any income
from operations in the foreseeable future, and thus, we must finance our
obligations entirely by external sources. The Company has no firm commitments
or arrangements for external financing. We will use our best efforts to obtain
equity or debt financing to fund operations. We provide no assurance that we
will be successful in any future financing effort to obtain the necessary
working capital to support our operations. Our viability is contingent upon our
ability to receive external financing.
ITEM 6. RESIGNATIONS OF REGISTRANT'S DIRECTORS
Inapplicable.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Pharmafrontiers Corporation
Tomball, Texas
We have audited the accompanying balance sheet of Pharmafrontiers Corporation,
("Pharma")(a development stage company), as of December 31, 2003 and the related
statements of operations, changes in stockholders' deficit and cash flows for
the year ended December 31, 2003. These financial statements are the
responsibility of Pharma'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 of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Pharma as of December 31, 2003
and the results of its operations and its cash flows for the year ended December
31, 2003 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that Pharma
will continue as a going concern. As discussed in Note 2 to the financial
statements, Pharma has suffered recurring losses from operations and has a
negative working capital, which raises substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters are
described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
MALONE & BAILEY, PLLC
www.malone-bailey.com
Houston, Texas
May 23, 2004
PHARMAFRONTIERS CORPORATION
(A Development Stage Company)
BALANCE SHEET
December 31, 2003
ASSETS
Current Assets
Cash $ 68
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 137
Accrued expenses 7,505
Notes Payable 61,394
----------
Total Current Liabilities 69,036
----------
Commitments and Contingencies -
Stockholders' Deficit
Preferred stock, $.01 par value, 50,000,000 shares
authorized, no shares issued and outstanding -
Common stock, $.00001 par value, 50,000,000 shares
authorized, 3,543,750 shares issued and outstanding 35
Additional paid in capital 57,000
Accumulated deficit (126,003)
----------
Total Stockholders' Deficit (68,968)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 68
==========
See accompanying summary of accounting policies
and notes to financial statements.
PHARMAFRONTIERS CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
January 22, 2003 (Inception) to
December 31, 2003
2003
-----------
General and administrative $ 80,801
-----------
Net operating loss (80,801)
Interest expense (45,202)
-----------
NET LOSS $ (126,003)
===========
Basic and diluted loss per share $ (.03)
Weighted average shares outstanding 3,543,750
See accompanying summary of accounting policies
and notes to financial statements.
25
PHARMAFRONTIERS CORPORATION
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
January 22, 2003 (Inception) to
December 31, 2003
Additional
Common Stock Paid in Retained
Shares Amount Capital Deficit Totals
------------- ---------- ---------- ---------- ----------
Shares issued for cash 5,250,000 $ 53 $ 947 $ - $ 1,000
Shares cancelled (1,706,250) ( 18) ( 307) (325)
Beneficial Conversion
feature 28,180 28,180
Warrants 28,180 28,180
Net loss (126,003) (126,003)
------------- ---------- ---------- ---------- ----------
Balances at
December 31, 2003 3,543,750 $ 35 $ 57,000 $(126,003) $( 68,968)
============= ========== ========== ========== ==========
See accompanying summary of accounting policies
and notes to financial statements.
26
PHARMAFRONTIERS CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOW
January 22, 2003 (Inception) to
December 31, 2003
2003
----------
Cash Flows From Operating Activities
Net loss $(126,003)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of discount on notes payable due
to warrants and beneficial conversion feature 42,755
Changes in:
Accounts payable 137
Accrued liabilities 7,504
----------
Net Cash Used In Operating Activities (75,607)
----------
Cash Flows from Financing Activities
Common Stock issued for cash 675
Proceeds from convertible notes 75,000
----------
Net Cash Provided By Financing Activities 75,675
----------
Net change in cash 68
Cash at beginning of year -
----------
Cash at end of year
$ 68
==========
See accompanying summary of accounting policies
and notes to financial statements.
27
PHARMAFRONTIERS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
Pharmafrontiers Corporation ("Pharma"), was incorporated in Texas on January 22,
2003. During the development stage, PharmaFrontiers plans to acquire the
worldwide license to technology developed at Argonne National Laboratory, a U.S.
Department of Energy Laboratory Operated by the University of Chicago
("Argonne"). The license provides PharmaFrontiers rights to utilize technology
related to Pluripotent Stem Cell in Adults (the "License"). A patent
application was filed, in November of 2003, with the United States Patent and
Trade Office regarding the technology involved in the License. This technology
allows the isolation of stem cells from an individual's blood.
Cash Equivalents. Highly liquid investments with original maturities of three
months or less are considered cash equivalents. There were no cash equivalents
as of December 31, 2003.
Long-lived Assets. Property and equipment are stated on the basis of historical
cost less accumulated depreciation. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets. Major
renewals and improvements are capitalized, while minor replacements, maintenance
and repairs are charged to current operations.
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Income Taxes. Income tax expense is based on reported earnings before income
taxes. Deferred income taxes reflect the impact of temporary differences
between assets and liabilities recognized for financial reporting purposes and
such amounts recognized for tax purposes, and are measured by applying enacted
tax rates in effect in years in which the differences are expected to reverse.
Basic and Diluted Loss Per Share. Basic and diluted loss per share equals net
loss divided by weighted average shares outstanding during the period. Diluted
loss per share includes the impact of common stock equivalents using the
treasury stock method when the effect is dilutive. There were no common stock
equivalents during 2003.
Use of Estimates in Financial Statement Preparation. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock Options and Warrants. Pharma accounts for non-cash stock-based
compensation issued to non-employees in accordance with the provisions of
28
SFAS No. 123 and EITF No. 96-18, Accounting for Equity Investments That Are
Issued to Non-Employees for Acquiring, or in Conjunction with Selling Goods or
Services. Common stock issued to non-employees and consultants is based upon the
value of the services received or the quoted market price, whichever value is
more readily determinable. Pharma accounts for stock options and warrants issued
to employees under the intrinsic value method. Under this method, Pharma
recognizes no compensation expense for stock options or warrants granted when
the number of underlying shares is known and the exercise price of the option or
warrant is greater than or equal to the fair market value of the stock on the
date of grant.
RecentlyIssued Accounting Pronouncements. Pharma does not expect the adoption
of recently issued accounting pronouncements to have a significant impact on
their financial position, results of operations or cash flow.
NOTE 2 - GOING CONCERN
Pharma incurred a net loss of $126,003 forthe initial period ended December 31,
2003, and has negative working capital of $68,698 as of December 31, 2003.
These conditions create an uncertainty as to Pharma's ability to continue as a
going concern. Management is seeking financing from third parties and sale or
merger opportunities. The financial statements do not include any adjustments
that might be necessary if Pharma is unable to continue as a going concern.
NOTE 3 - INCOME TAXES
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2003 are
as follows:
Net operating loss carryforward $ 42,841
Less: valuation allowance (42,841)
--------------
Net current deferred tax assets -
==============
Pharma has a net operating loss carryforward of $126,003 which will expire in
the year 2023.
NOTE 4 - NOTES PAYABLE
During 2003 Pharma borrowed $75,000 from four individuals by issuing convertible
notes. The notes bear interest at 8% per annum and have varying maturity dates.
The holder of the notes may convert at $0.50 per share given the stock has
traded on a recognized exchange for an average of $1.00 per share in any given
20 consecutive day period. The holder may also, at his sole discretion,
purchase from Warren Lau, the President and CEO of the Company, two shares of
the Company's common stock at a purchase price of $0.10 per share for every
$1.00 in principal amount of the Note. Pharma may elect to extend each note by
no more than six months. In consideration for such an extension, Pharma will
allow the holder to purchase one share of common stock for every $1.00 in
principal of the note at an exercise price of $1.00 per share. As of December
31, 2003, two notes totaling $15,000 were in default.
29
NOTE 5 - EQUITY
In February and March of 2003, Pharma issued 5,250,000 shares of common stock
for $1,000. On April 2, 2003, 1,706,250 shares were reacquired for $325 and
retired.
Additional contributions to capital of $56,240 resulted from the discounted
value to notes payable due to warrants and beneficial conversion features
attached to convertible notes.
Warrants
On February 27, 2003, 40,000 warrants were issued per terms of an 8% convertible
note referenced in "Note 4 - Notes Payable". The warrants have an exercise
price of $0.10 per share, vest immediately, and expire upon conversion Note.
On March 28, 2003, 10,000 warrants were issued per terms of an 8% convertible
note referenced in "Note 4 - Notes Payable". The warrants have an exercise
price of $0.10 per share, vest immediately, and expire upon conversion of the
Note.
On June 11, 2003, 20,000 warrants were issued per terms of an 8% convertible
note referenced in "Note 4 - Notes Payable". The warrants have an exercise
price of $0.10 per share, vest immediately, and expire upon conversion of the
Note.
On August 27, 2003, 40,000 warrants were issued per terms of an 8% convertible
note referenced in "Note 4 - Notes Payable". The warrants have an exercise
price of $0.10 per share, vest immediately, and expire upon conversion of the
Note.
On October 8, 2003, 20,000 warrants were issued per terms of an 8% convertible
note referenced in "Note 4 - Notes Payable". The warrants have an exercise
price of $0.10 per share, vest immediately, and expire upon conversion of the
Note.
On July 4, 2003, 20,000 warrants were issued per terms of an 8% convertible note
referenced in "Note 4 - Notes Payable". The warrants have an exercise price of
$0.10 per share, vest immediately, and expire upon conversion of the Note.
On September 20, 2003, 5,000 warrants were issued per terms of an 8% convertible
note referenced in "Note 4 - Notes Payable". The warrants have an exercise
price of $1.00 per share, vest immediately, and expire upon conversion of the
Note.
On December 1, 2003, 10,000 warrants were issued per terms of an 8% convertible
note referenced in "Note 4 - Notes Payable". The warrants have an exercise
price of $1.00 per share, vest immediately, and expire upon conversion of the
Note.
30
Summary information regarding warrants is as follows:
As of December 31, 2003, there were 165,000 warrants outstanding and exercisable
with a weighted average price of $.45 per warrant. The warrants will expire
upon conversion of the Notes. As of May 26, 2004, all notes were either paid in
full, or converted to shares of Pharma common stock.
NOTE 6 - SUBSEQUENT EVENTS
Employee Agreements
In January, 2004, Pharma entered into an employment agreement with its President
and COO. The agreement provides an annual salary of $98,000 per year with
additional employee benefits as defined by the agreement. On February 23, 2004
500,000 shares were issued to the COO for services at a value of $.40 per share.
On April 29, 2004, Pharma entered into an employment agreement with its Vice
President of Corporate Development. The agreement provides for the issuance of
231,500 shares of common stock to the employee as well as, for consideration
paid of $100, two options, each to purchase at a price per share of 80% of the
then current market value of common stock, 200,000 shares of Pharma's common
stock. The options retire two and three years from the effective date of the
agreement, respectively. The agreement will terminate on April 29, 2007.
On April 29, 2004, Pharma entered into an employment agreement with its Chief
Financial Officer. The agreement provides for an annual salary of $55,000.
Additionally, the employee may purchase 150,000 shares of Pharma common stock at
$0.01 per share. As well, the agreement granted two options, each to purchase
at a price per share of 80% of the then current market value of common stock,
50,000 shares of Pharma's common stock, one each upon the occurrence of the
earlier of the following:(1) the acquisition of more than fifty percent of the
stock of Pharma by an acquirer at a total market value exceeding two hundred
fifty million dollars, or (2) a financing of Pharma with one time proceeds of at
least ten million dollars which values the then outstanding Pharma common stock
at one hundred million dollars or more. This agreement will terminate on April
29, 2005.
License Agreement
On February 20, 2004 Pharma entered into an agreement with the University of
Chicago for the worldwide license to technology developed at Argonne National
Laboratory, a U.S. Department of Energy Laboratory Operated by the University of
Chicago. In consideration for the license, Pharma paid the University $25,000
and authorized the issuance of 375,375 shares of its common stock. Of which,
187,688 were issued on February 20, 2004 and 187,687 will be issued upon the
successful rescue of diabetic mice by implantation of insulin producing cells
generated from peripheral monocyte derived stem cells. Per agreement terms,
upon the latter of a) testing monocyte derived stem cells in humans by any
party, or b) issuance of a US patent to the University of Chicago related to
UHCI# ANL-IN-02-021, Pharma will issue to the University, a number of shares of
stock such that the University's ownership of Pharma stock is equal to 10% of
the then fully diluted outstanding shares less the University's pro rata portion
of the number of shares actually issued by Pharma as a whole or in partial
consideration for any merger, stock purchase,
31
or other acquisition by Pharma of all or substantially all of the stock or
assets of another company, or for any license to Pharma of additional technology
related to the commercialization of Licensed Product.
Board of Directors Agreements
In April and May of 2004, Pharma entered into agreements with four individuals
that will comprise its Board of Directors. The agreements resulted in the
authorization of 200,000 shares of common stock and compensation of $22,000 per
year. As of May 26, 2004, 180,000 shares of the authorized stock have been
issued.
Stock Purchase Agreement
On May 5, 2004 Pharma entered into an agreement with Sportan United Industries
whereby Pharma will exchange 100 percent of its shares of common stock for the
shares of common stock of Sportan. The closing of this transaction has not
occurred as of May 26, 2004.
Convertible Notes Payable
As of May 26, 2004, Pharma has issued fifteen additional 8% Convertible Notes
totaling $175,000. The terms of the Notes were consistent with those of NOTE 4.
One note was settled in full by payment of cash. The principal and interest on
all remaining notes have been converted into shares of common stock at a price
of $.40 per share resulting in the issuance of 607,501 shares of Pharma common
stock. Also, as of May 26, 2004, all warrants attached to the 8% Convertible
Notes with an exercise price of $.10 have been exercised, resulting in the
transfer of 352,002 shares from Warren Lau to various shareholders.
Related Party Transactions
On February 23, 2004, 750,000 shares of Pharma common stock valued at $.40 per
share were issued to a major shareholder for $.01 per share. The difference in
the value of the stock less the cash paid to Pharma resulted in a $292,500
expense.
32
PHARMAFRONTIERS CORPORATION
(A Development Stage Company)
BALANCE SHEET
March 31, 2004
(unaudited)
ASSETS
Current Assets
Cash $ 61,516
License 100,075
Property & equipment, net 3,575
----------
Total Assets $ 165,166
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accrued expenses $ 12,088
Notes Payable 114,380
----------
Total Current Liabilities 126,468
----------
Commitments and Contingencies -
Stockholders' Equity
Preferred stock, $.01 par value, 50,000,000 shares
authorized, no shares issued and outstanding -
Common stock, $.00001 par value, 50,000,000 shares
authorized, 4,981,438 shares issued and outstanding 50
Additional paid in capital 707,679
Accumulated deficit (669,031)
----------
Total Stockholders' Equity 38,698
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 165,166
==========
33
PHARMAFRONTIERS CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2004, and
Period from January 22, 2003 (Inception) to
March 31, 2003 and 2004
(unaudited)
Three
Months Inception Inception
Ended to to
March 31, March 31, March 31,
2004 2003 2004
----------- ----------- -----------
General and administrative $ 512,411 $ 674 $ 593,213
----------- ----------- -----------
Net operating loss (512,411) (674) (593,213)
Interest expense ( 30,616) - ( 75,818)
----------- ----------- -----------
NET LOSS $ (543,027) $ (674) $ (669,031)
=========== =========== ===========
Basic and diluted loss per share $ (0.12) $ (0.00) $ (0.18)
Weighted average shares outstanding 4,376,771 2,559,375 3,752,005
34
PHARMAFRONTIERS CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOW
Three Months Ended March 31, 2004, and
Period from January 22, 2003 (Inception) to
March 31, 2003 and 2004
(unaudited)
Three
Months Inception Inception
Ended to to
March 31, March 31, March 31,
2004 2003 2004
----------- ----------- -----------
Cash Flows From Operating Activities
Net loss $ (543,028) $ (674) $ (669,031)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Stock issued for services 492,500 - 492,500
Amortization of discount on
notes payable due to warrants
and beneficial conversion feature 28,604 - 71,357
Depreciation 37 - 37
Changes in:
Accounts payable ( 137) - -
Accrued liabilities 4,583 - 12,088
----------- ----------- -----------
Net Cash Used In Operating Activities ( 17,441) (674) ( 93,049)
----------- ----------- -----------
Cash Flows From Investing Activities
Purchase of license ( 25,000) - ( 25,000)
Purchase of property & equipment ( 3,611) - ( 3,611)
----------- ----------- -----------
Net Cash Used In Financing Activities ( 28,611) - ( 28,611)
----------- ----------- -----------
Cash Flows From Financing Activities
Common Stock issued for cash 7,500 1,000 8,176
Proceeds from convertible notes 100,000 - 175,000
----------- ----------- -----------
Net Cash Provided By Financing Activities 107,500 1,000 183,176
----------- ----------- -----------
Net change in cash 61,448 326 61,516
Cash at beginning of year 68 - -
----------- ----------- -----------
Cash at end of year $ 61,516 $ 326 $ 61,516
=========== =========== ===========
35
PHARMAFRONTIERS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Pharmafrontiers
Corporation, ("Pharma",(a development stage company), have been prepared in
accordance with accounting principles generally accepted in the United States of
America and the rules of the Securities and Exchange Commission ("SEC"), and
should be read in conjunction with the audited financial statements and notes
thereto contained in the Pharma's latest Annual Report filed with the SEC on
Form 8-K. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the interim periods presented have been
reflected herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. Notes
to the financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal year,
2003, as reported in Form 8-K, have been omitted.
NOTE 2 - LICENSE AGREEMENT
On February 20, 2004, Pharma entered into an agreement with the University of
Chicago for the worldwide license to technology developed at Argonne National
Laboratory, a U.S. Department of Energy Laboratory operated by the University of
Chicago. In consideration for the license, Pharma paid the University $25,000
and authorized the issuance of 375,375 shares of its common stock. Of which,
187,688 were issued on February 20, 2004 and 187,687 will be issued upon the
successful rescue of diabetic mice by implantation of insulin producing cells
generated from peripheral monocyte derived stem cells. Per agreement terms,
upon the latter of a) testing monocyte derived stem cells in humans by any
party, or b) issuance of a US patent to the University of Chicago related to
UHCI# ANL-IN-02-021, Pharma will issue to the University, a number of shares of
stock such that the University's ownership of Pharma stock is equal to 10% of
the then fully diluted outstanding shares less the University's pro rata portion
of the number of shares actually issued by Pharma as a whole or in partial
consideration for any merger, stock purchase, or other acquisition by Pharma of
all or substantially all of the stock or assets of another company, or for any
license to Pharma of additional technology related to the commercialization of
Licensed Product.
NOTE 3 - STOCK PURCHASE AGREEMENT
On May 5, 2004 Pharma entered into an agreement with Sportan United Industries
whereby Pharma will exchange 100 percent of its shares of common stock for the
shares of common stock of Sportan. The closing of this transaction has not
occurred as of May 26, 2004.
36
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following pro forma financial statements has been derived from the financial
statements of Pharmafrontiers Corporation ("Pharma") at December 31, 2003 and
adjusts such information to give effect to its reverse acquisition by Sportan
United Industries, Inc. ("Sportan"), as if the acquisition had occurred at their
respective year-ends as shown. The pro forma financial statements are presented
for informational purposes only and do not purport to be indicative of the
financial condition that would have resulted if the acquisition had been
consummated at either year-end. The pro forma financial statements should be
read in conjunction with the notes thereto and each Company's consolidated
financial statements and related notes thereto contained herein and in Pharma's
latest annual report filed with the SEC.
Pro forma Consolidated Condensed Balance Sheet:
12/31/03 9/30/03
Pharma Sportan Adjustments Pro-Forma
---------- ------------ -------------- ------------
Current Assets
Cash $ 68 $ 1,235 $ 1,303
========== ============ ============
Current Liabilities
Accounts payable $ 137 232,068 232,205
Accrued Expenses 7,505 21,371 28,876
Accrued salary to stockholder - 281,152 281,152
Notes payable 61,394 - 61,349
Notes payable - related party - 657,175 657,175
---------- ------------ ------------
Total Liabilities 69,036 1,191,766 1,260,802
---------- ------------ ------------
Preferred stock, $.01 par,
50,000,000 shares authorized,
none issued and outstanding - - -
Common stock, $.00001 par,
50,000,000 shares authorized,
3,543,750 shares issued
and outstanding 35 - (1) 35 -
Convertible Preferred stock,
$.001 par, 10,000,000 shares
authorized, none issued
and outstanding - - -
Common stock, $.05 par,
50,000,000 shares authorized,
666,789 and 7,053,728 shares
37
issued and outstanding - 33,339 (1) (319,322) 352,661
Paid in capital 57,000 732,252 (1) 2,275,409 (1,486,157)
Accumulated Deficit (126,003) (1,956,122) (1)(1,956,122) (126,003)
---------- ------------ ------------
Total Stockholders' deficit ( 68,968) (1,190,531) (1,259,499)
---------- ------------ ------------
Total liabilities and
Stockholders' deficit $ 68 $ 1,235 $ 1,303
========== ============ ============
38
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On June 4, 2004 6,386,439 shares of Sportan common stock were issued to Pharma
shareholders for all outstanding Pharma common shares.
ITEM 8. CHANGE IN FISCAL YEAR
Concurrent with the Stock Transaction, the Company's management elected to
change its fiscal year-end from September 30 to December 31. The Company's next
periodic filing in accordance with the Securities Exchange Act of 1934, as
amended, will be a Form 10-QSB for the three and six months ended June 30, 2004.
ITEM 9. REGULATION FD DISCLOSURE.
Inapplicable.
ITEM 10. AMENDMENT TO THE REGISTRANT'S CODE OF ETHICS , OR WAIVER OF A
PROVISION OF THE CODE of ETHICS.
Inapplicable.
ITEM 11. TEMPORARY SUSPENSION OF TRADING UNDER REGISTRANT'S EMPLOYEE BENEFIT
PLANS
ITEM 12. RESULTS OF OPERATION AND FINANCIAL CONDITION
39
The following exhibits are to be filed as part of this 8-k:
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
Exhibit 2.1(2) Stock Purchase Agreement dated May 5, 2004.
Exhibit 3.1(1) Articles of Incorporation of Sportan United Industries,
Inc.
Exhibit 3.2(1) Bylaws of Sportan United Industries, Inc.
Exhibit 4.1(1) Common Stock Certificate, Sportan United Industries, Inc.
Exhibit 10.1(1) Sportan United Industries, Inc. 1999 Stock Option Plan
Exhibit 10.2(2) Employment Agreement with Warren C. Lau
Exhibit 10.3(2) Employment Agreement with William Rouse.
Exhibit 10.4(2) Employment Agreement with Wayne Fritzshe.
Exhibit 10.5(2) Director's Agreement with Jeffrey Adduci
Exhibit 10.6(2) Director's Agreement with Robert H. Gow
Exhibit 10.7(2) Director's Agreement with Warren C. Lau
- ----------------
(1) Filed previously on registration statement Form 10-SB SEC File No.
000-25513.
(2) Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SPORTAN UNITED INDUSTRIES, INC.
By: Jason Otteson
-------------------
Chief Executive Officer
DATE: June 4, 2004
40
END OF FILING
41