DELIATROPH PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
DECEMBER 31, 2003
The Board of Directors and Shareholders
DeliaTroph Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of DeliaTroph Pharmaceuticals,
Inc., doing business as Hyalozyme Therapeutics, (a California corporation) as of
December 31, 2003 and 2002, and the related statements of operations,
shareholders' equity and cash flows for the years then ended and for the period
from inception (February 26, 1998) to December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DeliaTroph Pharmaceuticals,
Inc. as of December 31, 2003 and 2002, and the results of its operations and its
cash flows for the years then ended and for the period from inception (February
26, 1998) to 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 the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding this uncertainty are also described in Note 8. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
CACCIAMATTA ACCOUNTANCY CORPORATION
Irvine, CA
January 7, 2004
DELIATROPH PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
- ---------------------------------------------------------------------------------------------------------
2003 2002
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 503,580 $ 88,910
----------- -----------
Total Current Assets 503,580 88,910
PROPERTY AND EQUIPMENT - Net 130,904 134,170
OTHER ASSETS 12,763 7,500
----------- -----------
Total Assets $ 647,247 $ 230,580
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 223,278 $ 58,800
Accrued expenses 50,162 109,085
Notes payable -- 430,000
Interest on notes payable -- 12,255
----------- -----------
Total Current Liabilities 273,440 610,140
COMMITMENTS AND CONTINGENCIES: -- --
SHAREHOLDERS' EQUITY (DEFICIT):
Series A convertible preferred stock, without par value; 4,816,000 shares
authorized; 0 shares issued and outstanding
in 2003; 3,803,507 shares issued and outstanding in 2002 -- 198,006
Series B convertible preferred stock, without par value; 3,473,343
shares authorized; 0 shares issued and outstanding in 2003; 5,333,350
shares authorized; 2,743,121 shares issued and outstanding in 2002 -- 1,254,672
Series C convertible preferred stock, without par value; 2,367,394
shares authorized; 2,367,114 shares issued and outstanding
in 2003; 0 shares issued and outstanding in 2002 1,004,486 --
Common stock, without par value; 60,000,000 shares authorized;
15,952,980 shares issued and outstanding in 2003;
4,599,951 shares issued and outstanding in 2002 3,349,826 33,242
Deficits accumulated during the development stage (3,980,505) (1,865,480)
----------- -----------
Total Shareholders' Equity (Deficit) 373,807 (379,560)
----------- -----------
Total Liabilities and Shareholders' Equity (Deficit) $ 647,247 $ 230,580
=========== ===========
DELIATROPH PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND FROM INCEPTION TO DECEMBER 31, 2003
- ------------------------------------------------------------------------------------------
CUMULATIVE
FROM INCEPTION
(FEBRUARY 26, 1998)
2003 2002 TO 2003
----------- ----------- -----------
EXPENSES:
Research and development $ 1,145,420 $ 773,464 $ 2,410,044
General and administrative 576,452 379,438 1,201,145
----------- ----------- -----------
OPERATING LOSS (1,721,872) (1,152,902) (3,611,189)
Other income (expense)
Interest expense (394,439) (12,306) (406,745)
Other, net 2,086 31,243 42,229
----------- ----------- -----------
Other income (expense) (392,353) 18,937 (364,516)
LOSS BEFORE INCOME TAXES (2,114,225) (1,133,965) (3,975,705)
Income tax expense 800 800 4,800
----------- ----------- -----------
NET LOSS $(2,115,025) $(1,134,765) $(3,980,505)
=========== =========== ===========
Net loss per share, basic and diluted $ (0.31) $ (0.25)
=========== ===========
Shares used in computing net loss per share,
basic and diluted 6,826,109 4,599,591
=========== ===========
DELIATROPH PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
FROM INCEPTION (FEBRUARY 26, 1998) TO DECEMBER 31, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
(All share information reflects post-split amounts)
SERIES A SERIES B SERIES C DEFICIT TOTAL
CONVERTIBLE CONVERTIBLE CONVERTIBLE ACCUMULATED SHARE-
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK DURING HOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEVELOPMENT EQUITY
------------------- ------------------- ------------------- ----------------- ----------- ---------
Initial
capitalization -- -- -- -- -- -- 2,078,662 10,956 -- 10,956
Issuance of
Series A
preferred
stock 2,520,014 132,819 -- -- -- -- -- -- -- 132,819
Net loss -- -- -- -- -- -- -- -- (41,884) (41,884)
------------------- ------------------- ------------------- ------------------- -------------------
BALANCE,
DECEMBER
31, 1999 2,520,014 132,819 -- -- -- -- 2,078,662 10,956 (41,884) 101,891
Issuance of
common stock
for cash -- -- -- -- -- -- 2,078,662 10,956 -- 10,956
Issuance of
common stock
for license -- -- -- -- -- -- 442,267 2,330 -- 2,330
Issuance of
Series A
preferred
stock - net 1,283,493 65,187 -- -- -- -- -- -- -- 65,187
Net loss -- -- -- -- -- -- -- -- (125,210) (125,210)
------------------- ------------------- ------------------- ------------------- -------------------
BALANCE,
DECEMBER
31, 2000 3,803,507 198,006 -- -- -- -- 4,599,591 24,242 (167,094) 55,154
Issuance of
Series B
preferred
stock - net -- -- 1,779,608 801,709 -- -- -- -- -- 801,709
Net loss -- -- -- -- -- -- -- -- (563,621) (563,621)
------------------- ------------------- ------------------- ------------------- -------------------
BALANCE,
DECEMBER
31, 2001 3,803,507 198,006 1,779,608 801,709 -- -- 4,599,591 24,242 (730,715) 293,242
Issuance of
Series B
preferred
stock - net -- -- 963,513 452,963 -- -- -- -- -- 452,963
Issuance of
common stock
options
to consultant -- -- -- -- -- -- -- 500 -- 500
Issuance
of warrants
for common
stock for
services -- -- -- -- -- -- -- 8,500 -- 8,500
Net loss -- -- -- -- -- -- -- -- (1,134,765) (1,134,765)
------------------- ------------------- ------------------- ------------------- -------------------
BALANCE,
DECEMBER
31, 2002 3,803,507 198,006 2,743,121 1,254,672 -- -- 4,599,591 33,242 (1,865,480) (379,560)
Issuance of
Series C
preferred
stock - net -- -- 289,482 -- 2,367,114 1,004,486 -- -- -- 1,004,486
Issuance of
common
stock
options to
consultants -- -- -- -- -- -- -- 85,388 -- 85,388
Issuance of
common stock
due to the
exercise
of options -- -- -- -- -- -- 256,410 100,000 -- 100,000
Conversion of
notes to
common stock -- -- -- -- -- -- 3,960,359 1,272,000 -- 1,272,000
Conversion of
interest on
notes to
common stock -- -- -- -- -- -- 300,510 99,764 -- 99,764
Beneficial
conversion
feature of
2003 notes -- -- -- -- -- -- -- 306,754 -- 306,754
Conversion
of Series A
preferred
stock to
common stock (3,803,507) (198,006) -- -- -- -- 3,803,507 198,006 -- --
Conversion
of Series B
preferred
stock to
common stock -- -- (3,032,603) (1,254,672) -- -- 3,032,603 1,254,672 -- --
Net loss -- -- -- -- -- -- -- -- (2,115,025) (2,115,025)
------------------- ------------------- ------------------- ------------------- -------------------
BALANCE,
DECEMBER
31, 2003 -- -- -- -- 2,367,114 1,004,486 15,952,980 3,349,826 (3,980,505) 373,807
=================== =================== ===================== ==================== ====================
DELIATROPH PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND FROM INCEPTION TO DECEMBER 31, 2003
- -----------------------------------------------------------------------------------------------------------------------
CUMULATIVE
FROM INCEPTION
(FEBRUARY 26, 1998)
2003 2002 TO 2003
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,115,025) $(1,134,765) $(3,980,505)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 75,726 100,386 208,890
Issuance of common stock for goods and services 85,388 9,000 102,245
Issuance of common stock for license -- -- 2,330
Issuance of common stock for accrued interest on notes 87,510 12,254 99,764
Beneficial conversion feature on 2003 notes 306,754 -- 306,754
Changes in operating assets and liabilities:
Prepaid expenses and other assets (5,263) (9,999) (12,763)
Accounts payable and accrued expenses 105,554 156,375 273,440
----------- ----------- -----------
Net cash used by operating activities (1,459,356) (866,749) (2,999,845)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (72,460) (194,738) (316,695)
----------- ----------- -----------
Net cash used in investing activities (72,460) (194,738) (316,695)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes 842,000 430,000 1,272,000
Proceeds from issuance of common stock 100,000 -- 110,956
Proceeds from issuance of Series A preferred stock - net -- -- 178,006
Proceeds from issuance of Series B preferred stock - net -- 452,962 1,254,672
Proceeds from issuance of Series C preferred stock - net 1,004,486 -- 1,004,486
----------- ----------- -----------
Net cash provided by financing activities 1,946,486 882,962 3,820,120
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 414,670 (178,525) 503,580
CASH AND CASH EQUIVALENTS, beginning of period 88,910 267,435 --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 503,580 $ 88,910 $ 503,580
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 800 $ 800 $ 4,800
=========== =========== ===========
Interest paid $ -- $ -- $ --
=========== =========== ===========
Non cash investing and financing activities:
Common stock issued for property and equipment $ -- $ -- $ 3,099
=========== =========== ===========
Series A preferred stock issued for property and equipment $ -- $ -- $ 20,000
=========== =========== ===========
Conversion of notes payable to common stock $ 1,371,764 $ -- $ 1,371,764
=========== =========== ===========
Conversion of Series A preferred stock to common stock $ 198,006 $ -- $ 198,006
=========== =========== ===========
Conversion of Series B preferred stock to common stock $ 1,254,672 $ -- $ 1,254,672
=========== =========== ===========
DELIATROPH PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO DECEMBER 31, 2003 FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. GENERAL AND SIGNIFICANT ACCOUNTING POLICIES
GENERAL - DeliaTroph Pharmaceuticals, Inc. (a development stage company) dba
Hyalozyme Therapeutics, Inc. (the "Company") was incorporated on February 26,
1998 and is a development stage, product-focused biotechnology company dedicated
to the development and commercialization of recombinant therapeutic enzymes and
drug enhancement systems, based on intellectual property covering the family of
enzymes known as hyaluronidases.
BASIS OF PRESENTATION - The accompanying financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments
with maturities of three months or less from the original purchase date to be
cash equivalents.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
the Company to a concentration of credit risk consist of cash and cash
equivalents. The Company maintains its cash balances with one major commercial
bank. The balances are insured by the Federal Deposit Insurance Corporation up
to $100,000.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost. Equipment
and furniture are depreciated using the straight-line basis over their estimated
useful lives of three years and leasehold improvements are amortized using the
straight-line method over the estimated useful life of the asset or the lease
term, whichever is shorter.
LONG-LIVED ASSETS - The Company accounts for the impairment and disposition of
long-lived assets in accordance with Statements of Financial Accounting
Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. In accordance with SFAS No. 144, long-lived assets are
reviewed for events of changes in circumstances, which indicate that their
carrying value may not be recoverable. At December 31, 2003, the Company
believes there has been no impairment of the value of such assets.
INCOME TAXES - Income taxes are recorded in accordance with SFAS No. 109,
Accounting for Income Taxes. This statement requires the recognition of deferred
tax assets and liabilities to reflect the future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Measurement of the deferred items is based on enacted tax laws. In the event the
future consequences of differences between financial reporting bases and tax
bases of the Company's assets and liabilities result in a deferred tax asset,
SFAS No. 109 requires an evaluation of the probability of being able to realize
the future benefits indicated by such assets. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion
or all of the deferred tax asset will not be realized. At December 31, 2003, the
Company had federal and state deferred tax assets of approximately $1,200,000
and $300,000, respectively, both consisting primarily of net operating loss
carryforwards. The Company has recorded a full valuation allowance for all net
deferred tax assets generated to date. The deferred tax assets and valuation
allowances increased approximately $800,000 in 2003. The federal and state net
operating losses of approximately $3,400,000 will begin to expire in 2018 and
2008, respectively.
STOCK-BASED COMPENSATION - The Company has elected to adopt the disclosure only
provisions of SFAS No. 148 and will continue to follow APB Opinion No. 25 and
related interpretations in accounting for stock options granted to its employees
and directors. Accordingly, employee and director compensation expense is
recognized only for those options whose price is less than the market value at
the measurement date. When the exercise price of the employee or director stock
options is less then the estimated fair value of the underlying stock on the
grant date, the Company records deferred compensation for the difference and
amortizes this amount to expense in accordance with FASB Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other Variable Stock Options or
Award Plans, over the vesting period of the options.
Stock options issued to non-employees are recorded at their fair value as
determined in accordance with SFAS No. 123 and Emerging Issues Task Force
("EITF") No. 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring or in Conjunction With Selling Goods or Services,
and recognized over the related service period. Deferred charges for options
granted to non-employees are periodically re-measured as the options vest. The
Company's calculations were made using the Black-Scholes option-pricing model
with the following weighted-average assumptions: expected life of 48 months;
100% stock volatility; risk-free interest rate of 3.0%; no dividends during the
expected term; and forfeitures recognized as they occur.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the estimated life of the related options. The
Company's pro forma information follows (in thousands except per share data):
Year Ended
2003 2002
------- -------
Net loss, as reported $(2,115) $(1,135)
Deduct: Total stock-based employee
Compensation expense determined under
Fair value based method for all awards $ (149) $ (1)
------- -------
Pro forma net loss $(2,264) $(1,136)
======= =======
Net loss per share, basic and diluted, as reported $ (0.31) $ (0.25)
======= =======
Pro forma net loss per share, basic and diluted $ (0.33) $ (0.25)
======= =======
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from these estimates.
COMPREHENSIVE INCOME (LOSS) - Comprehensive income (loss) is defined as all
changes in a company's net assets, except changes resulting from transactions
with shareholders. At December 31, 2003 and 2002, the Company has no reportable
differences between net loss and comprehensive loss.
RESEARCH AND DEVELOPMENT COSTS - Costs and expenses that can be clearly
identified as research and development are charged to expense as incurred in
accordance with FASB statement No. 2, "Accounting for Research and Development
Costs."
NET LOSS PER SHARE - In accordance with SFAS No. 128, Earnings Per Share, and
SEC Staff Accounting Bulletin ("SAB") No. 98, basic net loss per common share is
computed by dividing net loss for the period by the weighted average number of
common shares outstanding during the period. Under SFAS No. 128, diluted net
income (loss) per share is computed by dividing the net income (loss) for the
period by the weighted average number of common and common equivalent shares,
such as stock options and warrants, outstanding during the period. Such common
equivalent shares have not been included in the Company's computation of net
loss per share as their effect would have been anti-dilutive.
2003 2002
------------ ------------
Numerator - Net loss $ (2,115,025) $ (1,134,765)
============ ============
Denominator - Weighted average shares outstanding 6,826,109 4,599,591
============ ============
Net loss per share $ (0.31) $ (0.25)
============ ============
Incremental common shares (not included
in denominator of diluted earnings per
share because of their anti-dilutive nature)
Employee stock options 6,392,567 168,710
Warrants to outside parties 67,129 --
Warrants on notes 867,419 315,830
Series B warrants 361,969 361,969
Series C warrants 2,367,114 --
Series C option 15,304,804 --
Warrants issuable if
Series C option is exercised 7,652,402 --
------------ ------------
Potential common equivalents 33,013,404 846,509
============ ============
If all currently outstanding potential common equivalents are exercised, the
Company would receive proceeds of approximately $25.3 million.
RECENT ACCOUNTING PRONOUNCEMENTS - In August 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 91, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions. This statement also amends
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. The provisions are generally to be applied
prospectively. The Company adopted the provisions of this statement effective
January 1, 2002. The adoption of SFAS No. 144 did not have a significant impact
on the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses financial accounting and reporting
for costs associated with exit or disposal activities and supersedes Emerging
Issues Task Force ("ETIF") Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a
liability for an exit cost, as defined in ETIF Issue 94-3, be recognized at the
date of an entity's commitment to an exit plan. SFAS No. 146 also establishes
that the liability should initially be measured and recorded at fair value. The
provisions of SFAS No. 146 will be adopted for exit or disposal activities that
are initiated after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Guarantees of Indebtedness of Others, an interpretation of FASB Statement Nos.
5, 57 and 107, and rescission of FIN 34, Disclosure of Indirect Guarantees of
Indebtedness of Others. FIN 45 elaborates on the disclosures to be made by the
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002; while the
provisions of the disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. The Company
believes the adoption of the recognition provisions of such interpretation will
not have a material impact on its results of operations or financial position
and has adopted such interpretation on January 1, 2003, as required.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123. This
statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
6
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic companies. For nonpublic companies, mandatory
redeemable financial instruments are subject to the provisions of this statement
for the first fiscal period beginning after December 15, 2003. The Company does
not believe that the adoption of this statement will have a significant impact
on its financial statements.
2. PROPERTY AND EQUIPMENT
2003 2002
--------- ---------
Research equipment $ 195,534 $ 168,445
Office equipment and furniture 59,687 30,254
Leasehold improvements 84,573 68,636
--------- ---------
339,794 267,335
Less accumulated depreciation and amortization (208,890) (133,165)
--------- ---------
$130,904 $134,170
3. ACCRUED EXPENSES
2003 2002
--------- ---------
Accrued wages payable $ 11,000 $ 86,667
Accrued vacation payable 39,162 22,418
--------- ----------
$ 50,162 $ 109,085
========= ==========
The 2002 accrued wages payable were due to two former officers and one current
officer of the Company. The former officers were paid their accrued wages of
$50,000 in February 2003. The remaining balance of $36,667 was converted to a
note payable in February 2003. This note was subsequently converted to common
stock (see Note 4).
4. NOTES PAYABLE
In 2002, the Company issued 10% promissory notes in the amount of $355,000. As
amended, principal and interest automatically convert to common stock at $0.449
per share at the closing of the next equity financing in which the Company
receives gross proceeds of at least $800,000. Because market value of the common
shares was below the conversion price at the commitment date, there was no
beneficial conversion feature. The notes carried a 40 percent warrant coverage
for the purchase of common stock (see Note 5).
7
In 2002 and 2003, the Company issued 10% promissory notes in the amount of
$917,000. As amended, principal and interest automatically convert to common
stock at $0.281 per share at the closing of the next equity financing in which
the Company receives gross proceeds of at least $800,000. Because the market
value of the shares was above the conversion price at the commitment date, a
beneficial conversion feature of $306,754 was recorded as interest expense and
additional paid in capital in October 2003, upon the Company's issuance of
$1,004,486 of Series C preferred stock. The notes carried a 20 percent warrant
coverage for the purchase of common stock (see Note 5).
Upon closing the Series C preferred financing, the principal balance of
$1,272,000 of the above described notes and $99,764 of accrued interest were
converted into 4,260,869 shares of common stock of the Company.
5. SHAREHOLDERS' EQUITY
ISSUANCE OF COMMON STOCK - In March 1999, the Company issued 2,078,662 shares of
common stock for $10,956 in goods and services. In January 2000, the Company
issued 2,078,662 shares of common stock for $10,956 in cash. In August 2000, the
Company issued 442,267 shares of common stock in exchange for a license valued
at $2,330. Of the common stock 4,157,324 shares were sold to founders of the
Company.
ISSUANCE OF COMMON STOCK OPTIONS FOR SERVICES - In September 2002, the Company
issued 7,897 common stock options for consulting services valued at $500. In
January 2003, the Company issued 39,488 common stock options for consulting
services valued at $2,500. In April 2003, the Company issued 39,488 common stock
options for consulting services valued at $2,500. In October 2003, the Company
issued 39,488 common stock options for consulting services valued at $2,500. In
November 2003, the Company issued 24,712 common stock options for consulting
services valued at $9,638. In December 2003, the Company issued 100,000 common
stock options to two former Board members and 75,000 common stock options to
members of its Scientific Advisory Board. These options were fully exercisable
and fully vested on the date of grant and shall expire in ten years based on the
terms of the options. The fair value of these options, totaling $68,250, was
recorded as a noncash stock issuance cost by the Company.
SERIES A, B AND C CONVERTIBLE PREFERRED STOCK - In January 2001, the Company
completed an 8 for 1 stock split of its outstanding common stock and Series A
preferred stock. In November 2001 the Company completed a 2 for 1 stock split
for the Series B preferred stock and warrants. In October 2003, the Company
completed a 1 for 1.266199 reverse stock split of all its common stock. All
share numbers and per share dollar values in the accompanying financial
statements and footnotes have been restated for all periods presented to reflect
the stock splits.
8
From March 1999 to January 2000, the Company sold 3,803,507 shares of Series A
convertible preferred stock ("Series A") for $198,006 ($178,006 in cash and
$20,000 in goods and services), net of issuance costs. From March 2001 to May
2002, the Company sold 2,743,121 shares of Series B convertible preferred stock
("Series B") for $1,254,672 in cash, net of issuance costs. During October 2003,
the Company sold 2,367,114 shares of Series C convertible preferred stock
("Series C") for $1,004,486, net of issuance costs. In addition, in connection
with the Series C financing, the Company issued an option to purchasers of the
Series C to buy an additional 15,304,804 shares of the Company's common stock
for $0.4647 per share or $7,112,142. In connection with the Series C financing,
289,482 additional shares of Series B stock were issued to the Series B
investors as a result of anti-dilution provisions.
Upon closing the Series C investment, the Series A and Series B were all
converted to common stock. The liquidation preference of the Series C is $0.4647
per share and is payable in preference to the common stock. Following this
distribution, upon liquidation, any remaining assets of the Company shall be
distributed ratably to holders of the common stock.
WARRANTS - In November and December of 2001, the Company granted warrants to
purchase 252,721 shares of common stock at an exercise price of $0.4748 per
share to purchasers of the Series B. From January to May 2002, the Company
granted warrants to purchase 109,248 shares of common stock at an exercise price
of $0.4748 per share to purchasers of the Series B. These warrants are
exercisable until February 15, 2005. In June 2002, the Company granted, to
outside parties for services, warrants to purchase 67,129 shares of common stock
at an exercise price of $0.13 per share. These warrants were fully exercisable
and fully vested on the date of grant and shall expire in ten years based on the
terms of the warrants. The fair value of these warrants, totaling $8,500, was
recorded as a noncash stock issuance cost by the Company.
In connection with the notes issued in 2002 and 2003 (see Note 4), the Company
granted warrants to purchase 867,419 shares of common stock at an exercise price
of $0.4496 per share. In October 2003, in conjunction with the issuance of its
Series C convertible preferred stock, the Company granted warrants to purchase
2,367,114 shares of common stock to purchasers of the Series C at an exercise
price of $0.7667 per share, exercisable until October 15, 2008.
In connection with an option the Company issued to purchasers of the Series C
stock to buy an additional 15,304,804 disclosed above, the Company also granted
these purchasers warrants to purchase 7,652,402 shares of common stock at an
exercise price of $1.75 per share, as amended.
6. STOCK OPTION PLAN
The Company's 2001 Stock Option Plan (the "Plan"), as amended, provides for the
granting of non-statutory or incentive stock options to acquire shares of the
Company's common stock to employees of the Company. The Plan is administered by
the Board of Directors and permits the issuance of options for the purchase of
up to 10,000,000 shares, as amended, of the Company's common stock at exercises
prices of not less than the fair market value of the underlying shares on the
date of grant. Options granted under the Plan generally vest over a four-year
period and expire up to a maximum of 10 years from the date of grant.
9
The following table summarizes stock option activity for the periods indicated:
WEIGHTED
AVERAGE
EXERCISE
PRICE
SHARES PER SHARE
-------- ----------
Outstanding, January 1, 2002 -- --
Granted 179,037 $ 0.06
Canceled (10,327) $ 0.06
--------
Outstanding, December 31, 2002 168,710 $ 0.06
Granted 6,484,962 $ 0.39
Exercised (256,410) $ 0.39
Canceled (4,695) $ 0.06
---------
Outstanding, December 31, 2003 6,392,567 $ 0.38
=========
The following table summarizes information concerning on outstanding and
exercisable options as of December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE UTSTANDING LIFE PRICE EXERCISABLE PRICE
$0.06 164,015 5.5 $0.06 61,714 $ 0.06
$0.39 6,228,552 9.9 $0.39 705,153 $ 0.39
--------- -------
6,392,567 9.8 $0.38 766,867 $ 0.36
========= =======
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases its San Diego, California corporate office
under a two-year lease. Additionally, the Company leases certain office
equipment under operating leases. Rent expense totaled $123,110 and $64,958 for
the years ended December 31, 2003 and 2002, respectively.
Future minimum payments, by year and in the aggregate, required under the
Company's noncancelable operating lease obligations consist of the following:
YEAR ENDING
DECEMBER 31
2004 $132,306
2005 67,492
--------
199,798
========
CONTRACT MANUFACTURING AGREEMENT - In November 2003, the Company entered into a
contract manufacturing agreement whereby the contractor will manufacture the
Company's recombinant protein to be used as the Company seeks regulatory
approval for its product. The value of the contract is approximately $1,500,000
and is payable as milestones are achieved over the term of the contract in 2004.
CONSULTING AGREEMENTS - In November and December 2003, the Company entered into
consulting agreements with key members of its Scientific Advisory Board. In
connection with these agreements, the Company issued stock options to some of
these members. As discussed in Note 4, the Company recorded the fair value of
these options as an expense on the date of grant.
MANAGEMENT AGREEMENTS - The Company has entered into employment agreements with
various members of its executive management team. The agreements are for one
year and then revert to "at will" employment.
INDEMNITIES AND GUARANTEES - During its normal course of business, the Company
has made certain indemnities, commitments and guarantees under which it may be
required to make payments in relation to certain transactions. These indemnities
include those given to directors and officers of the Company to the maximum
extent permitted under the laws of the State of California. The duration of
these indemnities, commitments and guarantees varies. Some of these indemnities,
commitments and guarantees do not provide for any limitation of the maximum
potential future payments the Company could be obligated to make. The Company
has not recorded any liability for these indemnities, commitments and guarantees
in the accompanying balance sheets.
MERGER AGREEMENT - The Company is currently in negotiations to merge with a
public company in order to maximize shareholder value. The terms of the
agreement have not yet been finalized.
8. GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has reported losses from its
inception, is still in the development stage and does not have sufficient cash
to cover its current operating needs. The Company is seeking to raise the
additional capital it will require to meet its obligations in 2004. There can be
no assurances that the Company will be successful in these efforts.
* * * * * * *