UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006; or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 000-52263
CAVIT SCIENCES, INC.
(Exact Name of Small Business Issuer In Its Charter)
Florida 03-0586935
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
100 East Linton Boulevard, Suite 106B
Delray Beach, Florida 33483
(561) 278-7856
(Address and telephone number of principal executive offices
and principal place of business)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of October 31, 2006, there were 10,617,500 shares of the issuer's common
stock and outstanding, par value $0.01.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). (Check one): Yes [ ] No [X]
CAVIT SCIENCES, INC.
INDEX TO FORM 10-QSB
September 30, 2006
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets dated September 30, 2006 and June 30, 2006 (unaudited) 3
Statements of Operations for the Three Months Ended September 30, 2006
and the Period from April 12, 2006 (Inception) to September 30, 2006
(unaudited) 4
Statements of Cash Flows for the Three Months Ended September 30, 2006
and the Period from April 12, 2003 (Inception) to September 30, 2006
(unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2. Management's Plan of Operation 10
Item 3. Controls and Procedures 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Recent Sales of Unregistered Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 24
Signatures 25
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CAVIT SCIENCES, INC.
(A Development Stage Company)
BALANCE SHEETS
(unaudited)
September 30, 2006 June 30, 2006
------------------ -------------
ASSETS
Current
Cash $ 1,674 $ 49,562
Due from affiliate 27,000 13,000
--------- ---------
Total Current Assets 28,674 62,562
--------- ---------
Intellectual property rights 86,997 56,997
--------- ---------
Total Assets $ 115,671 $ 119,559
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current
Accrued Liabilities $ 89,300 $ 35,495
Notes Payable 10,000 --
--------- ---------
Total Current Liabilities 99,300 35,495
--------- ---------
Preferred Stock - $.01 par value; 5,000,000 shares, none
issued or outstanding
Common Stock - $.01 par value; 45,000,000 shares authorized, 105,175 105,175
10,517,500 shares issued and outstanding
Additional Paid in Capital 179,184 179,184
Deficit Accumulated During the Development Stage (267,988) (200,295)
--------- ---------
Total Stockholders' Equity 16,371 84,064
--------- ---------
Total Liabilities and Stockholders' Equity $ 115,671 $ 119,559
========= =========
The Accompanying Notes are an Integral Part of These Financial Statements
3
CAVIT SCIENCES, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(unaudited)
April 12, 2006
Three months ended (Date of Inception) to
September 30, 2006 September 30, 2006
------------------ ------------------
Revenue $ -- $ --
Purchased R&D cost -- 88,462
Expenses 67,693 179,526
------------ ------------
Net loss for the period $ (67,693) $ (267,988)
============ ============
Loss per share
Loss per share basic and diluted $ (0.01)
Weighted average shares outstanding 10,517,500
The Accompanying Notes are an Integral Part of These Financial Statements
4
CAVIT SCIENCES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(unaudited)
April 12, 2006
Three months ended (Inception) to
September 30, 2006 September 30, 2006
------------------ ------------------
Operating Activities
Net loss for the period $ (67,693) $(267,988)
Change in non-cash working capital balance
related to operations:
Stock issued for services 39,900
Purchased R&D cost 88,462
Changes in assets and liabilities:
Increase in receivables from affiliate (14,000) (27,000)
Increase in accrued liabilities 53,805 89,300
--------- ---------
Cash used in operating activities (27,888) (77,326)
--------- ---------
Investing Activity
Purchase of intellectual property rights (30,000) (30,000)
--------- ---------
Cash from investing activity (30,000) (30,000)
--------- ---------
Financing Activity
Sale of stock for cash 0 99,000
Notes payable proceeds 10,000 10,000
--------- ---------
Cash provided by financing activity 10,000 109,000
--------- ---------
Increase (Decrease) in cash during the period (47,888) 1,674
Cash, beginning of the period 49,562 0
--------- ---------
Cash, end of the period $ 1,674 $ 1,674
========= =========
The Company did not pay any amounts for interest or taxes during the period
ended September 30, 2006.
Non-cash Activity:
On May 31, 2006 the Company issued 8,475,000 shares of common stock to acquire
intellectual property relating to three patent applications from it's parent
corporation for $145,459.
The Accompanying Notes are an Integral Part of These Financial Statements
5
CAVIT SCIENCES, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Note 1 Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Cavit Sciences, Inc. ("The Company" or "Cavit") is in the development
stage and is in the process of acquiring and developing intellectual
property rights to treat cancer and viral diseases. The Company plans to
market such rights to major drug companies. Cavit was incorporated on
April 12, 2006 under the laws of the State of Florida, as a wholly owned
subsidiary of Hard to Treat Diseases ("Parent"), and was spun-off as a
separate entity from the Parent effective October 16, 2006, the date on
which the Company's registration statement on Form SB-2 became effective
with the Securities and Exchange Commission.
At September 30, 2006, the Company had negative working capital of
$70,626 and has incurred losses since inception totalling $267,988 and
has yet to achieve profitable operations. The Company's ability to
continue as a going concern is dependent on raising additional capital to
fund future operations and ultimately to attain profitable operations.
Accordingly, these factors raise substantial doubt as to the Company's
ability to continue as a going concern. These financial statements do not
give affect to adjustments that would be necessary to the carrying values
and classification of assets and liabilities should the Company be unable
to continue as a going concern. Management plans to continue to provide
for its capital needs during the year ending December 31, 2006 by issuing
equity securities or by pursuing alternative financing, however, there
are no assurances that management's plans will be attained.
The financial statements of the Company have been prepared in accordance
with accounting principles generally accepted in the United States of
America. Because a precise determination of many assets and liabilities
is dependent upon future events, the preparation of financial statements
for a period necessarily involves the use of estimates which have been
made using careful judgment. Actual results may vary from these
estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
investments purchased with a maturity of three months or less to be cash
equivalents.
Concentration of Credit Risk
The Company has no significant off-balance-sheet concentrations of credit
risk such as foreign exchange contracts, options contracts or other
foreign hedging arrangements. The Company maintains the majority of its
cash balances with one financial institution, in the form of demand
deposits.
Development Stage Company
The Company complies with Financial Accounting Standards Board Statement
No. 7 and for its characterization of the Company as a Development Stage
Company.
Financial Instruments
The carrying value of cash and accounts payable and accrued liabilities
approximates their fair value because of the short maturity of these
instruments. It is management's opinion that the Company is not exposed
to significant interest, currency or credit risks arising from these
financial instruments.
6
Income Taxes
The Company accounts for income taxes under the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement
109"). Under Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Long-Lived Assets
The Company accounts for long-lived assets under the Statements of
Financial Accounting Standards Nos. 142 and 144 "Accounting for Goodwill
and Other Intangible Assets" and "Accounting for Impairment or Disposal
of Long-Lived Assets" ("SFAS No. 142 and 144"). In accordance with SFAS
No. 142 and 144, long-lived assets, goodwill and certain identifiable
intangible assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, goodwill and
intangible assets, the recoverability test is performed using
undiscounted net cash flows related to the long-lived assets.
Loss per Share
Basic and diluted net loss per common share is computed based upon the
weighted average common shares outstanding as defined by Financial
Accounting Standards No. 128, "Earnings Per Share." As of September 30,
2006, there were no dilutive securities outstanding.
Share-Based Payment
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
("SFAS 123R"), which revises SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION.." SFAS 123R supersedes APB Opinion No. 25, "ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES," and its related implementation guidance. SFAS
123R establishes standards for the accounting for transactions in which
an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. SFAS 123R does not
change the accounting guidance for share-based payment transactions with
parties other than employees provided in SFAS No. 123 as originally
issued and EITF Issue No. 96-18, "ACCOUNTING FOR EQUITY INSTRUMENTS THAT
ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH
SELLING, GOODS OR SERVICES.." SFAS 123R is effective for the first
interim or annual reporting period of the company's first fiscal year
that begins on or after June 15, 2005. The Company has implemented this
pronouncement effective April 12, 2006, where applicable.
In March 2005, the U.S. Securities and Exchange Commission, or SEC,
released Staff Accounting Bulletin No. 107, "SHARE-BASED PAYMENTS," ("SAB
107"). The interpretations in SAB 107 express views of the SEC staff, or
staff, regarding the interaction between SFAS 123R and certain SEC rules
and regulations, and provide the staff's views regarding the valuation of
share-based payment arrangements for public companies. In particular, SAB
107 provides guidance related to share-based payment transactions with
non-employees, the transition from nonpublic to public entity status,
valuation methods (including assumptions such as expected volatility and
expected term), the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the
classification of compensation expense, non-GAAP financial measures,
first-time adoption of SFAS 123R in an interim period, capitalization of
compensation cost related to share-based payment arrangements, the
accounting for income tax effects of share-based payment arrangements
upon adoption of SFAS 123R, the modification of employee share options
prior to adoption of SFAS 123R and disclosures in Management's Discussion
and Analysis subsequent to adoption of SFAS 123R. SAB 107 requires
stock-based compensation be classified in the same expense lines as cash
compensation is reported for the same employees. The Company and
management have adopted SAB 107 in conjunction with SFAS 123R.
Note 2 Related Parties
On May 31, 2006, the Company entered an Asset Purchase Agreement with
Parent to acquire intellectual property rights relating to three patent
applications. In exchange for the intellectual property rights, the
Company issued 8,475,000 shares of common stock to Parent at $0.017 per
share. The Company recorded this transaction on its books at Parent's
historical cost value of $145,459; comprised of $56,997, which is the
capitalized portion of the intellectual property relating to legal costs
and $88,462 of research and development expenses. The Company analyzed
7
the value of the intellectual property rights at September 30, 2006 and
no impairment charge was recorded for the period.
On June 1, 2006 the Company entered into a management advisory and
support agreement for a twelve month period with its parent company Hard
to Treat Diseases, Inc. for $1,000 per month which includes the use of
office space.
During the period April 12, 2006 (inception) to September 30, 2006,
Parent collected funds on behalf of the Company and repaid certain
expenses on the Company's behalf. At September 30, 2006, the net balance
due from the Parent to the Company was $27,000.
During September 2006 Cavit issued notes payable to two of its
shareholders for a total of $10,000 to evidence loans to the Company.
Note 3 Accrued Liabilities
The Company accrued four month's salary and related employment taxes for
the President pursuant to his employment agreement.
Note 4 Income Taxes
As of September 30, 2006, the Company had a net operating loss
carryforward for income tax reporting purposes of approximately $267,988
that may be offset against future taxable income through 2026. Current
tax laws limit the amount of loss available to be offset against future
taxable income when a substantial change in ownership occurs. Therefore,
the amount available to offset future taxable income may be limited. No
tax benefit has been reported in the financial statements, because the
Company believes there is a 50% or greater chance the carryforwards will
expire unused. Accordingly, the potential tax benefits of the loss
carryforwards are offset by a valuation allowance of the same amount
2006
---------
Deferred tax assets:
Net operating loss carryforwards $ 267,988
---------
Gross deferred tax assets 90,000
Less: valuation allowance (90,000)
---------
Net deferred tax asset $ --
=========
Note 5 Stockholders' Equity
The Company is authorized to issue 5,000,000 shares of preferred stock
$.01 par value and 45,000,000 shares of common stock $.01 par value. The
Board of Directors may make the provisions of the preferred stock prior
to issuance. As of September 30, 2006 no shares of preferred stock have
been issued.
During the period from inception through September 30, 2006 the Company
issued 10,517,500 shares of common stock to pay for services, for cash,
and to acquire patent application rights. There are no options or
warrants issued as of September 30, 2006.
Note 6 Commitments
The Company has executed a three year employment agreement with it's
President and CEO. The agreement began on May 1, 2006. The agreement
calls for annual compensation of $180,000, Annual increases of 10% on the
prior year's base salary, 50,000 shares of restricted common stock, and
the other benefits standard to an executive employee.
8
Note 7 Patent Acquisition Information
On May 31, 2006, the Company acquired intellectual property rights from
its Parent consisting of three patent applications. The Company paid
$145,459 by issuing 8,475,000 shares of its common stock at $.017 value.
The value paid for such intellectual property consisted of $56,997 of
legal fees and $88,462 of purchased research and development costs
("R&D"). The Company did not pay for the Parent's overhead expenses
related to R&D. Such costs amounted to $47,060 for the period from
January 1, 2004 to May 31, 2006 when the Parent began to expend resources
to develop such intellectual property rights.
On July 7, 2006 the Company entered into an assignment agreement whereby
it acquired a portion of the rights to a patent application entitled,
"Methods and Compositions for Treatment of Viral Infections".. The
Company acquired such rights for $30,000 with a down payment of $10,000
and two subsequent $10,000 payments through May 10, 2007.
Note 8 Subsequent Events
On October 16, 2006 Cavit's Form SB-2 Registration Statement became
effective with the Securities and Exchange Commission.
On October 18, 2006 Cavit entered into a Financial Consulting Services
Agreement with Aaron Capital Inc. for financial services. Cavit issued
100,000 shares of restricted common stock and is obligated to pay $3,000
to Aaron Capital Inc. per the agreement.
During October 2006, shareholders holding notes payable from the Company
accepted the Company's offer to allow them to convert these notes into
Cavit common stock at $.08 per share.
During October 2006, Cavit entered into four Common Stock Purchase
Agreements for the sale of Cavit unregistered common stock at $.08 per
share. As a result of the agreements Cavit raised $51,000.
On November 8, 2006 Cavit entered into a Consulting Agreement, regarding
advice and guidance in forming business relationships, for a term of one
year with Dr. Serge Sira. Cavit is obligated to issue 200,000 shares of
restricted common stock to Dr. Serge Sira.
9
ITEM 2. MANAGEMENT'S PLAN OF OPERATIONS
The following discussion of our plan of operations should be read together
with the financial statements and related notes that are included elsewhere in
this Form 10-QSB. This discussion may contain forward-looking statements based
upon current expectations that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under "Risk
Factors," "Disclosure Regarding Forward-Looking Statements" or in other parts of
this Form 10-QSB. We undertake no obligation to update any information in our
forward-looking statements except as required by law.
PATENT ACQUISITION INFORMATION
Hard to Treat began to internally develop the intellectual property rights
during 2004, that were acquired by Cavit on May 31, 2006, as part of the
operations of Hard to Treat's biotechnology division. During 2004, research and
development commenced, which was the foundation for the first patent application
being filed during December of 2004. As a result of additional research and
development in 2005, two additional patent applications were filed in December
2005.
The boards of directors of Cavit Sciences and Hard to Treat determined the
value of the intangible assets and related costs acquired to be $145,459;
comprised of $56,997 in capitalized legal fees associated with the development
of the rights from inception and $88,462 of direct research and development
which are considered purchased R&D and have been expensed in the June 30, 2006
financial statements. The $145,459 carved out cost determined the value of the
intangible assets. The acquisition costs do not include $47,060 of certain
overhead expenses incurred by Hard to Treat during the development of the
intellectual property rights from inception that began in 2004. The overhead
expenses of $47,060 that were not part of the purchase price paid by Cavit
include wages, rent, phone and other expenditures that Hard to Treat incurred to
develop the intellectual properties.
Cavit was incorporated on April 12, 2006 and acquired intellectual property
rights from Hard to Treat on May 31, 2006. In July 2006, Cavit acquired
additional rights in some of these intellectual property rights, resulting in
Cavit owning 100% of such rights.
OVERVIEW
We are a development-stage company and have a limited operating history.
Cavit Sciences, Inc. was formed on April 12, 2006, as a wholly owned subsidiary
of Hard to Treat Diseases, Inc., to acquire certain intellectual property rights
from Hard to Treat Diseases and to develop and market the acquired rights.
Our plan is to market our intellectual property rights to major drug
companies. We are finalizing presentations to be delivered and presented to
individuals at drug companies that we have sought as candidates for our
technology. Non-confidential information is included in the presentations to the
drug companies. If a drug company is interested in our technology,
confidentiality disclosure agreements will be signed on behalf of Cavit and the
drug company. We anticipate that a confidential review of information will take
place before face-to-face scientific meetings are held between Cavit's medical
advisors and researchers and scientists and researchers of the drug company. If
the drug company decides to move forward with the transaction, term sheet
negotiations and due diligence will be conducted and definitive agreements will
be negotiated before agreements are executed.
Depending on the level of interest of drug companies in our intellectual
property rights, there are numerous agreements that can be entered into:
* A drug company may feel that additional testing is required on our
substances before they make a decision. After reviewing the testing
protocols we have prepared for additional testing, a drug company may or
may not be willing to fund the additional testing or a portion of it.
10
* A drug company may feel that additional testing is required on our
substances and they will fund additional testing that they will design the
testing protocol for. We anticipate that the drug company will fund any
testing that is to be customized to its specifications.
* A drug company may decide to joint venture with Cavit on additional testing
as part of the term sheet negotiations.
* A drug company may decide to become an equity partner with Cavit.
* A drug company may decide to acquire our patent application rights for a
specified price payable over a period of time in cash, stock or a
combination of both.
At this point, we believe we have enough data and information to market our
patented intellectual property rights to drug companies. We may or may not
decide to conduct additional testing on our current substances once we have
received formal responses on our drug company candidates.
We have not generated any profits since our entry into the biotechnology
business, have no source of revenues and have incurred operating losses. We
expect to incur additional operating losses for the foreseeable future. We do
not have any sources of revenues and may not have any in the foreseeable future
unless we market our rights to a drug company.
We need to obtain additional capital resources from sources including
equity and/or debt financings, license arrangements, grants and/or collaborative
research arrangements in order to develop products and continue Cavit's
business. We believe that we have sufficient working capital to finance
operations through the end of 2006. Thereafter, we will need to raise additional
working capital. Our current burn rate is approximately $10,000 per month
excluding capital expenditures. The timing and degree of any future capital
requirements will depend on many factors, including:
Research and development. We expect to make investments in research and
development in order to develop and market our technology. Research and
development costs will consist primarily of general and administrative and
operating expenses related to research and development activities. We will
expense research and development costs as incurred. Property, plant and
equipment for research and development that has an alternative future use will
be capitalized and the related depreciation will be expensed as research and
development costs. We expect our research and development expense to increase as
we continue to invest in the development of our technology.
General and administrative. General and administrative expenses will
consist primarily of salaries and benefits, office expense, professional
services fees, and other corporate overhead costs. We anticipate increases in
general and administrative expenses as we continue to develop and prepare for
marketing of our technology.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED WITH THE PERIOD FROM APRIL
12, 2006 ( INCEPTION) THROUGH JUNE 30, 2006
REVENUE. We recorded no revenue for the three months ended September 30,
2006 and the period ending June 30, 2006 (Inception period).
EXPENSES. Our expenses decreased during the three months ended September
30, 2006, to $67,693 as compared to $111,833 from the prior Inception period.
The decrease in expenses is due primarily to the decrease of legal and
professional expenses associated with the Inception period.
RESEARCH AND DEVELOPMENT COSTS. There were no research and development
costs for the three months ended September 30, 2006, compared to $88,462 in the
Inception period. The decrease is related to the purchased research and
development cost during the Inception period.
NET LOSS. We had a net loss for the three months ended September 30, 2006,
of $67,693 compared with a net loss of $200,295 for the Inception period.. The
decrease in net loss is primarily due to the decrease in purchased research and
development cost and the decrease in legal and professional expenses.
11
RECENT FINANCING
We received $10,000 from notes payable issued to shareholders during the
three months ended September 30, 2006 and we raised a total of $99,000 from
investors in a private offering of our common stock during the Inception period.
LIQUIDITY AND CAPITAL RESOURCES
CHANGES IN CASH FLOW. Cash used in operations for the three month period
ended September 30, 2006 decreased from $49,438 in the Inception period to
$27,888. Cash used in investing activities for the three month period ended
September 30, 2006 increased from $0 in the Inception period to $30,000. The
increase was due to the purchase of intellectual property rights. Cash provided
from financing activities for the three month period ended September 30, 2006
was $10,000 as compared to $99,000 in the Inception period. The decrease was due
to no sales of stock offset by the proceeds from the notes payable issued to
shareholders.
Historically, Cavit has financed its operations primarily from the sale of
its equity securities. As of September 30, 2006, Cavit had cash of approximately
$1,674. Our current burn rate is approximately $10,000 per month excluding
capital expenditures. As a result of current financing, Cavit believes that it
has sufficient working capital to fund operations through the end of calendar
2006. Thereafter, Cavit will need to raise additional capital to fund its
working capital needs. Cavit does not have any material commitments from
investors or any credit facilities available with financial institutions or any
other third parties. Therefore, it is expected that Cavit will need to enter
into agreements with investors or engage in best efforts sales of its securities
to raise needed working capital. There is no assurance that we will be
successful in any funding effort. The failure to raise such funds will
necessitate the curtailment of operations and delay of the start of any
additional testing.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2006, we had no off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations is based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies affect our
most significant judgments and estimates used in preparation of our consolidated
financial statements.
Impairment of Long-Lived Assets. We review long-lived assets and certain
identifiable assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If the sum
of the expected future undiscounted cash flows is less than the carrying amount
of the asset, further impairment analysis is performed. An impairment loss is
measured as the amount by which the carrying amount exceeds the fair value of
assets.
Stock-Based Compensation. Effective June 26, 2006, we adopted the
provisions of Statement of Financial Accounting Standards No. 123R, "Share-Based
Payment," which establishes accounting for equity instruments exchanged for
employee service. We do not believe the adoption of these provisions will have
an adverse effect on our financial statements.
Research and Development. The costs of materials and equipment or
facilities that are acquired or constructed for research and development
activities and that have alternative future uses will be capitalized as tangible
assets when acquired or constructed. The cost of such materials consumed in
research and development activities and the depreciation of such equipment or
facilities used in those activities will be research and development costs.
However, the costs of materials, equipment, or facilities acquired or
constructed for research and development activities that have no alternative
future uses will be considered research and development costs and will expensed
at the time the costs are incurred.
12
GENERAL
Cavit Sciences, Inc., a Florida corporation (the "Company" or "Cavit")
filed a Registration Statement with respect to its outstanding shares of
common stock, $.01 par value. There is no current trading market for our common
stock. The registration statement filed with the Securities and Exchange
Commission ("SEC") was declared effective on October 16, 2006. On the same date,
the Company filed a Form 10-SB Registration Statement with the SEC, which caused
the Company to become a reporting issuer under the Securities Exchange Act of
1934.
FORWARD LOOKING STATEMENTS
This Form 10-QSB 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 Cavit 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. The Company is under no duty to update any of the forward-looking
statements after the date of this Form 10-QSB to conform its prior statements to
actual results.
Further, this Form 10-QSB contains forward-looking statements 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. The Company's actual
results may vary materially from those contained in such forward-looking
statements because of risks to which the Company is subject, such as lack of
available funding, competition from third parties, intellectual property rights
of third parties, regulatory constraints, litigation and other risks to which
the Company is subject.
OVERVIEW
On April 12, 2006, we were incorporated under the laws of the State of
Florida and became a subsidiary of Hard to Treat Diseases, Inc. ("Hard to
Treat") in May 2006. We chose the name Cavit Sciences, Inc. based on "Cavit" as
an acronym for cancer and viral infection treatment.
We are a biotechnology company engaged in developing treatments of cancer
and viral infections. Our strategy is to develop and commercialize intellectual
property rights to treat, prevent and inhibit several major diseases, including
cancers, viral infections and diseases associated with cancers and viral
infections.
We currently own three patent applications and intend to acquire additional
ones. One of our applications is a U.S. utility patent application relating to
compositions and methods for inhibition of viral infections and therapeutic
treatment of diseases or disorders caused by viral infections. Our second
application is a Patent Cooperation Treaty or PCT utility patent application
relating to compositions and methods for inhibition of viral infections and
therapeutic treatment of diseases or disorders caused by viral infections. Our
third application is a U.S. provisional patent application relating to
compositions and methods for inhibition of cancers and therapeutic treatment of
diseases or disorders caused by cancers.
We acquired these intellectual property rights from Hard to Treat Diseases
on May 31, 2006 in exchange for 8,475,000 shares of our common stock. We valued
these intellectual property rights and related costs at $145,459.
Cancers and viral infections destroy the lives of millions of people each
year. Drug companies are spending millions of dollars on research and testing in
order to bring new drugs to market. Current treatments are normally expensive,
painful and do not always promote better health.
13
Two of our patent applications are the result of testing on two drug
candidates. The two substances listed in our applications, Tubercin (T-5) and
Specific Substance of Maruyama ("SSM"), were acquired for testing. The rights to
the composition, Tubercin (T-5), are owned by Dr. Chung of South Korea, the
inventor and patent holder. Dr. Chung has licensed the rights to Tubercin (T-5)
for the use in medical care of cancer to a third party. SSM was developed and
advanced by Zeria Pharmaceutical Co., Ltd. of Japan. This drug was also called
Z-100 for clinical trials and is currently trade named Ancer 20. Zeria is
currently using Ancer 20 injections for radiotherapy-induced leukopenia. The
composition patent for this drug has been abandoned and is no longer protected
by patent.
Tubercin (T-5) has been used in South Korea for years as a treatment of
cancer. SSM has been used in Japan for years as a treatment of certain diseases.
Both substances are extracts from mycrobacterium tuberculosis and have been used
successfully and are relatively inexpensive.
In addition to the treatment of cancer and viral infections, our patent
applications claim the treatment of numerous additional diseases. These
substances act to increase the strength of the immune system by warding off,
inhibiting and treating diseases.
LICENSES, PATENTS AND PROPRIETARY RIGHTS
We believe that proprietary protection of our technologies will be critical
to the development of our business. We intend to protect our proprietary
intellectual property through patents and other appropriate means. We rely upon
trade secret protection for certain types of confidential and proprietary
information and take active measures to control access to that information. We
currently have non-disclosure agreements with all of our employees and
consultants.
RESEARCH COLLABORATIONS
We anticipate entering into collaborative research agreements with academic
and research institutions. We will use these agreements to enhance our research
capabilities. In our industry, these agreements typically provide the industry
partner with rights to license the intellectual property created through the
collaboration. We may also enter into collaborative research agreements with
other pharmaceutical companies if necessary to support the development and
commercialization of our technology.
COMMERCIALIZATION THROUGH THIRD PARTIES
We may grant sublicenses for certain applications of our technologies.
Sublicensing certain rights in our technology to pharmaceutical companies and
other third parties help us to efficiently develop some applications of our
technologies.
COMPETITION
The development of therapeutic cancer and viral infection products for
human disease is intensely competitive. Major pharmaceutical companies currently
offer a number of pharmaceutical products to treat cancers, infectious diseases
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 these products, alter the prognosis
of these diseases or prevent their onset. We believe our products, when and if
successfully developed, will compete with these products on the basis of
improved and extended efficacy and safety and their overall economic benefit to
the health care system. We expect intense competition. Our most significant
competitors will be fully integrated pharmaceutical companies and established
biotechnology companies. Smaller companies may also be significant competitors,
14
particularly through collaborative arrangements with large pharmaceutical or
biotechnology companies. Many of our competitors have significant products in
development that could compete with our potential products. Practically all of
our competitors have more money and expertise than we have.
DESCRIPTION OF PROPERTY
Our principal executive and administrative office facility is located in
Delray Beach, Florida at 100 East Linton Blvd., Suite 106B, Delray Beach,
Florida 33483 and our telephone number is (561) 278-7856. We share office space,
telecommunication equipment and incidental equipment and furniture with Hard to
Treat Diseases, Inc. and pay them $1,000 a month for same. We believe the terms
of the office sharing arrangement are on favorable terms to us.
GOVERNMENT REGULATION
Our research and development activities and the future manufacturing and
marketing of our potential products are, and will be, subject to regulation for
safety and efficacy by a number of governmental authorities in the United States
and other countries.
In the United States, pharmaceuticals, biological and medical devices are
subject to Food and Drug Administration regulation. The Federal Food, Drug and
Cosmetic Act, as amended, and the Public Health Service Act, as amended, the
regulations promulgated thereunder, 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 take several years, cost a lot of
money and involve significant uncertainty.
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.
EMPLOYEES
As of October 31, 2006, we had one full time employee, Mr. Colm King, who
is our President and Chief Executive Officer. We believe that our relations with
our employee are good. Our employee is not represented by a union or covered by
a collective bargaining agreement. We believe Mr. King is best suited to oversee
the operations of Cavit during the next several months due to his intimate
knowledge of our biotechnology business. While serving as president of Hard to
Treat, Mr. King was involved in the testing of our products and the patent
application process for our two applications. We will actively recruit and hire
a new chief financial officer and a new chief operating officer when funds
become available. We intend to fill these posts with individuals having
pharmaceutical and/or biotechnology experience and expertise.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following risk factors and the other information
in this prospectus before investing in our common stock. Our business and
results of operations could be seriously harmed by any of the following risks.
RISKS RELATED TO OUR BUSINESS
OUR INDEPENDENT AUDITOR HAS RAISED DOUBT ABOUT OUR ABILITY TO CONTINUE AS A
GOING CONCERN.
The Independent Auditor's Report to our audited financial statements for
the period ended June 30, 2006, included in Form 10-SB filed with the Securities
and Exchange Commission, indicated that there are a number of factors that raise
substantial doubt about our ability to continue as a going concern. Such doubts
identified in the report include the fact that we currently have no source of
revenue and we need to obtain adequate financing. If we are not able to continue
as a going concern, it is likely that investors will lose all or a part of their
investment.
WE ARE SERIOUSLY UNDERCAPITALIZED AND HAVE LIMITED LIQUIDITY.
Historically, Cavit has financed its operations primarily from the sale of
its equity securities. As of September 30, 2006, Cavit had cash of approximately
15
$1,674. Our current burn rate is approximately $10,000 per month excluding
capital expenditures. As a result of current financing, Cavit believes that it
has sufficient working capital to fund operations through the end of calendar
2006. Thereafter, Cavit will need to raise additional capital to fund its
working capital needs. Cavit does not have any material commitments from
investors or any credit facilities available with financial institutions or any
other third parties. Therefore, it is expected that Cavit will need to enter
into agreements with investors or engage in best efforts sales of its securities
to raise needed working capital. There is no assurance that we will be
successful in any funding effort. The failure to raise such funds will
necessitate the curtailment of operations and delay of the start of any
additional testing.
WE DO NOT HAVE AN INDEPENDENT AUDIT OR COMPENSATION COMMITTEE.
Our audit and compensation committees are made up of members of our board
of directors and are, therefore, not considered independent. The absence of an
independent audit and compensation committee could lead to conflicts of interest
between committee members and our officers and directors, which could work as a
detriment to our shareholders.
WE ARE A DEVELOPMENT STAGE COMPANY AND WE HAVE NO SIGNIFICANT OPERATING HISTORY.
We are a development stage company that has not had prior operations. See
"Management's Plan of Operations - Patent Acquisition Information" and
"Description of Business - History of Intellectual Property Rights" for a more
detailed discussion of prior operations. Our plans and businesses are "proposed"
and "intended," but we may not be able to successfully implement them. Our
primary business purpose is to collaborate with and market our intellectual
property rights to major drug companies. As of the date of this prospectus,
wehave three patent applications, two of which include testing results of two
drug candidates: Tubercin (T-5) and Specific Substance of Maruyama. However, the
FDA has not approved either drug for sale in the United States and neither drug
has been approved for sale by any foreign country. In addition, we have not
earned revenues and have incurred losses since our incorporation in April 2006.
We currently lack sufficient capital to generate revenue or operate our business
in a profitable manner. As a development stage company, our prospects are
subject to all of the risks, expenses, and uncertainties frequently encountered
by companies in the drug development and pharmaceutical business. In addition,
we are subject to all of the risks, uncertainties, expenses, delays, problems,
and difficulties typically encountered in the establishment of a new business.
We expect that unanticipated expenses, problems, and technical difficulties will
occur and that they will result in material delays in the development of our
products. We may not obtain sufficient capital or achieve a significant level of
operations and, even if we do, we may not be able to conduct such operations on
a profitable basis.
APPROXIMATELY 75% OF OUR TOTAL ASSETS ARE COMPRISED OF INTANGIBLE ASSETS THAT
ARE SUBJECT TO PERIODIC REVIEW TO DETERMINE WHETHER IMPAIRMENT ON THESE ASSETS
IS REQUIRED.
We are required under generally accepted accounting principles to review
our good will and intangible assets for impairment whenever events or changes in
circumstances indicate their carrying values may not be recoverable. On
September 30, 2006, our intangible assets, consisting of three patent
applications, were valued at $86,997. If our management determines that
impairment exists, we will be forced to record a significant charge to expense
in our financial statements for the period in which any impairment of our
goodwill or intangible assets is determined.
WE DID NOT HAVE AN INDEPENDENT THIRD PARTY APPRAISE THE INTANGIBLE ASSETS
ACQUIRED FROM HARD TO TREAT, SO THERE IS NO GUARANTEE THAT OUR INTANGIBLE ASSETS
ARE WORTH $86,997.
The boards of directors of Cavit Sciences and Hard to Treat determined the
value of the intangible assets and related costs we acquired to be $145,459,
comprised of $56,997 in capitalized legal fees associated with the development
of the rights from inception and $88,462 of operating expenses from inception,
including research and development and operating costs, that were expensed as
incurred. Due to cost factors, the boards decided not to engage an independent
appraiser or investment banker to evaluate either the intangible assets and
related costs being transferred by Hard to Treat to Cavit Sciences or the
8,475,000 shares of Cavit Sciences common stock exchanged for those assets. If
creditors of Hard to Treat believe that the Cavit Sciences shares exchanged for
the assets were not worth $145,459 or if those creditors believe that Hard to
Treat's intangible assets and related costs were worth considerably more than
$145,459, then those creditors could take legal action in an attempt to rescind
the asset purchase transaction.
AN INDIVIDUAL WHO HAS A RIGHT TO OWNERSHIP OF A SUBSTANTIAL NUMBER OF SHARES OF
HARD TO TREAT COMMON STOCK, BUT WHO WAS NOT A HOLDER OF RECORD OF ANY HARD TO
16
TREAT SHARES ON JUNE 13, 2006 (THE RECORD DATE FOR THE RECENTLY COMPLETED
SPIN-OFF OF OUR SHARES TO HOLDERS OF HARD TO TREAT COMMON STOCK) MAY SEEK TO
HAVE 3,500,000 SHARES OF CAVIT SCIENCES COMMON STOCK ISSUED TO HIM, IN WHICH
CASE THE SHAREHOLDERS OF CAVIT SCIENCES COULD BE SUBSTANTIALLY DILUTED.
In July 2005, a Florida judge ruled in favor of an individual declaring
that the individual was the lawful owner of 350,000,000 shares of Hard to Treat
common stock "should he choose to exercise his right of ownership over these
shares." Since July 2005, this individual had not exercised any right of
ownership over these shares and was not a holder of record of Hard to Treat
common stock on June 13, 2006 (the record date of the recently completed
spin-off of our shares to holders of Hard to Treat common stock). Therefore, he
did not participate in the stock dividend that was the subject of the spin-off.
The same judge entered a money judgment in favor of Hard to Treat against this
individual for over $200,000, which amount plus interest would have to be paid
to Hard to Treat in order for the shares to be issued to him. Although the
amount of the money judgment will likely deter this individual from demanding
his shares, if he were to demand his shares and pay the money judgment and if he
could prove his entitlement to participate in the stock dividend in the
spin-off, Cavit Sciences would have to issue him 3,500,000 shares of our common
stock, which would substantially dilute our shareholders. Hard to Treat has
appealed this case. See "Description of Business --Legal Proceedings" for a more
detailed discussion of this litigation
IF WE DO NOT SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS, WE MAY NEVER ACHIEVE
PROFITABILITY.
We have never commercially introduced a product. Our research and
development programs are at an early stage. Potential drug candidates are
subject to inherent risks of failure. These risks include the possibilities that
no drug candidate will be found safe or effective, meet applicable regulatory
standards or receive necessary regulatory clearances. Even safe and effective
drug candidates may never be developed into commercially successful drugs. If we
are unable to develop safe, commercially viable drugs, we may never achieve
profitability and if we become profitable, we may not remain profitable.
AS A RESULT OF OUR INTENSELY COMPETITIVE INDUSTRY, WE MAY NOT GAIN ENOUGH MARKET
SHARES TO BE PROFITABLE.
The biotechnology and pharmaceutical industries are intensely competitive.
We have numerous competitors in the United States and elsewhere. Because we are
pursuing potentially large markets, our competitors include major, multinational
pharmaceutical and chemical companies, specialized biotechnology firms,
universities and other research institutions. Several of these competitors have
already successfully marketed and commercialized products that will compete with
our products, assuming that our products gain regulatory approval.
Most of our competitors have greater financial resources, larger research
and development staffs and more effective marketing and manufacturing
organizations than we do. In addition, academic and government institutions have
become increasingly aware of the commercial value of their research findings.
These institutions are now more likely to enter into exclusive licensing
agreements with commercial enterprises, including our competitors, to develop
and market commercial products.
Our competitors may succeed in developing or licensing technologies and
drugs that are more effective or less costly than any we are developing. Our
competitors may succeed in obtaining FDA or other regulatory approvals for drug
candidates before we do. If competing drug candidates prove to be more effective
or less costly than our drug candidates, our drug candidates, even if approved
for sale, may not be able to compete successfully with our competitors' existing
products or new products we may develop. If we are unable to compete
successfully, we will not be able to sell enough products at a price sufficient
to permit us to generate profits.
EXISTING PRICING REGULATIONS AND REIMBURSEMENT LIMITATIONS MAY REDUCE OUR
POTENTIAL PROFITS FROM THE SALE OF OUR PRODUCTS.
The requirements governing product licensing, pricing and reimbursement
vary widely from country to country. Some countries require approval of the sale
price of a drug before it can be marketed. In many countries, the pricing review
period begins after product-licensing approval is granted. As a result, we may
obtain regulatory approval for a drug candidate in a particular country, but
then be subject to price regulations that reduce our profits from the sale of
the product. In some foreign markets, pricing of prescription pharmaceuticals is
17
subject to continuing government control even after initial marketing approval.
In addition, certain governments may grant third parties a license to
manufacture our product without our permission. Such compulsory licenses
typically would be on terms that are less favorable to us and would have the
effect of reducing our revenues.
Varying price regulation between countries can lead to inconsistent prices
and some re-selling by third parties of products from markets where products are
sold at lower prices to markets where those products are sold at higher prices.
This practice of exploiting price differences between countries could undermine
our sales in markets with higher prices and reduce the sales of our future
products, if any. The decline in the size of the markets in which we may in the
future sell commercial products could cause the perceived market value of our
business and the price of our common stock to decline. Our ability to
commercialize our products successfully also will depend in part on the extent
to which reimbursement for the cost of our products and related treatments will
be available from government health administration authorities, private health
insurers and other organizations. Third-party payers are increasingly
challenging the prices charged for medical products and services. If we succeed
in bringing any of our potential products to the market, such products may not
be considered cost effective and reimbursement may not be available or
sufficient to allow us to sell such products on a profitable or competitive
basis.
OUR ABILITY TO ACHIEVE ANY SIGNIFICANT REVENUE WILL DEPEND ON OUR ABILITY TO
ESTABLISH EFFECTIVE SALES AND MARKETING CAPABILITIES.
Our efforts to date have focused on the development and evaluation of our
drug candidates. As we conduct clinical studies and prepare for
commercialization of our drug candidates, we may need to build a sales and
marketing infrastructure. As a company, we have no experience in the sales and
marketing of pharmaceutical products. If we fail to establish a sufficient
marketing and sales force or to make alternative arrangements to have our
products marketed and sold by others on attractive terms, it will impair our
ability to commercialize our drug candidates and to enter new or existing
markets. Our inability to effectively enter these markets would materially and
adversely affect our ability to generate significant revenues.
WE DEPEND HEAVILY ON MANAGEMENT TEAM AND CONSULTANTS.
Our business strategy and success is dependent on the skills and knowledge
of our management team. Our operations will also be dependent on the efforts,
ability and experience of key members of our prospective management staff. We
also operate with a small number of advisors and consultants and, therefore,
have little backup capability for their activities. The loss of services of one
or more members of our management team or the loss of one or more of our
advisors could weaken significantly our management expertise and our ability to
efficiently run our business. We do not maintain key man life insurance policies
on any of our officers, although we intend to obtain such insurance policies in
the future.
WE MAY FACE PRODUCT LIABILITY CLAIMS RELATED TO THE USE OR MISUSE OF OUR
PRODUCTS, WHICH MAY CAUSE US TO INCUR SIGNIFICANT LOSSES.
We may be exposed to the risk of product liability claims due to
administration of our drug candidates in our clinical trials, since the use or
misuse of our drug candidates during a clinical trial could potentially result
in injury or death. If we are able to commercialize our products, we will also
be subject to the risk of losses in the future due to product liability claims
in the event that the use or misuse of our commercial products results in injury
or death. We currently do not maintain liability insurance. In the event we
choose to purchase liability insurance, we cannot predict the magnitude or the
number of claims that may be brought against us in the future. Accordingly, we
do not know what coverage limits would be adequate. In addition, insurance is
expensive, difficult to obtain and may not be available in the future on
acceptable terms or at all. Any claims against us, regardless of their merit,
could substantially increase our costs and cause us to incur significant losses.
THE MARKETABILITY AND PROFITABILITY OF OUR PRODUCTS IS SUBJECT TO UNKNOWN
ECONOMIC CONDITIONS.
The marketability and profitability of our products may be adversely
affected by local, regional, national and international economic conditions
beyond our control and/or the control of our management. Favorable changes may
not necessarily enhance the marketability or profitability of the products. Even
under the most favorable marketing conditions, there is no guarantee that our
products can be sold or, if sold, that such sale will be made upon favorable
prices and terms.
18
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
IF WE FAIL TO PROTECT OUR PROPRIETARY TECHNOLOGY, THEN OUR COMPETITIVE POSITION
WILL BE IMPAIRED.
We have obtained and are in the process of obtaining United States and
foreign patent applications for our products. Our success will depend in part on
our ability to obtain additional United States and foreign patent protection for
our drug candidates and processes, preserve our trade secrets and operate
without infringing the proprietary rights of others. We place considerable
importance on obtaining patent protection for significant new technologies,
products and processes. Legal standards relating to the validity of patents
covering pharmaceutical and biotechnology inventions and the scope of claims
made under such patents are still developing. In some of the countries in which
we intend to market our products, pharmaceuticals are either not patentable or
have only recently become patentable. Past enforcement of intellectual property
rights in many of these countries has been limited or non-existent. Future
enforcement of patents and proprietary rights in many other countries may be
problematic or unpredictable. Moreover, the issuance of a patent in one country
does not assure the issuance of a similar patent in another country. Claim
interpretation and infringement laws vary by nation, so the extent of any patent
protection is uncertain and may vary in different jurisdictions. Our domestic
patent position is also highly uncertain and involves complex legal and factual
questions. The applicant or inventors of subject matter covered by patent
applications or patents owned by us may not have been the first to invent or the
first to file patent applications for such inventions. Due to uncertainties
regarding patent law and the circumstances surrounding our patent applications,
the pending or future patent applications we own may not result in the issuance
of any patents. Existing or future patents owned by us may be challenged,
infringed upon, invalidated, found to be unenforceable or circumvented by
others. Further, any rights we may have under any issued patents may not provide
us with sufficient protection against competitive products or otherwise cover
commercially valuable products or processes.
LITIGATION OR OTHER DISPUTES REGARDING PATENTS AND OTHER PROPRIETARY RIGHTS MAY
BE EXPENSIVE, CAUSE DELAYS IN BRINGING PRODUCTS TO MARKET AND HARM OUR ABILITY
TO OPERATE.
The manufacture, use, marketing or sale of our drug candidates may infringe
on the patent rights of others. If we are unable to avoid infringement of the
patent rights of others, we may be required to seek a license, defend an
infringement action or challenge the validity of the patents in court. Patent
litigation is costly and time consuming. We may not have sufficient resources to
bring these actions to a successful conclusion. In addition, if we do not obtain
a license, develop or obtain non-infringing technology, or fail to successfully
defend an infringement action or have the patents we are alleged to infringe
declared invalid, we may:
* incur substantial money damages;
* encounter significant delays in bringing our drug candidates to
market;
* be precluded from participating in the manufacture, use or sale of our
drug candidates or methods of treatment without first obtaining
licenses to do so; and/or
* not be able to obtain any required license on favorable terms, if at
all.
In addition, if another party claims the same subject matter or subject
matter overlapping with the subject matter that we have claimed in a United
States patent application or patent, we may decide or be required to participate
in interference proceedings in the United States Patent and Trademark Office in
order to determine the priority of invention. Loss of such an interference
proceeding would deprive us of patent protection sought or previously obtained
and could prevent us from commercializing our products. Participation in such
proceedings could result in substantial costs, whether or not the eventual
outcome is favorable. These additional costs could adversely affect our
financial results.
CONFIDENTIALITY AGREEMENTS WITH EMPLOYEES AND OTHERS MAY NOT ADEQUATELY PREVENT
DISCLOSURE OF TRADE SECRETS AND OTHER PROPRIETARY INFORMATION.
In order to protect our proprietary technology and processes, we also rely
in part on confidentiality agreements with our employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors. These
agreements may not effectively prevent disclosure of confidential information
and may not provide an adequate remedy in the event of unauthorized disclosure
of confidential information. In addition, others may independently discover
19
trade secrets and proprietary information. Costly and time-consuming litigation
could be necessary to enforce and determine the scope of our proprietary rights
and failure to obtain or maintain trade secret protection could adversely affect
our competitive business position.
RISKS RELATED TO OUR INDUSTRY
WE MUST OBTAIN GOVERNMENT REGULATORY APPROVAL FOR OUR PRODUCTS BEFORE WE CAN
SELL THEM AND GENERATE REVENUES.
Our principal development efforts are currently centered around research
and development of drugs for treatment of cancer and viral infections. However,
all drug candidates require FDA and foreign government approvals before they can
be commercialized in the U.S. or in foreign countries. These regulations change
from time to time and new regulations may be adopted. None of our drug
candidates has been approved for commercial sale. We will incur significant
operating losses over the next few years as we fund development, clinical
testing and other expenses while seeking regulatory approval. While limited
clinical trials of our drug candidates have been conducted to date, significant
additional trials are required and we may not be able to demonstrate that these
drug candidates are safe or effective. If we are unable to demonstrate the
safety and effectiveness of a particular drug candidate to the satisfaction of
regulatory authorities, the drug candidate will not obtain required government
approval. If we do not receive FDA or foreign approvals for our drug products,
we will not be able to sell our drug products and will not generate revenues. If
we receive regulatory approval of a drug product, such approval may impose
limitations on the indicated uses for which we may market the drug, further
limiting our ability to generate significant revenues.
AS A RESULT OF OUR INTENSELY COMPETITIVE INDUSTRY, WE MAY NOT GAIN ENOUGH MARKET
SHARES TO BE PROFITABLE.
The biotechnology and pharmaceutical industries are intensely competitive.
We have numerous competitors in the United States and elsewhere. Because we are
pursuing potentially large markets, our competitors include major, multinational
pharmaceutical and chemical companies, specialized biotechnology firms,
universities and other research institutions. Several of these competitors have
already successfully marketed and commercialized products that will compete with
our products, assuming that our products gain regulatory approval.
Most of our competitors have greater financial resources, larger research
and development staffs and more effective marketing and manufacturing
organizations than we do. In addition, academic and government institutions have
become increasingly aware of the commercial value of their research findings.
These institutions are now more likely to enter into exclusive licensing
agreements with commercial enterprises, including our competitors, to develop
and market commercial products.
Our competitors may succeed in developing or licensing technologies and
drugs that are more effective or less costly than any we are developing. Our
competitors may succeed in obtaining FDA or other regulatory approvals for drug
candidates before we do. If competing drug candidates prove to be more effective
or less costly than our drug candidates, our drug candidates, even if approved
for sale, may not be able to compete successfully with our competitors' existing
products or new products we may develop. If we are unable to compete
successfully, we will not be able to sell enough products at a price sufficient
to permit us to generate profits.
EXISTING PRICING REGULATIONS AND REIMBURSEMENT LIMITATIONS MAY REDUCE OUR
POTENTIAL PROFITS FROM THE SALE OF OUR PRODUCTS.
The requirements governing product licensing, pricing and reimbursement
vary widely from country to country. Some countries require approval of the sale
price of a drug before it can be marketed. In many countries, the pricing review
period begins after product-licensing approval is granted. As a result, we may
obtain regulatory approval for a drug candidate in a particular country, but
then be subject to price regulations that reduce our profits from the sale of
the product. In some foreign markets, pricing of prescription pharmaceuticals is
subject to continuing government control even after initial marketing approval.
In addition, certain governments may grant third parties a license to
manufacture our product without our permission. Such compulsory licenses
typically would be on terms that are less favorable to us and would have the
effect of reducing our revenues.
Varying price regulation between countries can lead to inconsistent prices
and some re-selling by third parties of products from markets where products are
sold at lower prices to markets where those products are sold at higher prices.
This practice of exploiting price differences between countries could undermine
our sales in markets with higher prices and reduce the sales of our future
20
products, if any. The decline in the size of the markets in which we may in the
future sell commercial products could cause the perceived market value of our
business and the price of our common stock to decline. Our ability to
commercialize our products successfully also will depend in part on the extent
to which reimbursement for the cost of our products and related treatments will
be available from government health administration authorities, private health
insurers and other organizations. Third-party payers are increasingly
challenging the prices charged for medical products and services. If we succeed
in bringing any of our potential products to the market, such products may not
be considered cost effective and reimbursement may not be available or
sufficient to allow us to sell such products on a profitable or competitive
basis.
OUR PRODUCTS IN DEVELOPMENT WILL BE SUBJECT TO REIMBURSEMENT FROM GOVERNMENT
AGENCIES AND OTHER THIRD PARTIES. PHARMACEUTICAL PRICING AND REIMBURSEMENT
PRESSURES MAY REDUCE PROFITABILITY.
Successful commercialization of our products depends, in part, on the
availability of governmental and third party payer reimbursement for the cost of
such products and related treatments. Government health administration
authorities, private health insurers and other organizations generally provide
reimbursement. Government authorities and third-party payers increasingly are
challenging the price of medical products and services, particularly for
innovative new products and therapies. This has resulted in lower average sales
prices. Our business may be adversely affected by an increase in U.S. or
international pricing pressures. These pressures can arise from rules and
practices of managed care groups, judicial decisions and governmental laws and
regulations related to Medicare, Medicaid and health care reform, pharmaceutical
reimbursement and pricing in general. New legislation has been proposed at the
federal and state levels that would effect major changes in the U.S. health care
system, either nationally or at the state level. These proposals have included
prescription drug benefit proposals for Medicare beneficiaries recently passed
by Congress. Additionally, some states have enacted health care reform
legislation. Further federal and state developments are possible. Our results of
operations could be adversely affected by future health care reforms. In Europe,
the success of our products will also depend largely on obtaining and
maintaining government reimbursement because in many European countries,
including the United Kingdom and France, patients are reluctant to pay for
prescription drugs out of their own pocket. We also expect that the success of
our products in development, particularly in Europe, will depend on the ability
to obtain reimbursement. Even if reimbursement is available, reimbursement
policies may adversely affect our ability to sell our products on a profitable
basis.
Delays in the conduct or completion of our preclinical or clinical studies
or the analysis of the data from our preclinical or clinical studies may result
in delays in our planned filings for regulatory approvals or adversely affect
our ability to enter into collaborative arrangements.
* We may encounter problems with some or all of our completed or ongoing
studies that may cause us or regulatory authorities to delay or
suspend our ongoing studies or delay the analysis of data from our
completed or ongoing studies.
* We rely, in part, on third parties to assist us in managing and
monitoring our preclinical and clinical studies. Our reliance on these
third parties may result in delays in completing or failure to
complete studies if third parties fail to perform their obligations to
us.
RESULTS OF CLINICAL TRIALS ARE UNCERTAIN AND MAY NOT SUPPORT CONTINUED
DEVELOPMENT OF A PRODUCT PIPELINE, WHICH WOULD ADVERSELY AFFECT OUR PROSPECTS
FOR FUTURE REVENUE GROWTH.
We are required to demonstrate the safety and effectiveness of products we
develop in each intended use through extensive preclinical studies and clinical
trials. The results from preclinical and early clinical studies do not always
accurately predict results in later, large-scale clinical trials. Even
successfully completed large-scale clinical trials may not result in marketable
products. A number of companies in our industry have suffered setbacks in
advanced clinical trials despite promising results in earlier trials. If any of
our products under development fail to achieve their primary endpoint in
clinical trials or if safety issues arise, commercialization of that drug
candidate could be delayed or halted.
21
RISKS RELATED TO AN INVESTMENT IN OUR SECURITIES
THERE WILL BE A LIMITED TRADING MARKET FOR OUR COMMON STOCK.
Our common stock is not currently traded on any securities exchange. We
have applied to have our shares of common stock quoted for trading on the OTC
Bulletin Board. However, there can be no assurance that our shares of common
stock will be quoted for trading on the OTC Bulletin Board or, if quoted, that
there will be sufficient liquidity in the shares. If no market develops for our
shares of common stock or there is insufficient liquidity in the shares, it will
be difficult for shareholders to sell their stock, if at all. Our shares of
common stock would then likely be quoted on the OTC Pink Sheets.
OUR COMMON STOCK IS CONSIDERED TO BE A "PENNY STOCK" AND, AS SUCH, THE MARKET
FOR OUR COMMON STOCK MAY BE FURTHER LIMITED BY CERTAIN SEC RULES APPLICABLE TO
PENNY STOCKS.
As long as the price of our common stock remains below $5.00 per share or
we have net tangible assets of $2,000,000 or less, our shares of common stock
are likely to be subject to certain "penny stock" rules promulgated by the SEC.
Those rules impose certain sales practice requirements on brokers who sell penny
stock to persons other than established customers and accredited investors
(generally, an institution with assets in excess of $5,000,000 or an individual
with a net worth in excess of $1,000,000). For transactions covered by the penny
stock rules, the broker must make a special suitability determination for the
purchaser and receive the purchaser's written consent to the transaction prior
to the sale. Furthermore, the penny stock rules generally require, among other
things, that brokers engaged in secondary trading of penny stocks provide
customers with written disclosure documents, monthly statements of the market
value of penny stocks, disclosure of the bid and asked prices and disclosure of
the compensation to the brokerage firm and disclosure of the sales person
working for the brokerage firm. These rules and regulations make it more
difficult for brokers to sell shares of our common stock and limit the liquidity
of our shares. See "Plan of Distribution" for a more detailed discussion of the
penny stock rules and related broker-dealer restrictions.
TRADING IN OUR SECURITIES COULD BE SUBJECT TO EXTREME PRICE FLUCTUATIONS THAT
COULD ADVERSELY AFFECT YOUR INVESTMENT.
The market prices for securities of biotechnology companies, particularly
hose that are not profitable, have been highly volatile, especially recently.
Publicized events and announcements may have a significant impact on the market
price of our common stock. For example, any of the following may have the effect
of temporarily or permanently driving down the price of our common stock:
* Biological or medical discoveries by competitors;
* Public concern about the safety of our drug candidates;
* Delays in the conduct or analysis of our clinical trials;
* Unfavorable results from clinical trials;
* Unfavorable developments concerning patents or other proprietary
rights; or
* Unfavorable domestic or foreign regulatory developments;
In addition, the stock market from time to time experiences extreme price
and volume fluctuations which particularly affect the market prices for emerging
and life sciences companies, such as ours, and which are often unrelated to the
operating performance of the affected companies.
SUBSTANTIAL SALES OF OUR STOCK MAY IMPACT THE MARKET PRICE OF OUR COMMON STOCK.
Future sales of substantial amounts of our common stock, including shares
that we may issue upon exercise of options and warrants, could adversely affect
the market price of our common stock. Further, if we raise additional funds
through the issuance of common stock or securities convertible into or
exercisable for common stock, the percentage ownership of our shareholders will
be reduced and the price of our common stock may fall.
WE DO NOT EXPECT TO PAY DIVIDENDS FOR THE FORESEEABLE FUTURE.
We will use any earnings generated from our operations to finance our
business and will not pay any cash dividends to our shareholders in the
foreseeable future.
22
ISSUING PREFERRED STOCK WITH RIGHTS SENIOR TO THOSE OF OUR COMMON STOCK COULD
ADVERSELY AFFECT HOLDERS OF COMMON STOCK.
Our charter documents give our board of directors the authority to issue
series of preferred stock without a vote or action by our shareholders. The
board also has the authority to determine the terms of preferred stock,
including price, preferences and voting rights. The rights granted to holders of
preferred stock may adversely affect the rights of holders of our common stock.
For example, a series of preferred stock may be granted the right to receive a
liquidation preference - a pre-set distribution in the event of a liquidation
that would reduce the amount available for distribution to holders of common
stock. In addition, the issuance of preferred stock could make it more difficult
for a third party to acquire a majority of our outstanding voting stock. As a
result, common shareholders could be prevented from participating in
transactions that would offer an optimal price for their shares.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains certain forward-looking statements regarding
management's plans and objectives for future operations including plans and
objectives relating to our planned marketing efforts and future economic
performance. The forward-looking statements and associated risks set forth in
this Form 10-QSB include or relate to, among other things, (a) our projected
sales and profitability, (b) our growth strategies, (c) anticipated trends in
our industry, (d) our ability to obtain and retain sufficient capital for future
operations, and (e) our anticipated needs for working capital. These statements
may be found under "Management's Plan of Operations" and "Business," as well as
in this Form 10-QSB, generally. Actual events or results may differ materially
from those discussed in forward-looking statements as a result of various
factors, including, without limitation, the risks outlined under "Risk Factors"
and matters described in this prospectus, generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this Form 10-QSB will, in fact, occur.
ITEM 3. CONTROLS AND PROCEDURES
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Management is responsible for establishing and maintaining adequate
internal control over our financial reporting. Our principal executive officer
and principal financial officer, after evaluating the effectiveness of our
disclosure controls and procedures (as defined in the Securities Exchange Act of
1934 (Exchange Act) Rules 13a-15(e) and 15d-15(e) as of September 30, 2006, has
concluded that our disclosure controls and procedures are effective in providing
reasonable assurance that information required to be disclosed by us in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Commission's
rules and forms.
(B) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
Our management, with the participation of the principal executive officer
and principal financial officer, have concluded there were no significant
changes in our internal controls over financial reporting that occurred during
our last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
23
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During May and June of 2006, we sold 1,237,500 common shares for $99,000 to
certain accredited investors. These transactions were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933 and did not involve any
possible offering and was sold to a limited group of investors. Each recipient
either received adequate information about us and we 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 us. 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.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Exhibit 31.1 Certification of Principal Executive Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Principal Financial Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted by Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
24
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Cavit Sciences, Inc.
By: /s/ Colm J. King
-------------------------------------------------------------
Colm J. King
President/Chief Executive Officer/Chief Financial Officer
(Principal Executive Officer and Principal Financial Officer
Date: November 14, 2006
25