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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(Mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________.
COMMISSION FILE NO. 000-28637
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BIOSANTE PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
WYOMING 58-2301143
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 OLDE HALF DAY ROAD, SUITE 123
LINCOLNSHIRE, ILLINOIS 60069
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (847) 793-2458
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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 / / NO /X/
Check if there is no disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B contained in this Form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. /X/
The issuer's revenues for the fiscal year ended December 31, 1999
were $196,295.
As of March 1, 2000, 52,642,686 shares of common stock of the
registrant were outstanding, and the aggregate market value of the Common
Stock of the Registrant as of that date (based upon the last reported sale
price of the common stock at that date as reported by the National Quotation
Bureau's Pink Sheets), excluding outstanding shares beneficially owned by
directors and executive officers, was $25,176,832.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-KSB incorporates by
reference information (to the extent specific sections are referred to
herein) from the Registrant's Proxy Statement for its 2000 Annual Meeting to
be held June 13, 2000 (the "2000 Proxy Statement").
Transitional Small Business Disclosure Format (check one): YES / / NO /X/
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TABLE OF CONTENTS
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PART I.........................................................................................2
ITEM 1. BUSINESS.........................................................................2
General..........................................................................2
Business Strategy................................................................3
Description of Our Core Technology...............................................4
Proposed Products and Product Development........................................4
Future Product Development.......................................................6
Sales and Marketing..............................................................6
Research and Product Development.................................................6
Manufacturing....................................................................7
Patents, Licenses and Proprietary Rights.........................................7
Competition......................................................................9
Governmental Regulation.........................................................10
Employees.......................................................................12
Certain Important Factors.......................................................12
ITEM 2. PROPERTIES......................................................................20
ITEM 3. LEGAL PROCEEDINGS...............................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................20
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY...............................................21
PART II.......................................................................................22
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.........................................................................22
Market Price....................................................................22
Number of Record Holders; Dividends.............................................22
Previous Sales of Unregistered Securities.......................................22
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.......................................................................23
General.........................................................................23
Liquidity and Capital Resources.................................................25
Impact of Year 2000.............................................................27
ITEM 7. FINANCIAL STATEMENTS............................................................28
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PART III......................................................................................49
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................................49
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............................49
Directors, Executive Officers, Promoters and Control Persons....................49
Section 16(a) Beneficial Ownership Reporting Compliance.........................49
ITEM 10. EXECUTIVE COMPENSATION..........................................................49
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................49
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................49
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................................50
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K................................................54-57
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PART I
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THIS FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS. FOR THIS
PURPOSE, ANY STATEMENTS CONTAINED IN THIS FORM 10-KSB THAT ARE NOT STATEMENTS
OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. YOU CAN
IDENTIFY FORWARD-LOOKING STATEMENTS BY THOSE THAT ARE NOT HISTORICAL IN
NATURE, PARTICULARLY THOSE THAT USE TERMINOLOGY SUCH AS "MAY," "WILL,"
"SHOULD," "EXPECTS," "ANTICIPATES," "CONTEMPLATES," "ESTIMATES," "BELIEVES,"
"PLANS," "PROJECTED," "PREDICTS," "POTENTIAL" OR "CONTINUE" OR THE NEGATIVE
OF THESE OR SIMILAR TERMS. IN EVALUATING THESE FORWARD-LOOKING STATEMENTS,
YOU SHOULD CONSIDER VARIOUS FACTORS, INCLUDING THE RISK FACTORS LISTED BELOW.
THESE FACTORS MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY
FORWARD-LOOKING STATEMENT.
ITEM 1. BUSINESS
GENERAL
We are a development stage biopharmaceutical company engaged in the
development and commercialization of vaccine adjuvants or immune system
boosters, proprietary novel vaccines and drug delivery systems. Our core
technology, which we license on an exclusive basis from the University of
California, is based on the use of extremely small, solid, uniform particles,
which we call "nanoparticles," as immune system boosters and for drug
delivery. We have identified three potential initial applications for our
core technology:
- - the creation of improved versions of current vaccines by the "adjuvant"
activity of our proprietary nanoparticles that would enhance the ability of
a vaccine to stimulate an immune response;
- - the development of new, unique vaccines against diseases for which there
currently are few or no effective methods of prevention (e.g., genital
herpes); and
- - the creation of inhaled forms of drugs that currently must be given by
injection (e.g., insulin).
Our goal is to leverage our core technology to become a pharmaceutical
company that develops and commercializes a wide range of pharmaceutical
products. Our strategy to obtain this goal is to:
- - enter into business collaborations or joint ventures to further develop and
commercialize products incorporating our core technology;
- - in-license or otherwise acquire products in the late-stage development
phase;
- - in-license or otherwise acquire products already on the market; and
- - enter into business collaborations or joint ventures with complementary
firms outside the scope of our core technology.
Our outlicensing activities with respect to our adjuvant for use in other
companies' vaccines have to date included meeting with target companies and,
in some cases, agreeing that the target company will test our adjuvant in
their animal models. Thereafter, the target company may send to us its
vaccine antigen or DNA which we will then formulate with our nanoparticles
and return for use in the target company's animal models. Once this is
completed, if the results are positive, we would hope to sign an out-license
agreement with the target company. To date, we have not entered into any
out-license agreements.
On November 1, 1999, we announced that we formed a collaborative research
alliance with Medi-Ject Corporation to evaluate the efficacy of continuing
our nanoparticle drug delivery and adjuvant or immune system boosters with
Medi-Ject's needle-free pressure injection. This research alliance will
evaluate the ability of the combined systems to deliver DNA vaccines as part
of a DNA vaccine program at a major U.S. university.
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On November 10, 1999, our shareholders approved our name change from
Ben-Abraham Technologies Inc. to BioSante Pharmaceuticals, Inc. Our company,
which was initially formed as a corporation organized under the laws of the
Province of Ontario on August 29, 1996, was continued as a corporation under
the laws of the State of Wyoming on December 19, 1996. Our company is the
continuing corporation resulting from an amalgamation, or consolidation, of
three companies, our company, which was previously named "Ben-Abraham
Technologies Inc.", Structured Biologicals Inc., a corporation organized
under the laws of the Province of Ontario and 923934 Ontario Inc., a
corporation organized under the laws of the Province of Ontario and a wholly
owned subsidiary of Structured Biologicals. The amalgamation was approved by
our shareholders on November 27, 1996 and the articles of arrangement were
filed and became effective as of December 6, 1996.
BUSINESS STRATEGY
Our goal is to leverage our core technology to become a pharmaceutical
company that develops and commercializes a wide range of pharmaceutical
products. Our strategy to obtain this goal is to (1) develop commercial
applications of our core technology or enter into business collaborations or
joint ventures with vaccine companies and others interested in either
co-development and co-marketing arrangements or out-license arrangements with
respect to our core technology, (2) further enhance our pharmaceutical
portfolio by in-licensing or otherwise acquiring products in the late-stage
development phase or products already on the market and (3) enter into
business collaborations or joint ventures with complementary firms outside
the scope of our core technology.
- - ENTER INTO BUSINESS COLLABORATIONS OR JOINT VENTURES TO FURTHER DEVELOP AND
COMMERCIALIZE PRODUCTS INCORPORATING OUR CORE TECHNOLOGY. We intend to seek
opportunities to enter into business collaborations or joint ventures with
entities that have businesses or technologies complementary to our
business, such as vaccine and pharmaceutical companies. We are particularly
interested in entering into product co-development and co-marketing
arrangements with respect to our core technology or out-licensing our core
technology to others for further development and marketing. We believe that
this partnering strategy will enable us to capitalize on our partner's
strengths in product development, manufacturing and commercialization and
thereby enable us to introduce into the market products incorporating our
core technology sooner than which we otherwise would be able. In addition,
such collaborations would significantly reduce our cash requirements for
developing and commercializing our core technology and thereby permit us to
spend cash on in-licensing or otherwise acquiring products in the
late-stage development phase or products already on the market.
- - IN-LICENSE OR OTHERWISE ACQUIRE PRODUCTS IN THE LATE-STAGE DEVELOPMENT
PHASE. We intend to seek opportunities to in-license or otherwise acquire
products in the late-stage development phase. In seeking such
opportunities, we intend to target products that cover therapeutic areas
treated by a limited number of physicians and drugs that are in or require
human clinical trials that involve a limited number of patients and not a
significant amount of time and cost needed to complete them. We believe
that targeting these products that are currently in or ready for human
clinical trials would decrease the risk associated with product development
and would likely shorten the time before we can introduce the products into
the market.
- - IN-LICENSE OR OTHERWISE ACQUIRE PRODUCTS ALREADY ON THE MARKET. In addition
to late-stage development products, we intend to seek opportunities to
in-license or otherwise acquire products that (1) have FDA approval, (2)
have been or are about to be commercially introduced into the U.S. markets,
(3) have a concentrated physician prescriber audience, and (4) have the
potential to generate significant sales.
- - ENTER INTO BUSINESS COLLABORATIONS OR JOINT VENTURES WITH COMPLEMENTARY
FIRMS OUTSIDE THE SCOPE OF OUR CORE TECHNOLOGY.
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We intend to seek opportunities to enter into business collaborations
or joint ventures with entities that have businesses or technology
complementary to our business. We are particularly interested in entering
into product co-development and co-marketing arrangements.
DESCRIPTION OF OUR CORE TECHNOLOGY
Research and development involving our core technology originated in a
project set up under an agreement dated April 6, 1989 between the University
of California and our predecessor company, Structured Biologicals, relating
to viral protein surface absorption studies. The discovery research was
performed by Structured Biologicals at UCLA School of Medicine and was based,
in essence, on the use of extremely small, solid, uniform particles as
components that could increase the stability of drugs and act as systems to
deliver drugs into the body. These ultrafine particles are made from inert,
biologically acceptable materials, such as ceramics, pure crystalline carbon
or a biodegradable calcium phosphate compound. The size of the particles is
in the nanometer range. A nanometer is one millionth of a millimeter and
typically particles measure less than 1,000 nanometers (nm). For comparison,
a polio virus particle is about 27 nm in diameter, a herpes virus particle
has a central core measuring 100 nm in diameter, contained in an envelope
measuring 150-200 nm, while a tuberculosis bacterium is rod-shaped, about
1,200 nm long by 300 nm across. Because the size of these particles is
measured in nanometers, we use the term "nanoparticles" to describe them.
We use the nanoparticles as the basis of a delivery system by applying a
layer of a "bonding" coating of cellobiose or another carbohydrate
derivative. The critical property of these coated nanoparticles is that
biologically active molecules, proteins, peptides or pharmacological agents,
for example, vaccine components like bacterial or viral antigens or proteins
like insulin, attached to them retain their activity and can be protected
from natural alterations to their molecular structure by adverse
environmental conditions. It has been shown in studies conducted by us that,
when these combinations are injected into animals, the attachment can
actually enhance the biological activity as compared to injection of the
molecule alone in solution.
A major immune response that is triggered by these combination particles is
the creation of antibody molecules, which can then specifically counteract an
invading virus or bacterium. Similarly, a drug will produce an effect on an
organ system only if it can attach to specific receptors on the surface of
target cells (e.g., tumor cells). The stabilizing and slow release
capabilities of a drug carrier and delivery system based on this discovery
can lead to significant advances towards finding more effective and less
toxic or harmful molecules to seek out and attach to such receptors.
We believe our core technology has a number of benefits, including the
following:
- - it is biodegradable (capable of being decomposed by natural biological
processes) and non-toxic and therefore potentially safe to use and
introduce into the human body;
- - it is fast, easy and inexpensive to manufacture which will keep our costs
down and potentially improve our profit margins;
- - the nanometer (one-millionth of a millimeter) size range makes it ideal for
delivering drugs through aerosol sprays or inhalation instead of using
painful injections; and
- - it has excellent "loading" capacity -- the amount of molecules that can
bond with the nanoparticles - thereby potentially decreasing the dose
needed to be taken by patients.
Research in these areas has resulted in the issuance of a number of patents
that we license from the University of California.
PROPOSED PRODUCTS AND PRODUCT DEVELOPMENT
We plan to develop commercial applications of our core technology and any
proprietary technology developed as a result of our ongoing research and
development efforts. Initially, we
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plan to pursue the development of (1) vaccine adjuvants, (2) new virus
vaccines, including vaccines to treat or prevent disease caused by Herpes
viruses and (3) drug delivery systems, including a method of delivering
insulin through inhalation. Our research and development team is currently
pursuing these objectives in our laboratory in Smyrna, Georgia.
VACCINE ADJUVANTS. Our nanoparticles when combined with vaccine antigens have
been shown in animal studies conducted by us to possess an ability to elicit
a higher immune response than non-adjuvanted vaccines and an immune response
of the same magnitude as alum-formulated vaccines but up to 100 times lower
concentrations. These preclinical studies also have shown that our CAP
nanoparticles also may sustain higher antibody levels over a longer time
period than both alum-formulated vaccines and non-adjuvanted vaccines.
Because our CAP nanoparticles are made of calcium phosphate, which has a
chemical nature similar to normal bone material and therefore is natural to
the human body, as opposed to aluminum hydroxide, or alum, which is not
natural to the human body, we believe that our nanoparticles may be safer to
use than alum. In our animal studies, we observed no material adverse
reactions when our CAP nanoparticles were administered at effective levels.
Based on these preclinical results, we believe that our CAP nanoparticles may
offer a means of preparing new improved formulations of current vaccines that
are equal or better in their immunogenicity, that is, in their capacity to
elicit an immune response, to alum-formulated and non-adjuvanted vaccines but
may be injected in lower concentrations and less often which could result in
certain benefits, including cost savings and improved patient compliance. We
hope to file an investigational new drug (IND) application with the FDA
before the end of 2000 to commence a Phase I human clinical trial. As
discussed in more detail under the heading "Government Regulation," the
purpose of a Phase I trial is to evaluate the metabolism and safety of the
experimental product in humans, the side effects associated with increasing
doses, and, if possible, to gain early evidence of possible effectiveness.
The Phase I trial of our CAP specifically will look at safety parameters,
including local irritation and blood chemistry changes. In anticipation of
commencing the Phase I trial, we have made arrangements with the University
of Iowa to assist us in manufacturing our CAP nanoparticles for use in our
proposed Phase I human clinical trial.
In addition to continuing our own research and development in this area, we
intend to seek opportunities to enter into business collaborations or joint
ventures with vaccine companies and others interested in co-development and
co-marketing arrangements with respect to our nanoparticle adjuvants. These
arrangements also could include out-licenses of our core technology to
vaccine companies and others for further development in their on-going
vaccine development.
Our outlicensing activities with respect to our adjuvant for use in other
companies' vaccines have to date included meeting with target companies and,
in some cases, agreeing that the target company will test our adjuvant in
their animal models. Thereafter, the target company may send to us its
vaccine antigen or DNA which we will then formulate with our nanoparticles
and return for use in the target company's animal models. Once this is
completed, if the results are positive, we would hope to sign an out-license
agreement with the target company. To date, we have not entered into any
out-license agreements.
NEW VACCINES. We believe our nanoparticle technology presents a new, and more
effective and safer, approach to vaccine preparation. As with our vaccine
adjuvant technology, we are continuing our own research and development in
this area, but we also intend to seek opportunities to enter into business
collaborations or joint ventures with vaccine companies and others interested
in co-development and co-marketing arrangements. We believe these
collaborations may enable us to accelerate the development of potential
improved vaccines for any products developed from our core technology. These
arrangements also could include out-licenses of our core technology to
vaccine companies and others for further development and marketing. We have
begun discussions with other companies to out-
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license our adjuvant for use in those companies' new vaccine development.
Based on animal tests to date, we hope to develop a vaccine using our
proprietary nanoparticle technology to prevent or treat genital herpes.
Herpes is the family name of over 50 related viruses that share common
characteristics. The viruses that cause oro-facial (affecting the lips, mouth
and face and sometimes called "cold sores") and genital herpes are two
members of this group and are classified as herpes simplex virus type I and
herpes simplex virus type II, respectively. To date, there is no currently
approved vaccine for genital herpes.
DRUG DELIVERY SYSTEMS. The third field of use in which we are exploring
applying our core technology involves creating novel and improved forms of
delivery of drugs, including hormones (e.g., insulin). The attachment of
drugs to nanoparticles may enhance their stability in the body or enable the
addition of further protective coatings to permit oral, delayed-release and
mucosal (through mucous membranes) applications. Currently, insulin is given
by frequent, inconvenient and often painful injections. However, several
companies are in the process of developing and testing products that will
deliver insulin orally or through inhalation. We believe we may have
successfully created a formulation for the inhaled delivery of insulin. Our
research and development efforts in this area are on going. We are in the
process of contacting several insulin manufacturers and companies with
devices for inhalation of drugs to pursue collaborations for this development.
FUTURE PRODUCT DEVELOPMENT
We intend to explore other applications of our nanoparticle technology. Such
applications may include the development of additional vaccines, including
DNA vaccines, and the treatment of diseases or conditions other than diabetes
in which inhaled delivery of drugs may be useful. We believe that our
nanoparticle technology has potentially major applications as an alternative
approach to vaccines and for drug delivery. The results obtained in our
animal studies indicate that similar combinations could be made using key
antigens, or molecules that can stimulate antibodies, extracted from the
surface membranes of pathogenic bacteria. Several biotechnology companies are
pursuing the bacterial extract approach and may offer future opportunities
for us to develop collaborations. On November 1, 1999, we announced that we
formed a collaborative research alliance with Medi-Ject Corporation to
evaluate the efficacy of combining our nanoparticle drug delivery and
adjuvant system with Medi-Ject's needle-free pressure injection. This
research alliance will evaluate the ability of the combined systems to
deliver DNA vaccines as part of a DNA vaccine program at a major U.S.
university. Other than the area of DNA vaccines, we currently are not
pursuing, however, any of these programs or collaborations, and we cannot
assure you that we will have the personnel or resources to develop them in
the future.
SALES AND MARKETING
We currently do not have any sales and marketing personnel to sell on a
commercial basis any of our proposed products. If and when we are ready to
commercially launch a product, we will either hire qualified sales and
marketing personnel or seek a joint marketing partner to assist us with this
function.
RESEARCH AND PRODUCT DEVELOPMENT
We expect to spend a significant amount of our financial resources on
research and development activities. We spent approximately $661,000 in 1999
and approximately $1,400,000 in 1998 on research and development activities.
Since we are not yet engaged in the commercial distribution of any products
and we have no revenues, other than interest revenues earned on available
cash balances, these research and development costs must be financed by us.
We estimate that we are currently spending approximately $80,000 to $100,000
per month on research and development activities. These expenditures,
however, may fluctuate from quarter-to-quarter and year-to-year depending on
the resources available and our development schedule. Results of preclinical
studies, clinical trials, regulatory decisions and competitive developments
may significantly influence the amount of our research and development
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activities. In addition, we expect that our spending on product development
will increase if we are successful at in-licensing or otherwise acquiring
other late-stage development products.
MANUFACTURING
We currently do not have any facilities suitable for manufacturing on a
commercial scale basis any of our proposed products nor do we have any
experience in volume manufacturing. If, and when we are ready to commercially
launch a product, we will either find our own manufacturing facilities, hire
additional personnel with manufacturing experience and comply with the
extensive GMP regulations of the FDA and other regulations applicable to such
a facility or we will more likely rely upon contractors to manufacture our
proposed products in accordance with these regulations. In September 1999, we
entered into an arrangement with the University of Iowa to manufacture our
CAP nanoparticles for use in our proposed Phase I human clinical trial. Under
the arrangement, the University of Iowa agreed to manufacture both a trial
batch of our CAP nanoparticles and a clinical batch we can use in the
clinical trial. We agreed to pay the University approximately $50,000,
approximately $10,000 of which we have already paid, a portion to be paid
upon completion of the trial batch and the remainder upon completion of the
clinical batch. In the event the University of Iowa is unable to perform
under the agreement or terminates the agreement at any time, we believe we
will be able to find another suitable manufacturer.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
Our success depends and will continue to depend in part on our ability to
maintain patent protection for our products and processes, to preserve our
proprietary information and trade secrets and to operate without infringing
the proprietary rights of third parties. Our policy is to attempt to protect
our technology by, among other things, filing patent applications or
obtaining license rights for technology that we consider important to the
development of our business. The validity and breadth of claims covered in
medical technology patents involve complex legal and factual questions and,
therefore, may be highly uncertain. We cannot assure you that any of our
pending or future applications will result in patents being issued or, if
issued, that these patents, or the patents we license from University of
California, will provide us a competitive advantage, or that our competitors
will not design around any patents issued to or licensed by us.
UNIVERSITY OF CALIFORNIA. In June 1997, we entered into a licensing agreement
with the Regents of the University of California pursuant to which the
University has granted us an exclusive license to nine United States patents
owned by the University, including rights to sublicense such patents, in
fields of use pertaining to: (1) vaccine adjuvants; (2) vaccine constructs or
combinations for use in immunization against herpes virus; (3) drug delivery
systems; and (4) red blood cell surrogates. The University of California has
filed patent applications for this licensed technology in certain foreign
jurisdictions, including Canada, Europe and Japan. Some of these foreign
patents have been issued but we cannot assure you that any others will issue.
Even if these foreign patents are obtained, they may not provide the level of
protection provided by United States patents.
The license agreement with the University of California requires us to
undertake various obligations, including:
- - payment of a $100,000 license issue fee, $75,000 of which we have already
paid and $25,000 of which is due in June 2000;
- - payment of royalties to the University based on a percentage of the net
sales of any products incorporating the licensed technology;
- - payment of minimum annual royalties on February 28 of each year beginning
in the year 2004 in the amounts set forth below, to be credited against
earned royalties, for the life of the agreement (2013);
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<CAPTION>
MINIMUM ANNUAL
YEAR ROYALTY DUE
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2004 $ 50,000
2005 $ 100,000
2006 $ 150,000
2007 $ 200,000
2008 $ 400,000
2009 $ 600,000
2010 $ 800,000
2011 $ 1,500,000
2012 $ 1,500,000
2013 $ 1,500,000
</TABLE>
- - maintaining an annual minimum amount of available capital for development
and commercialization of products incorporating the licensed technology
until a product is introduced to the market;
- - payment of the costs of patent prosecution and maintenance of the patents
included in the agreement which have amounted to $63,000 in fiscal 1999 and
which we estimate will equal approximately $70,000 per year;
- - meeting performance milestones relating to:
- hiring or contracting with personnel to perform research and
development, regulatory and other activities relating to the
commercial launch of a proposed product;
- testing proposed products;
- obtaining government approvals;
- conducting clinical trials; and
- introducing products incorporating the licensed technology into the
market; and
- - entering into partnership or alliance arrangements or agreements with
other entities regarding commercialization of the technology covered
by the license.
The license agreement further provides that we have the right to abandon any
project in any field of use without abandoning our license to pursue other
projects in that or other fields of use covered by the agreement. In May
1999, we notified the University of California that we would not pursue the
red blood cell surrogate use because we do not believe this will be proven an
effective use of CAP. On October 26, 1999, we signed an amendment to our
license agreement with the University of California. The amendment removes
the red-blood cell surrogate use from the agreement. In addition, under the
terms of the amendment, the University agreed to make other changes we
suggested to the license agreement, including delaying minimum royalty
payments until 2004 and limiting the University of California's rights to
terminate the agreement in cases where we do not perform under the agreement.
We believe we are in substantial compliance with all of the material terms of
the license agreement. If we violate or fail to perform any term or covenant
of the license agreement and fail to cure this default within 60 days after
written notice from the University of California, the University of
California may terminate some projects included in the agreement. The
termination of the agreement, however, will not relieve us of our obligation
to pay any royalty or license fees owing at the time of termination.
PATENTS AND PATENT APPLICATIONS. Although we do not own any United States
patents or foreign patents, on February 3, 2000, we filed a patent
application with the U.S. Trademark and Patent Office relating to our
development work with vaccine adjuvants, conventional, DNA and RNA vaccines
and drug delivery including aerosol delivery into the lungs.
TRADEMARKS AND TRADEMARK APPLICATIONS. We have filed an intent-to-use
application for the mark BioSante. On November 10, 1999, our shareholders
approved our name change from Ben-Abraham Technologies Inc. to BioSante
Pharmaceuticals, Inc. We currently do not have any registered trademarks.
CONFIDENTIALITY AND ASSIGNMENT OF INVENTIONS AGREEMENTS. We require our
employees, consultants and advisors having access to our confidential
information to execute confidentiality agreements upon commencement of their
employment or consulting relationships with us. These agreements generally
provide that all confidential information we develop or make known to the
individual during the course
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of the individual's employment or consulting relationship with us must be
kept confidential by the individual and not disclosed to any third parties.
We also require all of our employees and consultants who perform research and
development for us to execute agreements that generally provide that all
inventions conceived by these individuals will be our property.
LIMITATIONS OF OUR SAFEGUARDS. We cannot assure you, however, that our
confidentiality and assignment of inventions agreements and other safeguards
will protect our proprietary information and know-how or provide adequate
remedies for us in the event of unauthorized use or disclosure of this
information, or that others will not be able to independently develop this
information. In addition, to the extent, our strategic partners or
consultants apply technical information developed independently by them or
others to our projects or apply our technology to other projects, disputes
may arise as to the ownership of proprietary rights to this technology.
The issuance of a patent to us or of one of our licensed patents to the
University of California is not conclusive evidence as to the validity or as
to the enforceable scope of claims covered by the patent. The validity and
enforceability of a patent can be challenged by a request for re-examination
or litigation after its issuance, and, if the outcome of this litigation is
adverse to the owner of the patent, other parties may be free to use the
subject matter covered by the patent.
COMPETITION
Competition in the biopharmaceutical industry is intense both in the
development of products for prevention and/or treatment of the same
infectious diseases we target and in the acquisition of products in the
late-stage development phase or already on the market. Potential competitors
in the United States are numerous and include major pharmaceutical and
specialized biotechnology companies, universities and other institutions. In
general, competition in the pharmaceutical industry can be divided into four
categories: (1) corporations with large research and developmental
departments that develop and market products in many therapeutic areas; (2)
companies that have moderate research and development capabilities and focus
their product strategy on a small number of therapeutic areas; (3) small
companies with limited development capabilities and only a few product
offerings; and (4) university and other research institutions.
All of our competitors in categories (1) and (2) and some of our competitors
in category (3) have longer operating histories, greater name recognition,
substantially greater financial resources and larger research and development
staffs than we do, as well as substantially greater experience than us in
developing products, obtaining regulatory approvals, and manufacturing and
marketing pharmaceutical products. We cannot assure you that our competitors
will not succeed in developing technologies and products that are more
effective than any of which we are developing or which we may develop or
which would render our technology and products obsolete and noncompetitive.
In addition, we cannot assure you that our products under development will be
able to compete successfully with existing products or products under
development by other companies, universities and other institutions or that
they will attain regulatory approval in the United States or elsewhere. A
significant amount of research in the field is also being carried out at
academic and government institutions. These institutions are becoming
increasingly aware of the commercial value of their findings and are becoming
more aggressive in pursuing patent protection and negotiating licensing
arrangements to collect royalties for use of technology that they have
developed. These institutions may also market competitive commercial products
on their own or in collaboration with competitors and will compete with us in
recruiting highly qualified scientific personnel. We expect our products, if
and when approved for sale, to compete primarily on the basis of product
efficacy, safety, patient convenience, reliability and patent position. In
addition, the first product to reach the market in a therapeutic or
preventative area is often at a significant competitive advantage relative to
later entrants in the market.
We are aware of certain programs and products under development by others
which may compete with our programs and proposed
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products. The international vaccine industry is dominated by three companies:
SmithKline Beecham plc, Rhone-Poulenc S.A. (through its subsidiaries,
including Institut Merieux International, Pasteur Merieux Serums et Vaccins,
Connaught Laboratories Limited and Connaught Laboratories, Inc.) and Merck &
Co., Inc. The larger, better known pharmaceutical companies have generally
focused on a traditional synthetic drug approach, although some have
substantial expertise in biotechnology. During the last decade, however,
significant research activity in the biotechnology industry has been
completed by smaller research and development companies, like us, formed to
pursue new technologies. Competitive or comparable companies to us include ID
Biomedical Inc., which develops sub-unit vaccines from mycobacteria and other
organisms, ANTEX Inc., which is similar to ID Biomedical Inc., and RIBI
Pharmaceuticals, Inc., which develop new vaccine adjuvants. The existence of
products developed by these and other competitors, or other products of which
we are not aware or which may be developed in the future, may adversely
affect the marketability of our products. In addition, our competitive
position will depend upon our ability to enter into business collaborations
or joint ventures to further develop and commercialize products incorporating
our core technology, in-license or otherwise acquire products in the
late-stage development phase or products already on the market and obtain
additional financing when needed.
GOVERNMENTAL REGULATION
Pharmaceutical products intended for therapeutic use in humans are governed
by extensive Food and Drug Administration regulations in the United States
and by comparable regulations in foreign countries. Any products developed by
us will require FDA approvals in the United States and comparable approvals
in foreign markets before they can be marketed. The process of seeking and
obtaining FDA approval for a previously unapproved new human pharmaceutical
product generally requires a number of years and involves the expenditure of
substantial resources.
Following drug discovery, the steps required before a drug product may be
marketed in the United States include:
- - preclinical laboratory and animal tests;
- - the submission to the FDA of an investigational new drug application,
commonly known as an IND application;
- - clinical and other studies to assess safety and parameters of use;
- - adequate and well-controlled clinical trials to establish the safety and
effectiveness of the drug product;
- - the submission to the FDA of a new drug application, commonly known as an
NDA; and
- - FDA approval of the NDA prior to any commercial sale or shipment of the
product.
Typically, preclinical studies are conducted in the laboratory and in animals
to gain preliminary information on a proposed product's uses and
physiological effects and harmful effects, if any, and to identify any
potential safety problems that would preclude testing in humans. The results
of these studies, together with the general investigative plan, protocols for
specific human studies and other information, are submitted to the FDA as
part of the IND application. The FDA regulations do not, by their terms,
require FDA approval of an IND. Rather, they allow a clinical investigation
to commence if the FDA does not notify the sponsor to the contrary within 30
days of receipt of the IND. As a practical matter, however, FDA approval is
often sought before a company commences clinical investigations. That
approval may come within 30 days of IND receipt but may involve substantial
delays if the FDA requests additional information.
The initial phase of clinical testing, which is known as Phase I, is
conducted to evaluate the metabolism, uses and physiological effects of the
experimental product in humans, the side effects associated with increasing
doses, and, if possible, to gain early evidence of possible effectiveness.
Phase I studies can also evaluate
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various routes, dosages and schedules of product administration. These
studies generally involve a small number of healthy volunteer subjects, but
may be conducted in people with the disease the product is intended to treat.
The total number of subjects is generally in the range of 20 to 80. A
demonstration of therapeutic benefit is not required in order to complete
Phase I trials successfully. If acceptable product safety is demonstrated,
Phase II trials may be initiated.
Phase II trials are designed to evaluate the effectiveness of the product in
the treatment of a given disease and involve people with the disease under
study. These trials often are well controlled, closely monitored studies
involving a relatively small number of subjects, usually no more than several
hundred. The optimal routes, dosages and schedules of administration are
determined in these studies. If Phase II trials are successfully completed,
Phase III trials are often commenced, although Phase III trials are not
always required.
Phase III trials are expanded, controlled trials that are performed after
preliminary evidence of the effectiveness of the experimental product has
been obtained. These trials are intended to gather the additional information
about safety and effectiveness that is needed to evaluate the overall
risk/benefit relationship of the experimental product and provide the
substantial evidence of effectiveness and the evidence of safety necessary
for product approval. Phase III trials usually include from several hundred
to several thousand subjects.
A clinical trial may combine the elements of more than one Phase and
typically two or more Phase III studies are required. A company's designation
of a clinical trial as being of a particular Phase is not necessarily
indicative that this trial will be sufficient to satisfy the FDA requirements
of that Phase because this determination cannot be made until the protocol
and data have been submitted to and reviewed by the FDA. In addition, a
clinical trial may contain elements of more than one Phase notwithstanding
the designation of the trial as being of a particular Phase. The FDA closely
monitors the progress of the Phases of clinical testing and may, at its
discretion, reevaluate, alter, suspend or terminate the testing based on the
data accumulated and its assessment of the risk/benefit ratio to patients. It
is not possible to estimate with any certainty the time required to complete
Phase I, II and III studies with respect to a given product.
Upon the successful completion of clinical testing, an NDA is submitted to
the FDA for approval. This application requires detailed data on the results
of preclinical testing, clinical testing and the composition of the product,
specimen labeling to be used with the drug, information on manufacturing
methods and samples of the product. The FDA typically takes from six to 18
months to review an NDA after it has been accepted for filing. Following its
review of an NDA, the FDA invariably raises questions or requests additional
information. The NDA approval process can, accordingly, be very lengthy.
Further, there is no assurance that the FDA will ultimately approve an NDA.
If the FDA approves that NDA, the new product may be marketed. The FDA often
approves a product for marketing with a modification to the proposed label
claims or requires that post-marketing surveillance, or Phase IV testing, be
conducted.
All facilities and manufacturing techniques used to manufacture products for
clinical use or sale in the United States must be operated in conformity with
current "good manufacturing practice" regulations, commonly referred to as
"GMP" regulations, which govern the production of pharmaceutical products. We
currently do not have manufacturing capability. In the event we undertake any
manufacturing activities or contract with a third-party manufacturer to
perform our manufacturing activities, we intend to establish a quality
control and quality assurance program to ensure that our products are
manufactured in accordance with the GMP regulations and any other applicable
regulations.
Products marketed outside of the United States are subject to regulatory
approval requirements similar to those in the United States, although the
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country. No action can
be taken to market any product in a country until an appropriate
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application has been approved by the regulatory authorities in that country.
The current approval process varies from country to country, and the time
spent in gaining approval varies from that required for FDA approval. In
certain European countries, the sales price of a product must also be
approved. The pricing review period often begins after market approval is
granted. We intend to seek and utilize foreign partners to apply for foreign
approvals of our products.
EMPLOYEES
We had six full-time employees as of March 1, 2000, including four in
research and development and two in management or administrative positions.
None of our employees is covered by a collective bargaining agreement. We
consider our relationships with our employees to be good.
CERTAIN IMPORTANT FACTORS
There are several important factors that could cause our actual results to
differ materially from those anticipated by us or which are reflected in any
of our forward-looking statements. These factors, and their impact on the
success of our operations and our ability to achieve our goals, include the
following:
RISKS RELATING TO OUR COMPANY
WE HAVE A HISTORY OF OPERATING LOSSES, EXPECT CONTINUING LOSSES AND MAY NEVER
ACHIEVE PROFITABILITY.
We have incurred losses in each year since our amalgamation in 1996 and
expect to incur substantial and continuing losses for the foreseeable future.
We incurred a net loss of $1,406,259 for the year ended December 31, 1999,
and as of December 31, 1999, our accumulated deficit was $12,202,477.
All of our revenue to date has been derived from interest earned on invested
funds. We have not commercially introduced any products. We expect to incur
substantial and continuing losses for the foreseeable future as we seek to
in-license or otherwise acquire new products and as our own product
development programs expand and various preclinical and clinical trials
commence. The amount of these losses may vary significantly from year-to-year
and quarter-to-quarter and will depend on, among other factors:
- - the costs of licensure or acquisition of new products;
- - the timing and cost of product development;
- - the progress and cost of preclinical and clinical development
programs;
- - the timing and cost of obtaining necessary regulatory approvals; and
- - the timing and cost of obtaining third party reimbursement.
In order to generate revenues, we must successfully develop and commercialize
our own proposed products or products in the late-stage human clinical
development phase or already on the market that we may in-license or
otherwise acquire or enter into collaborative agreements with others who can
successfully develop and commercialize them. Even if our proposed products
and the products we may license or otherwise acquire are commercially
introduced, they may never achieve market acceptance and we may never
generate revenues or achieve profitability.
WE ARE A DEVELOPMENT STAGE COMPANY WITH A SHORT OPERATING HISTORY, MAKING IT
DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS AND YOUR INVESTMENT.
We are in the development stage and our operations and the development of our
proposed products are subject to all of the risks inherent in the
establishment of a new business enterprise, including:
- - the absence of an operating history;
- - the lack of commercialized products;
- - insufficient capital;
- - expected substantial and continual losses for the foreseeable future;
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- - limited experience in dealing with regulatory issues;
- - the lack of manufacturing experience and limited marketing experience;
- - an expected reliance on third parties for the development and
commercialization of our proposed products;
- - a competitive environment characterized by numerous, well-established and
well-capitalized competitors; and
- - reliance on key personnel.
Because we are subject to these risks, you may have a difficult time
evaluating our business and your investment in our company.
OUR PROPOSED PRODUCTS ARE IN THE RESEARCH STAGES AND WILL LIKELY NOT BE
COMMERCIALLY INTRODUCED FOR SEVERAL YEARS, IF AT ALL.
Our proposed products are in the research stages and will require further
research and development, preclinical and clinical testing and investment
prior to commercialization in the United States and abroad. We cannot assure
you that any of our proposed products will:
- - be successfully developed;
- - prove to be safe and efficacious in clinical trials;
- - meet applicable regulatory standards;
- - demonstrate substantial protective or therapeutic benefits in the
prevention or treatment of any disease;
- - be capable of being produced in commercial quantities at reasonable costs;
or
- - be successfully marketed.
We do not anticipate that any of our proposed products will receive the
requisite regulatory approvals for commercialization in the United States or
abroad for a number of years, if at all, and we cannot assure you that any of
our proposed products, if approved and marketed, will generate significant
product revenue and provide an acceptable return on our investment.
WE WILL NEED TO RAISE SUBSTANTIAL ADDITIONAL CAPITAL IN THE FUTURE TO FUND
OUR OPERATIONS AND WE MAY BE UNABLE TO RAISE SUCH FUNDS WHEN NEEDED AND ON
ACCEPTABLE TERMS.
We currently do not have sufficient resources to complete the
commercialization of any of our proposed products. Therefore, we may need to
raise substantial additional capital to fund our operations sometime in the
future. We cannot be certain that any financing will be available when
needed. If we fail to raise additional financing as we need it, we may have
to delay or terminate our own product development programs or pass on
opportunities to in-license or otherwise acquire new products that we believe
may be beneficial to our business. We expect to continue to spend capital on:
- - research and development programs;
- - preclinical studies and clinical trials;
- - regulatory processes;
- - establishment of our own commercial scale manufacturing and marketing
capabilities or a search for third party manufacturers and marketing
partners to manufacture and market our products for us; and
- - the licensure or acquisition of new products.
The amount of capital we may need will depend on many factors, including the:
- - progress, timing and scope of our research and development programs;
- - progress, timing and scope of our preclinical studies and clinical trials;
- - time and cost necessary to obtain regulatory approvals;
- - time and cost necessary to build our own manufacturing facilities and
obtain the necessary regulatory approvals for those facilities or to seek
third party manufacturers to manufacture our products for us;
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- - time and cost necessary to establish our own sales and marketing
capabilities or to seek marketing partners to market our products for us;
- - time and cost necessary to respond to technological and market
developments;
- - changes made or new developments in our existing collaborative, licensing
and other commercial relationships; and
- - new collaborative, licensing and other commercial relationships that we may
establish.
In addition, our principal asset, a license agreement with the University of
California, requires us to have available minimum amounts of funds each year
for research and development activities relating to our licensed technology
and to achieve research and development milestones. Moreover, our fixed
expenses, such as rent, license payments and other contractual commitments,
may increase in the future, as we may:
- - enter into additional leases for new facilities and capital equipment;
- - enter into additional licenses and collaborative agreements; and
- - incur additional expenses associated with being a public company.
Our cash on hand as of December 31, 1999 was $5,274,552. We believe this cash
will be sufficient to fund our operations through June 2002. We have based
this estimate on assumptions that may prove to be wrong. As a result, we may
need to obtain additional financing prior to that time. In addition, we may
need to raise additional capital at an earlier time to fund our ongoing
research and development activities, acquire new products or take advantage
of other unanticipated opportunities. Any additional equity financings may be
dilutive to our existing shareholders, and debt financing, if available, may
involve restrictive covenants on our business. In addition, insufficient
funds may require us to delay, scale back or eliminate some or all of our
programs designed to facilitate the commercial introduction of our proposed
products, prevent commercial introduction of our products altogether or
restrict us from acquiring new products that we believe may be beneficial to
our business.
OUR STRATEGY TO ACQUIRE PRODUCTS IN THE LATE-STAGE DEVELOPMENT PHASE OR
PRODUCTS ALREADY ON THE MARKET IS RISKY AND THE MARKET FOR ACQUIRING THESE
PRODUCTS IS COMPETITIVE.
We intend to acquire, through outright purchase, license, joint venture or
other methods, products in the late-stage development phase or products
already on the market, and assist in the final development and
commercialization of those products. There are a number of companies that
have similar strategies to ours, many of whom have substantially greater
resources than us. It is difficult to determine the value of a product that
has not been fully developed or commercialized, and the possibility of
significant competition for these products may tend to increase the cost to
us of these products beyond the point at which we will experience an
acceptable return on our investment. We cannot assure you that we will be
able to acquire any products on commercially acceptable terms or at all, that
any product we may acquire will be approved by the FDA or if approved, will
be marketable, or that even if marketed, that we will be able to obtain an
acceptable return on our investment.
While we have no current agreements or negotiations underway, if we purchase
any products, we could issue stock that would dilute existing shareholders'
percentage ownership, incur substantial debt or assume contingent
liabilities. These purchases also involve numerous other risks, including:
- - problems assimilating the purchased products;
- - unanticipated costs associated with the purchase;
- - incorrect estimates made in the accounting for acquisitions; and
- - risks associated with entering markets in which we have no or limited prior
experience.
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IF WE FAIL TO OBTAIN REGULATORY APPROVAL TO COMMERCIALLY MANUFACTURE OR SELL
ANY OF OUR FUTURE PRODUCTS, OR IF APPROVAL IS DELAYED, WE WILL BE UNABLE TO
GENERATE REVENUE FROM THE SALE OF OUR PRODUCTS.
We must obtain regulatory approval to sell any of our products in the United
States and abroad. In the United States, we must obtain the approval of the
FDA for each vaccine or drug that we intend to commercialize. The FDA
approval process is typically lengthy and expensive, and approval is never
certain. Products distributed abroad are subject to similar foreign
government regulation.
Generally, only a very small percentage of newly discovered pharmaceutical
products that enter preclinical development are approved for sale. Because of
the risks and uncertainties in biopharmaceutical development, our proposed
products could take a significantly longer time to gain regulatory approval
than we expect or may never gain approval. If regulatory approval is delayed
or never obtained, our management's credibility, the value of our company and
our operating results would be adversely affected.
Moreover, even if the FDA approves a product, such approval may be
conditioned upon commercially unacceptable limitations on the indications for
which a product may be marketed, and further studies may be required to
provide additional data on safety or effectiveness. The FDA may also require
post-marketing surveillance programs to monitor the product's side effects.
The later discovery of previously unknown problems with a product or
manufacturer may result in restrictions or sanctions on the product or
manufacturer, including the withdrawal of the product from the market.
TO OBTAIN REGULATORY APPROVAL TO MARKET OUR PRODUCTS, COSTLY AND LENGTHY
PRECLINICAL STUDIES AND CLINICAL TRIALS MAY BE REQUIRED, AND THE RESULTS OF
THE STUDIES AND TRIALS ARE HIGHLY UNCERTAIN.
As part of the FDA approval process, we must conduct, at our own expense,
preclinical studies on animals and clinical trials on humans on each of our
proposed products. We expect the number of preclinical studies and clinical
trials that the FDA will require will vary depending on the product, the
disease or condition the product is being developed to address and
regulations applicable to the particular product. We may need to perform
multiple preclinical studies using various doses and formulations before we
can begin clinical trials, which could result in delays in our ability to
market any of our products. Furthermore, even if we obtain favorable results
in preclinical studies on animals, the results in humans may be different.
After we have conducted preclinical studies in animals, we must demonstrate
that our products are safe and effective for use on the target human patients
in order to receive regulatory approval for commercial sale. The data
obtained from preclinical and clinical testing are subject to varying
interpretations that could delay, limit or prevent regulatory approval.
Adverse or inconclusive clinical results would prevent us from filing for
regulatory approval of our products. Additional factors that can cause delay
or termination of our clinical trials include:
- - slow patient enrollment;
- - longer treatment time required to demonstrate efficacy;
- - adverse medical events or side effects in treated patients; and
- - lack of effectiveness of the product being tested.
IF WE FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT FOR OUR PRODUCTS BY
THIRD PARTY PAYORS, THERE WOULD BE NO COMMERCIALLY VIABLE MARKETS FOR OUR
PRODUCTS.
Our ability to commercialize our products successfully will depend in part on
the price we may be able to charge for our products and on the extent to
which reimbursement for the cost of our products and related treatment will
be available from government health administration authorities, private
health insurers and other third party payors. Third party payors, such as
government or private health care insurers, carefully review and increasingly
challenge the
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price charged for products. Reimbursement rates from private companies vary
depending on the third party payor, the insurance plan and other factors.
Reimbursement systems in international markets vary significantly by country
and by region, and reimbursement approvals must be obtained on a
country-by-country basis. We cannot be certain that third party payors will
pay for the costs of our products. We currently have limited expertise
obtaining reimbursement. We will need to seek additional reimbursement
expertise unless we enter into collaborations with other companies with the
necessary expertise.
Even if we are able to obtain reimbursement from third party payors, we
cannot be certain that reimbursement rates will be high enough to allow us to
profit from sales of our products and realize an acceptable return on our
investment in product development. Certain payors may attempt to further
control costs by selecting exclusive providers of their pharmaceutical
products. If these types of arrangements were made with our competitors,
these payors would not reimburse patients for purchases of our competing
products.
We expect that in the future reimbursement will be increasingly restricted
both in the United States and internationally. The escalating cost of health
care has led to increased pressure on the health care industry to reduce
costs. Governmental and private third party payors have proposed health care
reforms and cost reductions. A number of federal and state proposals to
control the cost of health care, including the cost of drug treatments, have
been made in the United States. In some foreign markets, the government
controls the pricing of products which would affect our profitability on
these products. Current government regulations and possible future
legislation regarding health care may affect our future revenues and
profitability from sales of our products and may adversely affect our
business and prospects.
WE DO NOT HAVE ANY FACILITIES APPROPRIATE FOR CLINICAL TESTING, WE LACK
MANUFACTURING EXPERIENCE AND WE HAVE NO SALES AND MARKETING PERSONNEL. WE
WILL, THEREFORE, BE DEPENDENT UPON OTHERS FOR OUR CLINICAL TESTING,
MANUFACTURING, SALES AND MARKETING.
Our current facilities do not include accommodation for the testing of our
proposed products in animals to determine their harmful effects and uses and
physiological effects or in humans for the clinical testing required by the
FDA. We do not have a manufacturing facility that can be used for full-scale
production of our products. In addition, at this time, we do not have any
sales and marketing personnel. In the course of our development program, we
will therefore be required to enter into arrangements with other companies or
universities for our animal testing, human clinical testing, manufacturing,
and sales and marketing activities. If we are unable to retain third parties
for these purposes on acceptable terms, we may be unable to successfully
develop, manufacture and market our proposed products. In addition, any
failures by third parties to adequately perform their responsibilities may
delay the submission of our proposed products for regulatory approval, impair
our ability to deliver our products on a timely basis or otherwise impair our
competitive position. Our dependence on third parties for the development,
manufacture, sale and marketing of our products may also adversely affect our
profit margins.
WE WILL NOT BE ABLE TO SELL OUR PRODUCTS IF WE OR OUR THIRD PARTY
MANUFACTURERS FAIL TO COMPLY WITH MANUFACTURING REGULATIONS.
Before we can begin selling our products, we must obtain regulatory approval
of our manufacturing facility and process or the manufacturing facility and
process of the third party or parties with whom we may outsource our
manufacturing activities. In addition, the manufacture of our products must
comply with the FDA's current Good Manufacturing Practices regulations,
commonly known as GMP regulations. The GMP regulations govern quality control
and documentation policies and procedures. Our manufacturing facilities, if
any in the future, and the manufacturing facilities of our third party
manufacturers will be continually subject to inspection by the FDA and other
state, local and foreign regulatory authorities, before and after product
approval. We cannot guarantee that we, or any potential third party
manufacturer of our products, will be able to comply with the GMP regulations
or other applicable manufacturing regulations.
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WE LICENSE OUR CORE TECHNOLOGY FROM A THIRD PARTY AND MAY LOSE THE RIGHT TO
LICENSE IT.
We license our core technology from the University of California and may lose
the right to license some portions of it if we breach some of our obligations
under the license agreement.
Under the license agreement, we are required to:
- - pay a $100,000 license issue fee, $75,000 of which we have already paid and
$25,000 of which is due in June 2000;
- - pay royalties to the University based on a percentage of the net sales of
any products incorporating the licensed technology;
- - pay minimum annual royalties beginning in the year 2004, to be credited
against earned royalties, for the life of the agreement;
- - maintain an annual minimum amount of available capital for development and
commercialization of products incorporating the licensed technology until a
product is introduced to the market;
- - pay the costs of patent prosecution and maintenance of the patents included
in the agreement;
- - meet performance milestones relating to:
- hiring or contracting with personnel to perform research and
development, regulatory and other activities relating to the
commercial launch of a proposed product;
- testing proposed products;
- obtaining government approvals;
- conducting clinical trials; and
- introducing products incorporating the licensed technology into the
market; and
- - enter into partnership or alliance arrangements or agreements with other
entities regarding commercialization of the technology covered by the
license.
Although we intend to use our reasonable best efforts to meet these
obligations, if we violate or fail to perform any term or covenant of the
license agreement and fail to cure this default within 60 days after written
notice from the University of California, the University of California may
terminate certain projects contained in the agreement. The termination of the
agreement, however, will not relieve us of our obligation to pay any royalty
or license fees owing at the time of termination. Our failure to retain the
right to license our core technology could harm our business and future
operating results. For example, if we were to enter into an outlicense
agreement with a third party under which we agree to outlicense our core
technology for a license fee, the termination of the license agreement could
either, depending on the terms of the outlicense agreement, cause us to break
our obligations under the outlicense agreement or give the other party a
right to terminate that agreement, thereby causing us to lose the revenue
generated by the outlicense fees.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WE MAY NOT BE ABLE TO
COMPETE AS EFFECTIVELY.
The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and
processes. Our success will depend, in part, on our ability to obtain, enjoy
and enforce protection for any products we develop or acquire under United
States and foreign patent laws and other intellectual property laws, preserve
the confidentiality of our trade secrets and operate without infringing the
proprietary rights of third parties.
Where appropriate, we seek patent protection for certain aspects of our
technology. In February 2000, we filed a patent application relating to our
technology. However, our owned and licensed patents and patent applications
will not ensure the protection of our intellectual property for a number of
other reasons:
- - We do not know whether our patent applications will result in actual
patents. For example, we may not have developed a
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method for treating a disease before others developed similar methods.
- - Competitors may interfere with our patent process in a variety of ways.
Competitors may claim that they invented the claimed invention before us or
may claim that we are infringing on their patents and therefore cannot use
our technology as claimed under our patent. Competitors may also contest
our patents by showing the patent examiner that the invention was not
original or novel or was obvious.
- - We are in the research and development stage and are in the process of
developing proposed products. Even if we receive a patent, it may not
provide much practical protection. If we receive a patent with a narrow
scope, then it will be easier for competitors to design products that do
not infringe on our patent. Even if the development of our proposed
products is successful and approval for sale is obtained, there can be no
assurance that applicable patent coverage, if any, will not have expired or
will not expire shortly after this approval. Any expiration of the
applicable patent could have a material adverse effect on the sales and
profitability of our proposed product.
- - Enforcing patents is expensive and may require significant time by our
management. In litigation, a competitor could claim that our issued patents
are not valid for a number of reasons. If the court agrees, we would lose
that patent.
- - We may also support and collaborate in research conducted by government
organizations or universities. We cannot guarantee that we will be able to
acquire any exclusive rights to technology or products derived from these
collaborations. If we do not obtain required licenses or rights, we could
encounter delays in product development while we attempt to design around
other patents or we may be prohibited from developing, manufacturing or
selling products requiring these licenses. There is also a risk that
disputes may arise as to the rights to technology or products developed in
collaboration with other parties.
It is also unclear whether our trade secrets will provide useful protection.
While we use reasonable efforts to protect our trade secrets, our employees
or consultants may unintentionally or willfully disclose our proprietary
information to competitors. Enforcing a claim that someone else illegally
obtained and is using our trade secrets, like patent litigation, is expensive
and time consuming, and the outcome is unpredictable. In addition, courts
outside the United States are sometimes less willing to protect trade
secrets. Our competitors may independently develop equivalent knowledge,
methods and know-how.
CLAIMS BY OTHERS THAT OUR PRODUCTS INFRINGE THEIR PATENTS OR OTHER
INTELLECTUAL PROPERTY RIGHTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
The pharmaceutical industry has been characterized by frequent litigation
regarding patent and other intellectual property rights. Patent applications
are maintained in secrecy in the United States until the patents are issued
and are also maintained in secrecy for a period of time outside the United
States. Accordingly, we can conduct only limited searches to determine
whether our technology infringes any patents or patent applications of
others. Any claims of patent infringement would be time-consuming and could
likely:
- - result in costly litigation;
- - divert the time and attention of our technical personnel and
management;
- - cause product development delays;
- - require us to develop non-infringing technology; or
- - require us to enter into royalty or licensing agreements.
Although patent and intellectual property disputes in the pharmaceutical
industry have often been settled through licensing or similar arrangements,
costs associated with these arrangements may be substantial and often
18
<PAGE>
require the payment of ongoing royalties, which could hurt our gross margins.
In addition, we cannot be sure that the necessary licenses would be available
to us on satisfactory terms, or that we could redesign our products or
processes to avoid infringement, if necessary. Accordingly, an adverse
determination in a judicial or administrative proceeding, or the failure to
obtain necessary licenses, could prevent us from developing, manufacturing
and selling some of our products, which could harm our business, financial
condition and operating results.
BECAUSE WE ARE DEVELOPING NEW PRODUCTS, WE MAY FAIL TO GAIN MARKET ACCEPTANCE
FOR OUR PRODUCTS AND OUR BUSINESS COULD SUFFER.
None of the products we propose to develop or are developing have yet been
approved for marketing by regulatory authorities in the United States or
elsewhere. Even if our proposed products are ultimately approved for sale,
there can be no assurance that they will be commercially successful.
WE ARE DEPENDENT ON KEY PERSONNEL, MANY OF WHOM WOULD BE DIFFICULT TO REPLACE.
Our success will be largely dependent upon the efforts of Stephen M. Simes,
our President and Chief Executive Officer, Phillip B. Donenberg, our Chief
Financial Officer, Treasurer and Secretary, and other key employees. We do
not have key person life insurance on any of our key personnel, and with the
exception of Messrs. Simes and Donenberg, we generally do not have written
employment or noncompetition agreements with our employees. Our future
success also will depend in large part on our ability to identify, attract
and retain other highly qualified managerial, technical and sales and
marketing personnel. Competition for these individuals is intense. The loss
of the services of any of our key personnel, the inability to identify,
attract or retain qualified personnel in the future or delays in hiring
qualified personnel, could make it more difficult for us to manage our
business and meet key objectives, such as the timely introduction of our
proposed products, which would harm our business, financial condition and
operating results.
RISKS RELATING TO OUR INDUSTRY
BECAUSE OUR INDUSTRY IS VERY COMPETITIVE AND OUR COMPETITORS HAVE
SUBSTANTIALLY GREATER CAPITAL RESOURCES AND MORE EXPERIENCE IN RESEARCH AND
DEVELOPMENT, MANUFACTURING AND MARKETING THAN US, WE MAY NOT SUCCEED IN
DEVELOPING OUR PROPOSED PRODUCTS AND BRINGING THEM TO MARKET.
Competition in the pharmaceutical industry is intense. Potential competitors
in the United States are numerous and include pharmaceutical, chemical and
biotechnology companies, most of which have substantially greater capital
resources and more experience in research and development, manufacturing and
marketing than us. Academic institutions, hospitals, governmental agencies
and other public and private research organizations are also conducting
research and seeking patent protection and may develop and commercially
introduce competing products or technologies on their own or through joint
ventures. We cannot assure you that our competitors will not succeed in
developing similar technologies and products more rapidly than we do or that
these competing technologies and products will not be more effective than any
of those that we are currently developing or will develop.
IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGE, OUR PRODUCTS MAY BE
RENDERED OBSOLETE AND OUR OPERATING RESULTS MAY SUFFER.
The pharmaceutical industry has experienced rapid and significant
technological change. We expect that pharmaceutical technology will continue
to develop rapidly, and our future success will depend, in large part, on our
ability to develop and maintain a competitive position. Rapid technological
development may result in our products or processes becoming obsolete before
they are marketed or before we can recover a significant portion of the
development and commercialization expenses we incurred in developing and
commercially introducing the products. In addition, innovations in drug
delivery systems, alternative therapies or new medical treatments that alter
existing treatment regimes, reduce the need for therapy or cure certain
chronic diseases could harm our business.
19
<PAGE>
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY
INCUR SUBSTANTIAL LIABILITIES.
We are exposed to the potential product liability risks inherent in the
testing, manufacturing and marketing of human drug treatments. We currently
do not maintain insurance against product liability lawsuits. Although we
intend to obtain product liability insurance shortly before initiating
clinical trials for our products, we cannot be certain that we will be able
to obtain adequate insurance coverage. The pharmaceutical industry has
experienced increasing difficulty in maintaining product liability insurance
coverage at reasonable levels, and substantial increases in insurance premium
costs in many cases have rendered coverage economically impractical. We
cannot be certain that if any of our products receive FDA approval, the
product liability insurance we will need to obtain in connection with the
commercial sales of this product will be available at a reasonable cost. In
addition, we cannot be certain that we can successfully defend any product
liability lawsuit brought against us. If we are the subject of a successful
product liability claim which exceeds the limits of any insurance coverage we
may obtain, we may incur substantial liabilities which would adversely affect
our operating results and financial condition.
ITEM 2. PROPERTIES
Our principal executive office is located in Lincolnshire, Illinois. We lease
approximately 700 square feet of office space for approximately $1,000 per
month, which lease expires in June 2000. We plan to renew our lease for a
one-year term. Our research and development operations are located in Smyrna,
Georgia where we lease approximately 11,840 square feet of laboratory space
for approximately $5,100 per month, which lease expires in October 2003. We
also lease approximately 2,600 square feet of office space in Atlanta,
Georgia for approximately $3,500 per month, which lease expires in September
2002. Effective September 16, 1999, we entered into a sublease agreement for
the Atlanta office space under which we receive approximately $3,500 per
month from the sub-tenant through September 14, 2002. Management of our
company considers our leased properties suitable and adequate for our current
needs and adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders of BioSante was held on November 10, 1999.
The following matters were voted on and approved by our shareholders at the
Special Meeting. The tabulation of votes with respect to each of the
following matters voted on at the Special Meeting is set forth as follows:
1. Amendment to Article 1 of BioSante's Articles of Incorporation to change
its name from Ben-Abraham Technologies Inc. to BioSante Pharmaceuticals,
Inc.
Common stock voting as a separate class:
<TABLE>
<CAPTION>
Broker
For Against Abstain NonVote
- ----------------- ------------ ------------ -------------
<S> <C> <C> <C>
42,971,016 2,830 0 0
</TABLE>
Class C stock voting as a separate class:
<TABLE>
<CAPTION>
Broker
For Against Abstain NonVote
- ----------------- ------------ ------------ -------------
<S> <C> <C> <C>
4,700,715 0 0 0
</TABLE>
20
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their ages and the offices
held, as of March 1, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- -------------------------------------- ------- ------------------------------------------------------
<S> <C> <C>
Stephen M. Simes 48 Vice Chairman, President and Chief Executive Officer
Phillip B. Donenberg 39 Chief Financial Officer, Treasurer and Secretary
</TABLE>
Information regarding the business experience of the executive
officers is set forth below.
STEPHEN M. SIMES has served as our Vice Chairman, President and a
director of our company since January 20, 1998 and Chief Executive Officer
since March 1998. From October 1994 to January 1997, Mr. Simes was President,
Chief Executive Officer and a Director of Unimed Pharmaceuticals, Inc., a
company with a product focus on infectious diseases, AIDS, endocrinology and
oncology. From 1989 to 1993, Mr. Simes was Chairman, President and Chief
Executive Officer of Gynex Pharmaceuticals, Inc., a company which
concentrated on the AIDS, endocrinology, urology and growth disorders
markets. In 1993, Gynex was acquired by Bio-Technology General Corp., and
from 1993 to 1994, Mr. Simes served as Senior Vice President and Director of
Bio-Technology General Corp. Mr. Simes' career in the pharmaceutical industry
started in 1974 with G.D. Searle & Co.
PHILLIP B. DONENBERG, CPA has served as our Chief Financial Officer,
Treasurer and Secretary since July 1998. Before joining our company, Mr.
Donenberg was Controller of Unimed Pharmaceuticals, Inc. from January 1995 to
July 1998. From May 1993 to December 1994, Mr. Donenberg was Controller of
Molecular Geriatrics Corporation, a bio-tech corporation. Prior to this, Mr.
Donenberg held similar positions with other pharmaceutical companies: Gynex
Pharmaceuticals, Inc. and Xtramedics, Inc.
21
<PAGE>
PART II
--------------------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE
Our common stock has been traded in the United States on the National
Quotation Bureau, commonly referred to as the "Pink Sheets," under the symbol
"BTPH" since September 10, 1999 and on the Canadian Venture Exchange,
formerly known as the Alberta Stock Exchange, under the symbol "BAI" since
December 20, 1996.
The following table sets forth, in U.S. dollars and in dollars and cents (in
lieu of fractions), the high and low sales prices for each of the calendar
quarters indicated, as reported by the Canadian Venture Exchange. The prices
in the table may not represent actual transactions.
<TABLE>
<CAPTION>
CANADIAN VENTURE EXCHANGE
HIGH LOW
---- -----
<S> <C> <C>
1998
----
First Quarter............ $0.98 $0.55
Second Quarter........... $0.84 $0.26
Third Quarter............ $0.65 $0.33
Fourth Quarter........... $0.48 $0.10
1999
----
First Quarter............ $0.24 $0.15
Second Quarter........... $0.50 $0.21
Third Quarter............ $0.37 $0.23
Fourth Quarter........... $0.48 $0.45
</TABLE>
The following table sets forth, in U.S. dollars and in dollars and cents (in
lieu of fractions), the high and low sales prices for each of the calendar
quarters indicated, as reported by the National Quotation Bureau ("Pink
Sheets"). The prices in the table may not represent actual transactions.
These quotations reflect inter-dealer prices, without retail mark up, mark
down or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
NATIONAL QUOTATION
BUREAU ("PINK SHEETS")
1999 HIGH LOW
---- ---- ---
<S> <C> <C>
Third Quarter............ $ 0.51 $0.27
Fourth Quarter........... $1.125 $.175
</TABLE>
NUMBER OF RECORD HOLDERS; DIVIDENDS
As of March 1, 2000, there were 1,592 record holders of our common stock and
10 record holders of our class C stock. To date, we have not declared or
paid any cash dividends on our common stock and our class C stock is not
eligible to receive dividends.
PREVIOUS SALES OF UNREGISTERED SECURITIES
During the fiscal year ended December 31, 1999, we issued the following
securities without registration under the Securities Act:
- - In February 1999, we issued 10,000 shares of common stock to an accredited
investor pursuant to the conversion of class C stock, at a conversion price
of $0.25 per share, which was satisfied by the settlement of claims.
- - In May 1999, we issued an aggregate of 23,125,000 shares of common stock
and warrants to purchase 11,562,500 shares of common stock at an exercise
price of $0.30 per share to 31 accredited investors pursuant to a private
placement of our stock for an aggregate payment of $4,372,500. Stephen
Simes, our Vice Chairman, President and Chief Executive Officer, purchased
250,000 shares of common stock, Victor Morgenstern, our director, including
an affiliated Trust and a Partnership, purchased an aggregate of 2,500,000
shares of common stock, Fred Holubow, our director, purchased 250,000
shares of common stock and JO & Co. purchased 7,500,000 shares of common
stock to which Ross Mangano, our director, has sole voting power.
22
<PAGE>
- - In August 1999, an outstanding liability of $25,000 was converted into
70,000 shares of common stock to an accredited investor at approximately
$0.36 per share for executive placement services.
No underwriting commissions or discounts were paid with respect to the sales
of the unregistered securities described above. All of the above sales were
made to accredited investors and we have disclosed any related party sales.
In addition, all of the above sales were made to accredited investors in
reliance on Rule 506 of Regulation D and Section 4(2) under the Securities
Act and to persons outside the United States within the meaning of Regulation
S of the Securities Act. With regard to the reliance by us upon the
exemptions set forth in the previous sentence, certain inquiries were made by
us to establish that such sales qualified for such exemptions from the
registration requirements. In particular, we confirmed that (1) all offers of
sales and sales were made by personal contact from our officers or directors
or other persons closely associated with us; (2) each investor made
representations that he or she was sophisticated in relation to this
investment (and we have no reason to believe such representations were
incorrect); (3) each purchaser gave assurance of investment intent and the
certificates for the shares bear a legend accordingly; and (4) offers and
sales within any offering were made to a limited number of persons.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
We are a development stage biopharmaceutical company engaged in the
development and commercialization of vaccine adjuvants, proprietary novel
vaccines and drug delivery systems. Our core technology, which we license on
an exclusive basis from the University of California, is based on the use of
extremely small, solid, uniform particles, which we call "nanoparticles," as
immune system boosters and for drug delivery. We have identified three
potential initial applications for our core technology:
- - the creation of improved versions of current vaccines by the "adjuvant"
activity of our proprietary nanoparticles;
- - the development of new, unique vaccines against diseases for which there
currently are few or no effective methods of prevention (e.g., genital
herpes); and
- - the creation of inhaled forms of pharmaceutical compounds that currently
must be given by injection (e.g., insulin).
Our goal is to leverage our core technology to become a pharmaceutical
company that develops and commercializes a wide range of pharmaceutical
products. Our strategy to obtain this goal is to:
- - enter into business collaborations or joint ventures to further develop and
commercialize products incorporating our core technology;
- - in-license or otherwise acquire products in the late-stage development
phase;
- - in-license or otherwise acquire products already on the market; and
- - enter into business collaborations or joint ventures with complementary
firms outside the scope of our core technology.
Our strategy over the next 12 months is to continue development of our core
technology and to actively seek collaborators and licensees to accelerate the
development and commercialization of products incorporating our core
technology. We hope to file an investigational new drug application with the
FDA before the end of 2000 to commence a Phase I human clinical trial with
respect to our CAP nanoparticles. In addition, during the next 12 months, we
intend to seek opportunities to in-license or otherwise acquire products in
the late-stage development phase or products already on the market.
We currently do not expect any significant changes in the number of our
employees unless we are able to enter into a business collaboration or joint
venture to further develop and
23
<PAGE>
commercialize products incorporating our core technology or in-license or
otherwise acquire products in the late-stage human clinical development phase
or products already on the market. Alternatively, if we are able to enter
into business collaborations or joint ventures, in lieu of hiring additional
employees, we may elect to enter into arrangements with third parties to
accomplish the similar tasks of hired employees.
Since our inception, we have experienced significant operating losses, and we
expect to incur substantial and continuing losses for the foreseeable future.
We incurred a net loss of approximately $1,400,000 for the year ended
December 31, 1999, resulting in an accumulated deficit of approximately
$12,200,000.
All of our revenue to date has been derived from interest earned on invested
funds. We have not commercially introduced any products. We expect to incur
substantial and continuing losses for the foreseeable future as we seek to
in-license or otherwise acquire new products and as our own product
development programs expand and various preclinical and clinical trials
commence. The amount of these losses may vary significantly from year-to-year
and quarter-to-quarter and will depend on, among other factors:
- - the costs of licensure or acquisition of new products;
- - the timing and cost of product development;
- - the progress and cost of preclinical and clinical development
programs;
- - the timing and cost of obtaining necessary regulatory approvals; and
- - the timing and cost of obtaining third party reimbursement.
In order to generate revenues, we must successfully develop and commercialize
our own proposed products or products in the late-stage human clinical
development phase or already on the market that we may in-license or
otherwise acquire or enter into collaborative agreements with others who can
successfully develop and commercialize them. Even if our proposed products
and the products we may license or otherwise acquire are commercially
introduced, they may never achieve market acceptance and we may never
generate revenues or achieve profitability.
On December 6, 1996, we acquired all of the issued and outstanding shares of
capital stock of Structured Biologicals Inc. We accounted for this
transaction under the purchase method of accounting. The relationship between
Structured Biologicals Inc. and the University of California prior to our
acquisition of Structured Biologicals Inc., was one in which Structured
Biologicals Inc. funded research work in a laboratory of the University of
California. Such research work became the basis of our License Agreement with
the University of California that was signed in June 1997. In connection with
our acquisition of Structured Biologicals Inc., BioSante acquired the rights
to negotiate with the Regents of the University of California for licenses of
specific technologies and products relating to investigative research that
Structured Biologicals Inc. had funded at the University of California. This
research became the basis of our license agreement with the University of
California. At the time of our acquisition of Structured Biologicals Inc.,
the technologies and products had not yet been approved for human clinical
research. The value ascribed to these rights, based on an independent
evaluation, was $5,377,000. This amount was immediately expensed as the
technologies and products did not have their technological feasibility
established and had no identified future alternative use.
As of the date of our acquisition, the technology related to the development
of products for six indications [i.e. applications of the technology]. We
determined the value of the in process research and development related to
the acquired rights based on an independent valuation using discounted cash
flows. BioSante is continuing to develop the technology related to five of
the six indications. In June 1997, BioSante exercised its options and entered
into a license agreement with the University of California for the technology
that it had previously supported.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
To date, we, as well as our predecessor, Structured Biologicals, have
consistently raised equity financing to fund our activities, and we expect to
continue this practice to fund our ongoing activities. From inception through
March 1, 2000, we have raised net proceeds of $9.1 million from private
equity financings, class A and class C stock conversions and warrant
exercises. In May 1999, we sold an aggregate of 23,125,000 shares of common
stock and warrants to purchase 11,562,500 shares of common stock at an
exercise price of $0.30 per share to 31 accredited investors in a private
placement. Several current members of our board of directors and an executive
officer participated in this private placement. Stephen M. Simes, our
President and Chief Executive Officer, purchased 250,000 shares of common
stock; Victor Morgenstern, a member of our board of directors, and a trust
and partnership affiliated with Mr. Morgenstern purchased an aggregate of
2,500,000 shares of common stock; Fred Holubow, a member of our board of
directors, purchased 250,000 shares of common stock and a company affiliated
with Ross Mangano, a member of our board of directors, purchased 7,500,000
shares of common stock. The net proceeds to us from this private placement
were approximately $4.2 million, thereby increasing our cash balance to
approximately $5.3 million as of December 31, 1999.
Our cash and cash equivalents were $5,274,552 and $2,841,250 at December 31,
1999 and 1998, respectively. The increase in our cash balance is due to the
net proceeds from our private placement completed in May 1999.
1999 VERSUS 1998
We used cash in operating activities of $1,787,822 for the year ended
December 31, 1999 versus cash used in operating activities of $3,041,425 for
the year ended December 31, 1998. This change was driven by a reduction in
personnel-related expenses in research and development and general and
administrative expenses during 1999. Net cash used in investing activities
was $4,219 for the year ended December 31, 1999 versus $124,984 for the year
ended December 31, 1998. The significant uses of cash in investing activities
1999 were capital expenditures for the purchase of office furniture and a
computer. The significant uses of cash in investing activities for the year
ended December 31, 1998 included capital expenditures for laboratory
equipment and laboratory office furniture. Net cash provided by financing
activities was $4,225,343 for the year ended December 31, 1999 compared to
$4,257,328 for the year ended December 31, 1998. Net cash provided during
1999 was primarily the result of our private placement completed in May 1999.
Net cash provided in 1998 was primarily the result of the conversion of class
A and class C stock into shares of common stock.
1998 VERSUS 1997
We used cash in operating activities of $3,041,425 in 1998 versus cash used
in operating activities of $1,244,698 in 1997. This change was driven by the
scale-up of our laboratory facility and various research and development
programs. Net cash used in investing activities was $124,984 for 1998 versus
$723,649 for 1997. The significant uses of cash in investing activities for
1998 included capital expenditures for the purchase of laboratory equipment
and laboratory office furniture. The significant uses of cash in investing
activities for the 1997 included capital expenditures for the construction of
a laboratory. Net cash provided by financing activities was $4,257,328 for
1998 compared to $244,402 for 1997. This change resulted from an increase in
the number of class A and class C stock that were converted into shares of
common stock in 1998 compared to 1997.
We expect to continue to incur significant expenses, primarily relating to
our research and development activities. Management estimates that it is
currently expending approximately $80,000 to $100,000 per month on research
and development activities and approximately $125,000 to $150,000 per month
in total expenses, including research and development activities. Our
research and development expenditures, however, may fluctuate from
quarter-to-quarter and year-to-year depending on the resources available and
our development
25
<PAGE>
schedule. Results of studies, clinical trials, regulatory decisions and
competitive developments also may influence our expenditures. We are required
under the terms of our license agreement with the University of California to
have available certain amounts of funds for research and development
activities. In the event, however, we are able to in-license or otherwise
acquire drugs in the late-stage development phase or drugs already on the
market, it is likely that our research and development and total expenses
would increase significantly.
The capital equipment expenditures of $4,200 were principally for the
acquisition of office furniture and a computer. We expect to spend
approximately $10,000 to $20,000 in capital expenditures during the next 12
months.
COMMITMENTS
We have several financial commitments, including the following minimum annual
lease payments:
<TABLE>
<CAPTION>
MINIMUM ANNUAL
YEAR LEASE PAYMENTS
------------- ----------------------
<S> <C>
2000 $ 116,832
2001 $ 110,712
2002 $ 93,957
2003 $ 51,710
</TABLE>
Under our license agreement with the University of California, we are
required to:
- - pay a $100,000 license issue fee, $75,000 of which we have already paid and
$25,000 of which is due in June 2000;
- - pay royalties to the University based on a percentage of the net sales of
any products incorporating the licensed technology;
- - pay the following minimum annual royalties on February 28 of each year
beginning in the year 2004, to be credited against earned royalties, for
the life of the agreement (2013):
<TABLE>
<CAPTION>
MINIMUM ANNUAL
YEAR ROYALTY DUE
------------- ---------------------
<S> <C>
2004 $ 50,000
2005 $ 100,000
2006 $ 150,000
2007 $ 200,000
2008 $ 400,000
2009 $ 600,000
2010 $ 800,000
2011 $ 1,500,000
2012 $ 1,500,000
2013 $ 1,500,000
</TABLE>
- - maintain an annual minimum amount of available capital for development and
commercialization of products incorporating the licensed technology until a
product is introduced to the market;
- - pay the costs of patent prosecution and maintenance of the patents included
in the agreement;
- - meet performance milestones relating to:
- hiring personnel to perform research and development, regulatory and
other activities relating to the commercial launch of a proposed
product;
- testing proposed products;
- obtaining government approvals;
- conducting clinical trials; and
- introducing products incorporating the licensed technology into the
market; and
- - enter into partnership or alliance arrangements or agreements with other
entities regarding commercialization of the technology covered by the
license.
Our fixed expenses, such as rent, license payments and other contractual
commitments, may increase in the future, as we may:
- - enter into additional leases for new facilities and capital equipment;
- - enter into additional licenses and collaborative agreements; and
- - incur additional expenses associated with being a public company.
26
<PAGE>
We currently do not have sufficient resources to complete the
commercialization of any of our proposed products or to carry out our
business strategy or to meet the financial commitments described above.
Therefore, we will likely need to raise substantial additional capital to
fund our operations sometime in the future. We expect that our cash balance
of approximately $5.3 million as of December 31, 1999 will be sufficient to
fund our operations through at least June 2002. We have based this estimate,
however, on assumptions that may prove to be wrong. As a result, we may need
to obtain additional financing prior to that time. In addition, we may need
to raise additional capital at an earlier time to fund our ongoing research
and development activities, acquire new products or take advantage of other
unanticipated opportunities. We cannot be certain that any financing will be
available when needed. Any additional equity financings may be dilutive to
our existing shareholders, and debt financing, if available, may involve
restrictive covenants on our business. In addition, if we fail to raise
additional financing as we need it, we may have to delay or terminate our own
product development programs or pass on opportunities to in-license or
otherwise acquire new products that we believe may be beneficial to our
business.
We expect to continue to spend capital on:
- - research and development programs;
- - preclinical studies and clinical trials;
- - regulatory processes;
- - establishment of our own commercial scale manufacturing and marketing
capabilities or a search for third party manufacturers and marketing
partners to manufacture and market our products for us; and
- - the licensure or acquisition of new products.
The amount of capital we may need will depend on many factors, including the:
- - progress, timing and scope of our research and development programs;
- - progress, timing and scope of our preclinical studies and clinical trials;
- - time and cost necessary to obtain regulatory approvals;
- - time and cost necessary to build our own manufacturing facilities and
obtain the necessary regulatory approvals for those facilities or to seek
third party manufacturers to manufacture our products for us;
- - time and cost necessary to establish our own sales and marketing
capabilities or to seek marketing partners to market our products for us;
- - time and cost necessary to respond to technological and market
developments;
- - changes made or new developments in our existing collaborative, licensing
and other commercial relationships; and
- - new collaborative, licensing and other commercial relationships that we may
establish.
IMPACT OF YEAR 2000
During 1999, we conducted a comprehensive review of our computer systems to
identify the systems that could be affected by the year 2000 issue. To date,
we have experienced no problems with respect to year 2000 issues. The only
expenses we incurred in preparing our business for the year 2000 were
consulting fees in the amount of less than $200.
27
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Description Page
- ----------- ----
<S> <C>
Independent Auditors' Reports.................................................................................29-30
Balance Sheets as of December 31, 1999 and 1998..................................................................31
Statements of Operations for the years ended December 31, 1999, 1998 and 1997
and the cumulative period from August 29, 1996 (date of incorporation) to December 31, 1999......................32
Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997
and the cumulative period from August 29, 1996 (date of incorporation) to December 31, 1999......................33
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997
and the cumulative period from August 29, 1996 (date of incorporation) to December 31, 1999......................34
Notes to the Financial Statements for the years ended December 31, 1999, 1998 and 1997
and the cumulative period from August 29, 1996 (date of incorporation) to December 31, 1999...................35-48
</TABLE>
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
BioSante Pharmaceuticals, Inc.
Lincolnshire, Illinois
We have audited the accompanying balance sheet of BioSante Pharmaceuticals,
Inc. (a development stage company) as of December 31, 1999 and the related
statements of operations, stockholders' equity and cash flows for the year
ended December 31, 1999, and for the period from August 29, 1996 (date of
incorporation) through December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The Company's
financial statements as of and for the years ended December 31, 1998 and
1997, and for the period from August 29, 1996 (date of incorporation) through
December 31, 1998 were audited by other auditors whose report, dated February
19, 1999, expressed an unqualified opinion on those statements. The financial
statements for the period August 29, 1996 (date of incorporation) through
December 31, 1998 reflect total revenues and net loss $320,135 and
$10,796,218, respectively, of the related totals. The other auditors' report
has been furnished to us, and our opinion, insofar as it relates to the
amounts included for such prior period, is based solely on the report of such
other auditors.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform an audit to obtain reasonable assurance about whether the
financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, such
financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 1999 and the results of its
operations and its cash flows for the year ended December 31, 1999, and for
the period from August 29, 1996 (date of incorporation) through December 31,
1999 in conformity with accounting principles generally accepted in the
United States of America
As discussed in Note 1 to the financial statements, the Company is in the
development stage.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 2, 2000
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ben-Abraham Technologies Inc.
We have audited the accompanying balance sheets of Ben-Abraham Technologies
Inc. (a development stage company) as of December 31, 1998 and 1997 and the
related statements of operations, stockholders' equity and cash flows for the
years ended December 31, 1998 and 1997, and for the period from August 29,
1996 (date of incorporation) to December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and
1997 and the results of its operations and its cash flows for the years ended
December 31, 1998 and 1997, and for the period from August 29, 1996 (date of
incorporation) to December 31, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, the Company is in the
development stage.
/s/ Deloitte & Touche LLP
Chartered Accountants
Toronto, Ontario
February 19, 1999
30
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------------ -------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,274,552 $ 2,841,250
Prepaid expenses and other sundry assets 58,994 75,266
- ------------------------------------------------------------------------------------------------------------------------
5,333,546 2,916,516
PROPERTY AND EQUIPMENT (Note 4) 446,083 532,829
- ------------------------------------------------------------------------------------------------------------------------
$ 5,779,629 $ 3,449,345
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (Note 10) $ 76,057 $ 68,784
Accrued compensation 182,973 275,392
Other accrued expenses 45,085 346,422
Due to licensor 25,000 127,317
- ------------------------------------------------------------------------------------------------------------------------
329,115 817,915
- ------------------------------------------------------------------------------------------------------------------------
COMMITMENTS (Note 11)
STOCKHOLDERS' EQUITY (Note 6)
Capital stock
Issued and Outstanding
None (1998 - 1,531,386) Class A special stock - 153
4,807,865 (1998 - 3,286,479) Class C special stock 481 329
52,642,686 (1998 - 29,437,686) Common stock 17,652,510 13,427,166
- ------------------------------------------------------------------------------------------------------------------------
17,652,991 13,427,648
Deficit accumulated during the development stage (12,202,477) (10,796,218)
- ------------------------------------------------------------------------------------------------------------------------
5,450,514 2,631,430
- ------------------------------------------------------------------------------------------------------------------------
$ 5,779,629 $ 3,449,345
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the financial statements.
31
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
AND THE CUMULATIVE PERIOD FROM AUGUST 29, 1996
(DATE OF INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
AUGUST 29, 1996
(DATE OF
YEAR ENDED YEAR ENDED YEAR ENDED INCORPORATION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUE
Interest income $ 198,683 $ 123,061 $ 143,718 $ 518,818
- ----------------------------------------------------------------------------------------------------------------------------
EXPENSES
Research and development 660,588 1,400,129 335,823 2,396,540
General and administration 853,389 1,112,647 1,618,436 4,131,657
Depreciation and amortization 90,965 139,769 51,938 283,334
Loss on disposal of capital assets - 129,931 27,614 157,545
Costs of acquisition of Structured
Biologicals Inc. - - - 375,219
Purchased in-process research
and development - - - 5,377,000
- ----------------------------------------------------------------------------------------------------------------------------
1,604,942 2,782,476 2,033,811 12,721,295
- ----------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (1,406,259) $ (2,659,415) $ (1,890,093) $ (12,202,477)
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS
PER SHARE (Note 2) $ (0.03) $ (0.08) $ (0.05) $ (0.32)
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 49,424,140 34,858,243 35,961,528 38,531,082
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the financial statements.
32
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
AND THE CUMULATIVE PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION)
TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS C
SPECIAL SHARES SPECIAL SHARES COMMON STOCK
-------------------------- -------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, August 29, 1996,
Date of incorporation - $ - - $ - - $ -
Issuance of Class "C" shares
August 29, 1996
($0.0001 per share) - - 4,150,000 415 - -
Issuance of Class "A" shares
September 23, 1996
($0.0001 per share) 20,000,000 2,000 - - - -
Issuance of Subordinate voting shares
September 23, 1996 - - - - 4,100,000 4,100,000
Financing fees accrued - - - - - (410,000)
November 27, 1996 - issued
as consideration
upon acquisition of
SBI (Note 3) - - - - 7,434,322 4,545,563
Exercise of Series "X"
warrants (Note 6) - - - - 215,714 275,387
Exercise of Series "Z"
warrants (Note 6) - - - - 1,428 2,553
Net loss - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 20,000,000 2,000 4,150,000 415 11,751,464 8,513,503
Conversion of shares
January 13, 1997 - - (282,850) (28) 282,850 70,741
January 13, 1997 - - (94,285) (9) 94,285 23,580
December 2, 1997 - - (106,386) (11) 106,386 26,607
December 2, 1997 - - (100,000) (10) 100,000 25,010
Exercise of Series "V"
warrants (Note 6) - - - - 24,000 36,767
Exercise of Series "X"
warrants (Note 6) - - - - 28,571 36,200
Exercise of Series "W"
warrants (Note 6) - - - - 20,000 25,555
Adjustment for partial
shares issued
upon amalgamation - - - - 130 -
Financing fees reversed - - - - - 410,000
Net loss - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 20,000,000 2,000 3,566,479 357 12,407,686 $ 9,167,963
Conversion of shares
March 4, 1998 - - (20,000) (2) 20,000 5,002
March 16, 1998 - - (10,000) (1) 10,000 2,501
May 8, 1998 (15,000,000) (1,500) - - 15,000,000 3,751,500
June 1, 1998 (1,000,000) (100) - - 1,000,000 250,100
June 1, 1998 (1,000,000) (100) - - 1,000,000 250,100
Return of shares to treasury
May 8, 1998 (1,468,614) (147) - - - -
May 8, 1998 - - (250,000) (25) - -
Net loss - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,531,386 $ 153 3,286,479 $ 329 29,437,686 $13,427,166
Conversion of shares
February 2, 1999 - - (10,000) (1) 10,000 2,501
Private placement of shares,
net May 6, 1999 - - - - 23,125,000 4,197,843
Share redesignation
July 13, 1999 (1,531,386) (153) 1,531,386 153 - -
Issuance of shares
August 15, 1999 - - - - 70,000 25,000
Net loss - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 - - 4,807,865 481 52,642,686 17,652,510
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
DEVELOPMENT
STAGE TOTAL
------------- ------------
<S> <C> <C>
Balance, August 29, 1996,
Date of incorporation $ - $ -
Issuance of Class "C" shares
August 29, 1996
($0.0001 per share) - 415
Issuance of Class "A" shares
September 23, 1996
($0.0001 per share) - 2,000
Issuance of Subordinate voting shares
September 23, 1996 - 4,100,000
Financing fees accrued - (410,000)
November 27, 1996 - issued
as consideration
upon acquisition of
SBI (Note 3) - 4,545,563
Exercise of Series "X"
warrants (Note 6) - 275,387
Exercise of Series "Z"
warrants (Note 6) - 2,553
Net loss (6,246,710) (6,246,710)
- ------------------------------------------------------------------------------
Balance, December 31, 1996 (6,246,710) 2,269,208
Conversion of shares
January 13, 1997 - 70,713
January 13, 1997 - 23,571
December 2, 1997 - 26,596
December 2, 1997 - 25,000
Exercise of Series "V"
warrants (Note 6) - 36,767
Exercise of Series "X"
warrants (Note 6) - 36,200
Exercise of Series "W"
warrants (Note 6) - 25,555
Adjustment for partial
shares issued
upon amalgamation - -
Financing fees reversed - 410,000
Net loss (1,890,093) (1,890,093)
- ------------------------------------------------------------------------------
Balance, December 31, 1997 (8,136,803) 1,033,517
Conversion of shares
March 4, 1998 - 5,000
March 16, 1998 - 2,500
May 8, 1998 - 3,750,000
June 1, 1998 - 250,000
June 1, 1998 - 250,000
Return of shares to treasury -
May 8, 1998 - (147)
May 8, 1998 - (25)
Net loss (2,659,415) (2,659,415)
- ------------------------------------------------------------------------------
Balance, December 31, 1998 $(10,796,218) $ 2,631,430
Conversion of shares
February 2, 1999 - 2,500
Private placement of shares,
net May 6, 1999 - 4,197,843
Share redesignation
July 13, 1999 - -
Issuance of shares
August 15, 1999 - 25,000
Net loss (1,406,259) (1,406,259)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Balance, December 31, 1999 (12,202,477) 5,450,514
- ------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the financial statements.
33
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
AND THE CUMULATIVE PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION)
TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
AUGUST 29, 1996
(DATE OF
YEAR ENDED YEAR ENDED YEAR ENDED INCORPORATION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1999
------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $ (1,406,259) $ (2,659,415) $ (1,890,093) $ (12,202,477)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 90,965 139,769 51,938 283,334
Purchased in-process research and development - - - 5,377,000
Loss on disposal of equipment - 129,931 27,614 157,545
Changes in other assets and liabilities
affecting cash flows from operations
Prepaid expenses 16,272 (53,376) (10,831) (56,026)
Accounts payable and accrued expenses (386,483) (598,334) 712,306 (436,072)
Due to licensor (102,317) - (135,632) 25,000
Due from SBI - - - (128,328)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,787,822) (3,041,425) (1,244,698) (6,980,024)
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of capital assets (4,219) (124,984) (723,649) (852,852)
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
(Conversion) issuance of Class "A" shares - (1,847) - -
(Conversion) issuance of Class "C" shares - (28) (58) 481
Proceeds from sale or conversion of shares 4,225,343 4,259,203 244,460 13,106,947
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,225,343 4,257,328 244,402 13,107,428
- --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,433,302 1,090,919 (1,723,945) 5,274,552
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 2,841,250 1,750,331 3,474,276 -
- --------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,274,552 $ 2,841,250 $ 1,750,331 $ 5,274,552
- --------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF
CASH FLOW INFORMATION
Acquisition of SBI
Purchased in-process research and development $ - $ - $ - $ 5,377,000
Other net liabilities assumed - - - (831,437)
- --------------------------------------------------------------------------------------------------------------------------------
- - - 4,545,563
Less: subordinate voting shares issued therefor - - - 4,545,563
- --------------------------------------------------------------------------------------------------------------------------------
$ - $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------------------
Income tax paid $ - $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------------------
Interest paid $ - $ - $ - $ -
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the financial statements.
34
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997, AND THE CUMULATIVE
PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
1. ORGANIZATION
On December 19, 1996, Ben-Abraham Technologies, Inc. ("BAT") was
continued under the laws of the State of Wyoming, U.S.A. Previously, BAT
had been incorporated under the laws of the Province of Ontario effective
August 29, 1996. Pursuant to the shareholders meeting to approve the
arrangement on November 27, 1996 and subsequent filing of the articles of
arrangement December 6, 1996, BAT acquired Structured Biologicals Inc.
and its wholly-owned subsidiary 923934 Ontario Inc. ("SBI"), a Canadian
public company listed on the Alberta Stock Exchange. The "acquisition"
was effected by a statutory amalgamation wherein the stockholders of BAT
were allotted a significant majority of the shares of the amalgamated
entity. Upon amalgamation, the then existing stockholders of SBI received
7,434,322 subordinate voting shares of BAT (1 such share for every 3 1/2
shares held in SBI). On November 10, 1999, BAT changed its name to
BioSante Pharmaceuticals, Inc. ("the Company").
The Company was established to develop prescription pharmaceutical
products, vaccines and vaccine adjuvants using its core nanoparticle
technology licensed from the University of California. Research on this
technology was conducted by a predecessor company and as a result the
Company is continuing its efforts to develop several different potential
products using this core technology. The research and development on the
CAP technology is conducted in the Company's Smyrna, Georgia laboratory
facility. The business office is located in Lincolnshire, Illinois.
The Company has been in the development stage since its inception. The
Company's successful completion of its development program and its
transition to profitable operations is dependent upon obtaining
regulatory approval from the United States (the "U.S.") Food and Drug
Administration ("FDA") prior to selling its products within the U.S., and
foreign regulatory approval must be obtained to sell its products
internationally. There can be no assurance that the Company's products
will receive regulatory approvals, and a substantial amount of time may
pass before the achievement of a level of sales adequate to support the
Company's cost structure. Obtaining marketing approval will be directly
dependent on the Company's ability to implement the necessary regulatory
steps required to obtain marketing approval in the United States and in
other countries. It is not possible at this time to predict with
assurance the outcome of these activities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements are expressed in U.S. dollars.
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States and Statement of
Financial Accounting Standards ("SFAS") No. 7 "Accounting and Reporting
by Development Stage Enterprises". The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
35
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997, AND THE CUMULATIVE
PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all
instruments with original maturities of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation
and amortization. Depreciation of computer, office and laboratory
equipment is computed primarily by accelerated methods over estimated
useful lives of seven years. Leasehold improvements are amortized on a
straight-line basis over the terms of the leases, plus option renewals.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
BASIC AND DILUTED NET LOSS PER SHARE
The basic and diluted net loss per share is computed based on the
weighted average number of the aggregate of common stock and Class C
shares outstanding, all being considered as equivalent of one another.
Basic earnings (loss) per share is computed by dividing income (loss)
available to common stockholders by the weighted average number of shares
outstanding for the reporting period. Diluted earnings (loss) per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. The computation of diluted earnings (loss) per share does not
include stock options and warrants with dilutive potential that would
have an antidilutive effect on earnings (loss) per share.
STOCK-BASED COMPENSATION
The Company follows the provisions of APB Opinion No. 25, which requires
compensation cost for stock-based employee compensation plans be
recognized based on the difference, if any, between the quoted market
price of the stock on the date of grant and the amount the employee must
pay to acquire the stock. As a result of the Company continuing to apply
APB No. 25, SFAS No. 123, "Accounting for Stock-Based Compensation"
requires certain additional disclosures of the compensation expense
arising from the Company's fixed and performance stock compensation
plans. The expense is measured as the fair value of the award at the date
it was granted using an option-pricing model that takes into account the
exercise price and the expected term of the option, the current price of
the underlying stock, its expected volatility, expected dividends on the
stock and the expected risk-free rate of return during the term of the
option. The compensation cost is recognized over the service period,
usually the period from the grant date to the vesting date. The Company
has disclosed the required pro forma net loss and loss per share data in
Note 7 as if the Company had recorded compensation expense using the fair
value method per SFAS No. 123.
36
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997, AND THE CUMULATIVE
PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST INCOME
Interest income on invested cash is recorded as earned following the
accrual basis of accounting.
SEGMENT REPORTING
The Company implemented SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION," as of December 31, 1998. The
Statement establishes standards for the way that a public business
enterprise reports information about operating segments in annual
financial statements and interim financial reports issued to
shareholders. It also established standards for related disclosures about
products and services, geographic areas, and major customers. The Company
has determined that, at present, it does not have any reportable
segments.
NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVITIVES
INSTRUMENTS AND HEDGING ACTIVITIES. This Statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedge
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The statement, as amended, is
effective for the fiscal quarters of the Company's fiscal year ending
December 31, 2001. The Company is in the process of evaluating the effect
of this Statement on its financial statements.
3. ACQUISITION
Pursuant to the shareholders meeting to approve the arrangement held on
November 27, 1996 and the subsequent filing of the articles of
arrangement December 6, 1996, the Company completed the acquisition of
100% of the outstanding shares of SBI. The acquisition was effected by a
statutory amalgamation wherein the stockholders of the Company were
allotted a significant majority of the shares of the amalgamated entity.
Upon amalgamation, the then existing shareholders of SBI received
7,434,322 shares of common stock of the Company, (1 such share for every
3 1/2 shares they held in SBI). SBI's results of operations have beEN
included in these financial statements from the date of acquisition. The
acquisition was accounted for by using the purchase method of accounting,
as follows:
37
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997, AND THE CUMULATIVE
PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
3. ACQUISITION (CONTINUED)
<TABLE>
<S> <C>
ASSETS
In-process research and development $ 5,377,000
Other 37,078
--------------------------------------------------------------------------------------------- -----------------
5,414,078
--------------------------------------------------------------------------------------------- -----------------
LIABILITIES
Current liabilities 679,498
Due to directors 60,689
Due to the Company 128,328
--------------------------------------------------------------------------------------------- -----------------
868,515
--------------------------------------------------------------------------------------------- -----------------
Net assets acquired $ 4,545,563
--------------------------------------------------------------------------------------------- -----------------
--------------------------------------------------------------------------------------------- -----------------
CONSIDERATION
Common stock $ 4,545,563
--------------------------------------------------------------------------------------------- -----------------
--------------------------------------------------------------------------------------------- -----------------
</TABLE>
In connection with the acquisition of SBI, accounted for under the
purchase method, the Company acquired the rights to negotiate with the
Regents of the University of California for licenses of specific
technologies and products. The specific technologies and products relate
to investigative research funded by SBI. At the time of acquisition, the
technologies and products had not yet been approved for human clinical
research. The value ascribed to the rights, based on an independent
evaluation, was $5,377,000. This amount was immediately expensed as the
technologies and products did not have their technological feasibility
established and had no identified future alternative use.
As of the date of acquisition, the technology related to the development
of products for six indications [i.e. applications of the technology].
The Company determined the value of the in process research and
development related to the acquired rights based on an independent
valuation using discounted cash flows. Principle assumptions used in
the valuation were as follows:
- FDA approval for the products for the six
indications was expected to be received at various dates between
2002 and 2004, however, there are many competitive products in
development. There are also many requirements that must be met
before FDA approval is secured. There is no assurance that the
products will be successfully developed, proved to be safe in
clinical trials, meet applicable regulatory standards, or
demonstrate substantial benefits in the treatment or prevention
of any disease.
- The estimated additional research and development expenditures
required before FDA approval $26.5 million, to be incurred over
8 to 10 years.
- Future cash flows were estimated based on estimated market size,
with costs determined based on industry norms, an estimated
annual growth rate of 3%.
38
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997, AND THE CUMULATIVE PERIOD
FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
3. ACQUISITION (CONTINUED)
- The cash flows were discounted at 25%. The rate was preferred
due to the high-risk nature of the biopharmaceutical business.
- The Company is continuing to develop the technology related to
five of the six indications
- In June 1997, the Company exercised its option and entered into
a license agreement with UCLA for the technology that it had
previously supported.
4. PROPERTY AND EQUIPMENT
Property and equipment, net of accumulated depreciation at December 31
comprise:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Computer equipment $ 23,951 $ 22,976
Office equipment 32,862 29,619
Laboratory equipment 103,012 103,012
Leasehold improvements - Laboratory 470,094 470,094
----------------------------------------------------------- ------------ ------------
629,919 625,701
Accumulated depreciation and amortization (183,836) (92,872)
----------------------------------------------------------- ------------ ------------
$ 446,083 $ 532,829
----------------------------------------------------------- ------------ ------------
----------------------------------------------------------- ------------ ------------
</TABLE>
5. INCOME TAXES
The components of the Company's net deferred tax asset at December 31,
1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net operating loss carryforwards $ 2,367,292 $ 1,778,246 $ 768,277
Amortization of intangibles 1,613,942 1,759,186 1,904,429
Research & development credits 235,310 144,310 29,478
Other 38,794 16,594 421
4,255,338 3,698,336 2,702,605
Valuation allowance (4,255,338) (3,698,336) (2,702,605)
------------ ------------ ------------
$ - $ - $ -
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
39
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997, AND THE CUMULATIVE
PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
5. INCOME TAXES (CONTINUED)
The Company has no current tax provision due to its accumulated losses,
which result in net operating loss carryforwards. At December 31, 1999,
the Company had approximately $7,000,000 of net operating loss
carryforwards that are available to reduce future taxable income for a
period of up to 15 years. The net operating loss carryforwards expire in
the years 2011-2014. The net operating loss carryforwards as well as
amortization of various intangibles, principally acquired in-process
research and development, generate deferred tax benefits, which have been
recorded as deferred tax assets and are entirely offset by a tax
valuation allowance. The valuation allowance has been provided at 100% to
reduce the deferred tax assets to zero, the amount management believes is
more likely than not to be realized. Additionally, the Company has
approximately $235,000 of research and development credits available to
reduce future income taxes through the year 2013.
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate of 34% to pre-tax income
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Tax at U.S. federal statutory rate $ (469,799) $ (904,201) $ (642,632)
State taxes, net of federal benefit (91,015) (90,810) (55,284)
Change in valuation allowance 556,972 986,730 641,025
Other, net 3,842 8,281 56,891
----------- ----------- -----------
$ - $ - $ -
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
6. STOCKHOLDERS' EQUITY
By articles of amendment dated July 20, 1999 (effective as of July 13,
1999), the subordinate voting shares of the Company were redesignated as
common stock, the Class A special shares were reclassified as Class C
special shares and the Class B special shares were eliminated. There were
no changes in the number of shares outstanding.
a) AUTHORIZED
PREFERENCE SHARES
An unlimited number of preference shares issuable in series subject
to limitation, rights, and privileges as determined by the
directors. No preference shares have been issued as of December 31,
1999.
40
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997, AND THE CUMULATIVE
PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
6. STOCKHOLDERS' EQUITY (CONTINUED)
SPECIAL SHARES
An unlimited number of Class C special shares without par value,
convertible to common stock on the basis of one Class C special
share and U.S. $0.25. These shares are not entitled to a dividend
and carry one vote per share.
COMMON STOCK
An unlimited number of common shares of stock without par value,
which carry one vote per share.
SIGNIFICANT EQUITY TRANSACTIONS
Significant equity transactions since the date of the Company's
incorporation are as follows:
- Prior to the Amalgamation on December 6, 1996, the Company
issued 20,000,000 shares of the Company's class A stock for
$0.0001 per share, 4,150,000 shares of class C stock for
$0.0001 per share and 4,100,000 shares of the Company's
subordinate voting shares for $1.00 per share.
- Pursuant to the shareholders meeting to approve the
arrangement held on November 27, 1996 and the subsequent
filing of articles of arrangement on December 6, 1996, the
Company completed the acquisition of 100% of the outstanding
shares of SBI. Upon the effectiveness of this Amalgamation,
the then existing stockholders of SBI received 7,434,322
subordinate voting shares of the Company (1 subordinate
voting share of the Company for every 3 1/2 shares of SBI).
The deemed fair market value of this stock was $4,545,563.
- In May 1998, the Company and Avi Ben-Abraham, M.D., a
director and a founder of the Company and the Company's
then Chief Executive Officer and Chairman of the Board,
entered into an agreement pursuant to which Dr. Ben-Abraham
would relinquish his executive position and remain as a
director of the Company. Pursuant to the agreement, Dr.
Ben-Abraham converted shares of the Company's class A stock
held by him into 15,000,000 shares of subordinate voting
stock at $0.25 per share for proceeds to the Company of
$3,750,000. In addition, Dr. Ben-Abraham agreed to return to
the Company 1,468,614 shares of class A stock and 250,000
shares of class C stock to the Company, and also agreed not
to sell any of his shares of subordinate voting stock or any
other securities of the Company for a period of 15 months.
The Company and Dr. Ben-Abraham agreed to cross-indemnify
each other upon the occurrence of certain events.
- In June 1998, the Company issued an aggregate of 2,000,000
shares of subordinate voting shares pursuant to the
conversion of class A stock at a conversion price of $0.25
per share.
41
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997, AND THE CUMULATIVE
PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
6. STOCKHOLDERS' EQUITY (CONTINUED)
- On May 6, 1999, the Company sold an aggregate of 23,125,000
common shares and warrants to purchase 11,562,500 shares of
common stock at an exercise price of $0.30 per share (equal
to the then current market value of the Company's common
stock) to 31 accredited investors in a private placement,
including several current members of the board of directors
and one executive officer. Net proceeds to the Company from
this private placement were approximately $4.2 million.
- In August 1999, an outstanding liability of $25,000 was
converted into 70,000 shares of common stock.
b) WARRANTS
The Company upon the acquisition of SBI assumed 2,577,129
exercisable warrants to purchase common stock, all of which expired
prior to or as of December 31, 1998. Of this amount, 72,571 were
exercised in 1997 prior to their expiration.
Pursuant to the Company's private placement financing, warrants to
purchase an aggregate of 11,562,500 shares of common stock were
issued at an exercise price of $0.30 per share (equal to the then
current market value of the Company's common stock) with a term of
five years. These warrants represent the total number of warrants
outstanding, all of which were exercisable, as of December 31,
1999.
42
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997, AND THE CUMULATIVE
PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
7. STOCK OPTIONS
The Company has a stock option plan for certain officers, directors and
employees whereby 4,973,125 shares of common stock have been reserved
for issuance. Options for 4,973,125 shares of common stock have been
granted as of December 31, 1999 at prices equal to the ten-day weighted
average closing price of the stock at the date of the grant and are
exercisable and vest in a range substantially over a three year period.
The options expire five years from the date of the grants.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plan. Accordingly, no compensation cost has been
recognized for the plan. Had the compensation cost for the Company's
plan been determined based on the fair value of the rates of award
under the plan consistent with the method of SFAS No. 123 "Accounting
for Stock-Based Compensation" the Company's net loss, cumulative net
loss, and basic net loss per common share would have been increased to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net loss
As reported $ (1,406,259) $ (2,659,415) $ (1,890,093)
Pro forma $ (1,713,693) $ (2,771,391) $ (1,953,587)
Basic and diluted net loss per share
As reported $ (0.03) $ (0.08) $ (0.05)
Pro forma $ (0.03) $ (0.08) $ (0.05)
Cumulative net loss
As reported $ (12,202,477) -- --
Pro forma $ (12,856,950) -- --
Cumulative basic and diluted net loss per share
As reported $ (0.32) -- --
Pro forma $ (0.33) -- --
</TABLE>
43
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997, AND THE CUMULATIVE
PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
7. STOCK OPTIONS (CONTINUED)
The weighted average fair value of the options at the date of the grant
for options granted during 1999, 1998 and 1997 was $0.33, $0.44 and $0.19
was estimated using the Cox Rubinstein binomial model and the
Black-Scholes option-pricing model with following weighted average
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Expected option life (years) 5 5 5
Risk free interest rate 4.59% 5.05% 5.44%
Expected stock price volatility 238.08% 350.00% 105.81%
Dividend yield - - -
</TABLE>
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
1999 Exercise Price 1998 Exercise Price 1997 Exercise Price
---------- -------------- ---------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
Beginning of period 2,465,000 $ 0.37 250,000 $ 1.07 200,000 $ 1.07
Options granted 3,068,125 $ 0.24 2,225,000 $ 0.29 50,000 $ 1.04
Options cancelled/expired (560,000) $ 0.31 (10,000) $ 0.29
Options exercised - - - - - -
Options outstanding,
End of period 4,973,125 $ 0.30 2,465,000 $ 0.37 250,000 $ 1.07
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Options exercisable,
End of year 2,117,113 $ 0.35 674,500 $ 0.60 250,000 $ 1.07
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997, AND THE CUMULATIVE
PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
7. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
---------------------------------------------- ---------------------------
RANGE OF WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE OUTSTANDING PRICE
----------- ----------- ---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ .023 2,378,125 4.2 years $0.23 901,113 $0.23
$0.28-$0.29 2,345,000 4.0 years $0.28 966,000 $0.28
$1.04-$1.07 250,000 1.9 years $1.06 250,000 $1.06
--------- ---------
4,973,125 2,117,113
========= =========
</TABLE>
8. RETIREMENT PLAN
In July 1998, the Company began offering a discretionary 401(k) Plan (the
Plan) to all of its employees. Under the Plan, employees may defer income
on a tax-exempt basis, subject to IRS limitation. Under the Plan the
Company can make discretionary matching contributions. Company
contributions expensed in 1999 and 1998 totaled $23,899 and $21,799,
respectively.
45
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997, AND THE CUMULATIVE
PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
9. LEASE ARRANGEMENTS
The Company has entered into lease commitments for rental of its office
space and laboratory facilities. The future minimum lease payments are:
<TABLE>
<S> <C>
2000 $ 116,832
2001 110,712
2002 93,957
2003 51,710
THEREAFTER -
---------------------------------------------------------------------------
$ 373,211
---------------------------------------------------------------------------
</TABLE>
Rent expense amounted to $89,110, $134,788 and $36,755 for the years
ended December 31, 1999, 1998 and 1997, respectively. Effective September
16, 1999, the Company entered into a sublease agreement for its Atlanta
office space under which the Company receives approximately $3,500 per
month from the sub-tenant through September 14, 2002.
10. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Management fees paid to a company controlled
by a member of management, who is also a shareholder
and member of the Board of Directors $ - $ 94,200 $185,000
Financing expenses paid to a company controlled
by a member of management, who is also a shareholder
and member of the Board of Directors $ - $ - $ 44,019
</TABLE>
Included in current liabilities are $5,588, $133,901, and $156,412 which
represent amounts due to directors and officers of the Company as of
December 31, 1999, 1998 and 1997, respectively.
Prior to the Amalgamation on December 6, 1996, the Company issued
20,000,000 shares of class A stock and 4,150,000 shares of class C stock
for $0.0001 per shares. 17,000,000 of the class A shares were sold to a
director of the Company. 1,050,000 of the class C shares were sold to the
same director of the Company to be held by him in trust for the benefit
of others; 500,000 of the class C shares were sold to a separate company
controlled by a then officer of the Company; and 2,000,000 of the class C
shares were sold to other directors of the Company.
The 20,000,000 class A shares and 4,150,000 class C shares were founder's
shares and the terms under the authorization of these shares, provided
for their conversion to subordinate voting shares at $0.25 per share.
46
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997, AND THE CUMULATIVE
PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
10. RELATED PARTY TRANSACTIONS (CONTINUED)
In May 1998, the Company and Avi Ben-Abraham, M.D., a director and a
founder of the Company and the Company's then Chief Executive Officer and
Chairman of the Board, entered into an agreement pursuant to which Dr.
Ben-Abraham would relinquish his executive position and remain as a
director of the Company. See Note 6.
In connection with the May 1999 private placement of 23,125,000 shares of
common stock and warrants to purchase 11,562,500 shares of common stock,
the Company's Chief Executive Officer purchased 250,000 shares of the
common stock sold and warrants to purchase 125,000 shares of common
stock. Three other individuals, who purchased either individually or
through affiliated entities, an aggregate 10,250,000 shares of common
stock and warrants to purchase 5,125,000 shares of common stock, became
directors of the Company upon their acquisition of the shares.
11. COMMITMENTS
The Company's license agreement with the University of California
requires it to undertake various obligations, including:
- Payment of a $100,000 license issue fee, $75,000 of which the
Company has paid as of December 31, 1999 and $25,000 of which is
due in June 2000;
- Payment of royalties to the University based on a percentage of the
net sales of any products incorporating the licensed technology;
- Payment of minimum annual royalties on February 28 of each year
beginning in the year 2004 in the amounts set forth below, to be
credited against earned royalties, for the life of the agreement
(2013);
<TABLE>
<CAPTION>
Minimum
Annual Royalty
Year Due
------------------------- -------------------
<S> <C>
2004 $ 50,000
2005 $ 100,000
2006 $ 150,000
2007 $ 200,000
2008 $ 400,000
2009 $ 600,000
2010 $ 800,000
2011 $ 1,500,000
2012 $ 1,500,000
2013 $ 1,500,000
</TABLE>
47
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997, AND THE CUMULATIVE
PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------
11. COMMITMENTS (CONTINUED)
- commercialization of products incorporating the licensed
technology until a product is introduced to the market;
- Payment of the costs of patent prosecution and maintenance of the
patents included in the agreement which as of December 31, 1999
have amounted to $63,000 and which management estimates will
equal approximately $70,000 per year;
- Meeting performance milestones relating to:
- Hiring or contracting with personnel to perform research and
development, regulatory and other activities relating to the
commercial launch of a proposed product;
- Testing proposed products;
- Obtaining government approvals;
- Conducting clinical trials;
- Introducing products incorporating the licensed technology
into the market;
- Entering into partnership or alliance arrangements or agreements
with other entities regarding commercialization of the technology
covered by the license.
- The Company has agreed to indemnify, hold harmless and defend the
University of California and its affiliates, as designated in the
license agreement, against any and all claims, suits, losses,
damage, costs, fees and expenses resulting from or arising out of
exercise of the license agreement, including but not limited to,
any product liability claims.
48
<PAGE>
PART III
--------------------
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The information under the captions "Election of Directors -- Information
About Nominees and Directors" and "Election of Directors -- Other Information
About Nominees and Directors" in the Company's 2000 Proxy Statement is
incorporated herein by reference. The information concerning executive
officers of the Company is included in this Report under Item 4a, "Executive
Officers of the Company."
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 2000 Proxy Statement is incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information under the captions "Election of Directors -- Director
Compensation" and "Executive Compensation and Other Benefits" in the
Company's 2000 Proxy Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Principal Shareholders and Beneficial
Ownership of Management" in the Company's 2000 Proxy Statement is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions" in the Company's
2000 Proxy Statement is incorporated herein by reference.
49
<PAGE>
PART IV
--------------------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibits to this Report are listed on the Exhibit Index on
pages 54-57 below. A copy of any of the exhibits listed or referred to
above will be furnished at a reasonable cost, upon receipt from any
such person of a written request for any such exhibit. Such request
should be sent to BioSante Pharmaceuticals, Inc., 175 Olde Half Day
Road, Suite 123, Lincolnshire, Illinois 60069, Attn: Shareholder
Information.
The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an exhibit to
this Annual Report on Form 10-KSB pursuant to Item 13(a):
A. 1998 Stock Option Plan (incorporated by reference to
Exhibit 10.3 to BioSante's Registration Statement on
Form 10-SB (File No. 0-28637)).
B. Stock Option Agreement, dated July 6, 1995, between
BioSante Pharmaceuticals, Inc. and Avi Ben-Abraham,
M.D. (incorporated by reference to Exhibit 10.4 to
BioSante's Amendment No. 1 to the Registration
Statement on Form 10-SB (File No. 0-28637)).
C. Stock Option Agreement, dated December 7, 1997, between
BioSante Pharmaceuticals, Inc. and Edward C. Rosenow,
III, M.D. (incorporated by reference to Exhibit 10.5 to
BioSante's Amendment No. 1 to the Registration
Statement on Form 10-SB (File No. 0-28637)).
D. Stock Option Agreement, dated December 8, 1998, between
BioSante Pharmaceuticals, Inc. and Stephen M. Simes
(incorporated by reference to Exhibit 10.6 to
BioSante's Amendment No. 1 to the Registration
Statement on Form 10-SB (File No. 0-28637)).
E. Stock Option Agreement, dated December 8, 1998, between
BioSante Pharmaceuticals, Inc. and Stephen M. Simes
(incorporated by reference to Exhibit 10.7 to
BioSante's Amendment No. 1 to the Registration
Statement on Form 10-SB (File No. 0-28637)).
F. Stock Option Agreement, dated March 30, 1999, between
BioSante Pharmaceuticals, Inc. and Stephen M. Simes
(incorporated by reference to Exhibit 10.8 to
BioSante's Amendment No. 1 to the Registration
Statement on Form 10-SB (File No. 0-28637)).
G. Employment Agreement, dated January 21, 1998, between
BioSante Pharmaceuticals, Inc. and Stephen M. Simes, as
amended (incorporated by reference to Exhibit 10.16 to
BioSante's Registration Statement on Form 10-SB (File
No. 0-28637)).
50
<PAGE>
H. Employment Agreement, dated June 11, 1998, between
BioSante Pharmaceuticals, Inc. and Phillip B.
Donenberg, as amended (incorporated by reference to
Exhibit 10.17 to BioSante's Amendment No. 1 to the
Registration Statement on Form 10-SB (File No.
0-28637)).
(b) REPORTS ON FORM 8-K
We did not file any Current Reports on Form 8-K during the
quarter ended December 31, 1999.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 23, 2000 BIOSANTE PHARMACEUTICALS, INC.
By /s/ STEPHEN M. SIMES
---------------------------------
Stephen M. Simes
Vice Chairman, President and Chief
Executive Officer
By /s/ PHILLIP B. DONENBERG
---------------------------------
Phillip B. Donenberg
Chief Financial Officer, Treasurer
and Secretary
52
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below on March 23, 2000 by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE
------------------ -----
<S> <C>
/s/ STEPHEN M. SIMES Vice Chairman, President and Chief
- ----------------------------------- Executive Officer
Stephen M. Simes (Principal Executive Officer)
/s/ PHILLIP B. DONENBERG Chief Financial Officer, Treasurer
- ----------------------------------- and Secretary (Principal
Phillip B. Donenberg Financial Officer)
/s/ LOUIS W. SULLIVAN, M.D.
- ----------------------------------- Chairman of the Board
Louis W. Sullivan, M.D.
/s/ AVI BEN-ABRAHAM, M.D.
- ----------------------------------- Director
Avi Ben-Abraham, M.D.
/s/ VICTOR MORGENSTERN
- ----------------------------------- Director
Victor Morgenstern
/s/ EDWARD C. ROSENOW, III, M.D.
- ----------------------------------- Director
Edward C. Rosenow, III, M.D.
/s/ FRED HOLUBOW
- ----------------------------------- Director
Fred Holubow
/s/ ROSS MANGANO
- ----------------------------------- Director
Ross Mangano
/s/ ANGELA HO
- ----------------------------------- Director
Angela Ho
/s/ PETER KJAER
- ----------------------------------- Director
Peter Kjaer
</TABLE>
53
<PAGE>
BIOSANTE PHARMACEUTICALS, INC.
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT METHOD OF FILING
- ----------- ------- ----------------
<S> <C> <C>
2.1 Arrangement Agreement, dated October 23, 1996, between Structured
Biologicals Inc. and BioSante Pharmaceuticals,
Inc. ............................................................... Incorporated by reference to
Exhibit 2.1 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
3.1 Articles of Continuance of BioSante Pharmaceuticals, Inc., as
amended............................................................. Incorporated by reference to
Exhibit 3.1 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
3.2 Bylaws of BioSante Pharmaceuticals, Inc............................. Incorporated by reference to
Exhibit 3.2 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
4.1 Form of Warrant issued in connection with May 1999 Private
Placement........................................................... Incorporated by reference to
Exhibit 4.1 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
10.1 License Agreement, dated June 18, 1997, between BioSante
Pharmaceuticals, Inc. and The Regents of the University of
California (1)...................................................... Incorporated by reference to
Exhibit 10.1 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
</TABLE>
54
<PAGE>
<TABLE>
<S> <C> <C>
10.2 Amendment to License Agreement, dated October 26, 1999, between
BioSante Pharmaceuticals, Inc. and the Regents of the University of
California (1)...................................................... Incorporated by reference to
Exhibit 10.2 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
10.3 1998 Stock Option Plan.............................................. Incorporated by reference to
Exhibit 10.3 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
10.4 Stock Option Agreement, dated July 6, 1995, between BioSante
Pharmaceuticals, Inc. and Avi Ben-Abraham, M.D...................... Incorporated by reference to
Exhibit 10.4 contained in
BioSante's Registration
Statement on Form 10-SB, as
mended
(File No. 0-28637)
10.5 Stock Option Agreement, dated December 7, 1997,
between BioSante Pharmaceuticals, Inc. and Edward C. Rosenow, III,
M.D................................................................. Incorporated by reference to
Exhibit 10.5 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
10.6 Stock Option Agreement, dated December 8, 1998, between BioSante
Pharmaceuticals, Inc. and Stephen M. Simes.......................... Incorporated by reference to
Exhibit 10.6 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
10.7 Stock Option Agreement, dated December 8, 1998, between BioSante
Pharmaceuticals, Inc. and Stephen M. Simes.......................... Incorporated by reference to
Exhibit 10.7 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
</TABLE>
55
<PAGE>
<TABLE>
<S> <C> <C>
Stock Option Agreement, dated March 30, 1999, between BioSante
10.8 Pharmaceuticals, Inc. and Stephen M. Simes.......................... Incorporated by reference to
Exhibit 10.8 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
10.9 Escrow Agreement, dated December 5, 1996, among BioSante
Pharmaceuticals, Inc., Montreal Trust Company of Canada, as Escrow
Agent, and certain shareholders of BioSante Pharmaceuticals, Inc.... Incorporated by reference to
Exhibit 10.9 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
10.10 Voting Rights Limitation Agreement, dated November 28, 1996, by Avi
Ben-Abraham, M.D. to the Canadian Venture Exchange.................. Incorporated by reference to
Exhibit 10.10 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
10.11 Voting Agreements, dated May 6, 1999, between BioSante
Pharmaceuticals, Inc., Avi Ben-Abraham, M.D. and certain
shareholders of BioSante Pharmaceuticals, Inc....................... Incorporated by reference to
Exhibit 10.11 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
10.12 Shareholders' Agreement, dated May 6, 1999, between BioSante
Statement on Form 10-SB, as Pharmaceuticals, Inc., Avi
Ben-Abraham, M.D. and certain amended Incorporated by reference to
shareholders of BioSante Pharmaceuticals, Inc....................... Exhibit 10.12 contained in
BioSante's Registration
(File No. 0-28637)
</TABLE>
56
<PAGE>
<TABLE>
<S> <C> <C>
10.13 Registration Rights Agreement, dated May 6, 1999, between BioSante
Pharmaceuticals, Inc. and certain shareholders of BioSante
Pharmaceuticals, Inc. .............................................. Incorporated by reference to
Exhibit 10.13 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
10.14 Securities Purchase Agreement, dated May 6, 1999, between BioSante
Pharmaceuticals, Inc. and certain shareholders of BioSante
Pharmaceuticals, Inc. .............................................. Incorporated by reference to
Exhibit 10.14 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
10.15 Lease, dated September 15, 1997, between BioSante Pharmaceuticals,
Inc. and Highlands Park Associates.................................. Incorporated by reference to
Exhibit 10.15 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
10.16 Employment Agreement, dated January 21, 1998, between
BioSante Pharmaceuticals, Inc. and Stephen M. Simes, as amended..... Incorporated by reference to
Exhibit 10.16 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
10.17 Employment Agreement, dated June 11, 1998, between BioSante
Pharmaceuticals, Inc. and Phillip B. Donenberg, as amended.......... Incorporated by reference to
Exhibit 10.17 contained in
BioSante's Registration
Statement on Form 10-SB, as
amended
(File No. 0-28637)
27.1 Financial Data Schedule............................................. Filed herewith electronically
</TABLE>
- --------------------------
(1) Confidential treatment has been requested with respect to designated
portions of this document. Such portions have been omitted and filed
separately with the Secretary of the Commission pursuant to Rule 24b-2
of the Securities Exchange Act of 1934, as amended.
57
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,274,552
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,333,546
<PP&E> 629,919
<DEPRECIATION> (183,836)
<TOTAL-ASSETS> 5,779,629
<CURRENT-LIABILITIES> 329,115
<BONDS> 0
0
0
<COMMON> 17,652,991
<OTHER-SE> (12,202,447)
<TOTAL-LIABILITY-AND-EQUITY> 5,779,629
<SALES> 0
<TOTAL-REVENUES> 198,683
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,604,942
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,406,259)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,406,259)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,406,259)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
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