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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES ACT OF 1934
DEMEGEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COLORADO 84-1065575
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1051 Brinton Road, Pittsburgh, PA 15221
(Address of Principal Executive Office) (Zip Code)
(412) 241-2150
(Issuer's Telephone Number)
Securities to be Registered under Section 12 (b) of the Act:
NONE
Securities to be Registered under Section 12 (g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
This Registration Statement contains forward-looking statements which involve
risks and uncertainties. When used in this Registration Statement, the words
"believe", "anticipate", "expects" and similar expressions are intended to
identify such forward-looking statements. The Company's actual results may
differ significantly from the results discussed in the forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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ITEM 1 - BUSINESS
THE COMPANY
The Company was formed after the July 27, 1992 acquisition of the assets of The
Demeter Corporation by Excelsior Capital Corporation ("Excelsior"). Excelsior
was incorporated in Colorado on September 16, 1987. Excelsior acquired all of
the assets of The Demeter Corporation in exchange for 6,625,821 shares of
Excelsior's $0.001 par value common stock. The Demeter Corporation's assets
consisted of intangible assets related to various biotechnology applications in
the fields of human and animal health care, agricultural and commercial
chemicals. Subsequent to the acquisition, Excelsior changed its name to Demeter
BioTechnologies, Ltd. On September 18, 1998, shareholders approved the proposal
of the Company's Board of Directors to change the Company's name to Demegen,
Inc. The Company is currently incorporated in the State of Colorado
For accounting purposes, the acquisition was treated as a reverse acquisition
whereby The Demeter Corporation acquired Excelsior Capital Corporation. The
historical financial statements prior to the acquisition are those of The
Demeter Corporation utilizing the capital structure of Excelsior. However, The
Demeter Corporation had no operating activities from the date of inception,
December 6, 1991, through July 27, 1992. Likewise, Excelsior had no operating
activities prior to December 6, 1991.
The Company is a life science company located in Pittsburgh, Pennsylvania. The
Company is developing two types proprietary products. These products include
peptide (small protein) therapeutics for pharmaceutical applications and
peptide-encoded plant genes for agricultural applications.
The Company's business strategy is to focus its resources on the design and
development of its core technology, while licensing to larger partners its many
potential applications for commercialization. The Company has a platform
technology which can be commercialized by using specific compounds as the active
ingredient for many different potential products. The compounds have
demonstrated activity against many different types of infectious diseases and
cancer. The Company is targeting specific peptides or plant genes, disease
targets and commercial partners with whom products will be fully developed and
commercialized.
The Company has discovered key structural design parameters to construct
proprietary synthetic compounds with potent anti-cancer and anti-bacterial
performance characteristics. In the peptide form, the Company's compounds are
stable and soluble and have demonstrated efficacy in treating certain diseases
in animals. The anti-cancer and anti-bacterial performance represent significant
market opportunities - both in terms of the size of the market and also because
there are no cures or effective treatments for the important diseases being
targeted. In the plant gene form, the Company's compounds have been transformed
successfully in crops. In vivo disease resistant results have been obtained in
both potatoes and tobacco, both important demonstration crops. Significant
nutrition enhancement in sweet potatoes has also been obtained including both
qualitative and quantitative increases in overall plant protein content.
The Company has assembled an experienced team that will further develop, enhance
and protect its core technology, as well as aggressively develop product
applications from the technology. In general, the Company's primary sources or
revenue will be license fees, milestone payments, royalties, research grants and
revenues from supplying materials to licensees. The Company's November 1997
license agreement with Mycogen Corporation, a large agricultural biotechnology
company owned by Dow AgraSciences LLC a wholly owned entity of The Dow Chemical
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Company, was the Company's first major success at licensing technology which the
Company has developed.
The Company received an initial payment of $0.95 million for licensing its
disease resistant agricultural technology plus $0.3 million for research
support. Additionally, the Company will receive future milestone payments, as
Mycogen commercializes the agricultural technology, and royalties for licensing
its disease resistant agricultural technology. The Mycogen Agreement includes
the exclusive license of certain technologies for genetic disease prevention and
spray-on treatment. The Mycogen partnership is poised to become a major revenue
stream for the Company as Mycogen pursues the commercial application of the
process. In November 1998 the Company expanded the agreement to include its
agricultural nutrition technology to Mycogen and received an initial payment of
$0.2 million plus a $0.15 million fee for research support. The Company expects
to receive $20 million, exclusive of royalties, over the next four to six years
in the form of license fees, research support and milestone payments as Mycogen
commercializes these agricultural technologies. The Mycogen milestone payments
under the initial agreement (disease resistance) are expected, based upon
current discussions with Mycogen, to begin in 2002 upon regulatory approval or
first sale. Additional milestone payments will be received in 2002 - 2008 for
the first commercial sale of certain crops and for the first commercial sale of
other crops not specified in the agreement. The term of the initial agreement is
the later of the expiration of the last patent or the cessation of sales of
products covered by the license.
The Mycogen milestone payments under the addendum (nutrition enhancement) are
expected, based upon current discussions with Mycogen, to begin in 1999 for the
achievement of technical feasibility benchmarks in monocots and dicots.
Additional milestone payments will be received in 2000 - 2008 for animal feeding
benchmarks, the first commercial sale of certain crops, for the first commercial
sale of other crops not specified in the agreement and the achievement of
cumulative gross margin benchmark sale of certain crops. The term of the
addendum is the later of the expiration of the last nutrition patent or the
cessation of sales of products covered by the license.
Mycogen will be responsible for all development and commercialization costs. By
licensing agricultural applications, the Company will be able to focus upon
pharmaceutical applications and will have a revenue source to help fund the
pharmaceutical research and development.
The Mycogen Agreement conveys to Mycogen all rights with regard to the
development and use of the technology. Mycogen has a three year period from the
date of the Agreement to pursue the commercialization of the technology covered
by the Agreement. After that time should Mycogen not successfully commercialize
a technology the Company has the right to bring possible interested parties to
Mycogen but Mycogen retains the rights to the technology until such time as
Mycogen grants those rights to a third party or return them to the Company.
In June 1998, the Company received a $2 million equity investment from the CEO
Venture Fund of Pittsburgh, PA. The financial commitment marked the largest
investment in the Company since the Company's inception. Since 1992, the Company
has raised in excess of $12 million of capital since inception.
OPERATIONS
The Company's primary focus is the development of human therapeutics. The
Company accomplishes this by developing and refining its core technology and
intellectual property, and secondly, by using its drug development team to bring
individual applications from the pre-clinical stage to human clinical studies.
The Company plans to out-license its pharmaceutical products, after completing
Phase I or Phase II human clinical trials for that application. The majority of
the Company's agricultural technologies are being developed and will be
commercialized by the Company's agricultural partner. In this role, Mycogen is
spending significant funds to develop enhanced crops using the Company's plant
gene technology. Mycogen is providing all of the development, patent and
regulatory costs and clearances for the individual crops.
During the past few years, the Company has explored the breadth of its
technology in order to determine the best targets for initial commercialization.
In order to attain proof of concept for an application, the Company has
collaborated with many renowned scientists with U.S. medical centers and
research universities, as well as in the laboratories of the NIH and USDA. In
doing so, the Company was able to develop numerous pharmaceutical and
agricultural applications with limited personnel and without large
infrastructure resources.
Since the Company's inception, an estimated $5 million and the use of
sophisticated laboratories have been expended by universities, governmental
agencies and private foundations developing products using the Company's
Peptidyl MIMs, while the Company maintains commercial rights and control.
The Company has not sought to build all of the pre-clinical facilities required
for drug development. However, the Company has established a core laboratory in
Pittsburgh to be able to perform microbiology, tissue screening, quality control
and chemistry necessary of the utility and potential of the Peptidyl MIMs as
well as testing the design theories of
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Dr. Jesse M. Jaynes, inventor of the Peptidyl MIM technology. The Company
expects to continue to out-source toxicology and animal efficacy studies
required in development of therapeutic application. The Company's strength lies
in that it has capable and experienced drug development personnel to accomplish
the required experiments in a timely and cost efficient manner.
PHARMACEUTICAL APPLICATIONS
The Company has selected a lead compound Peptidyl MIM D2A21, for development as
a cancer therapeutic. The majority of the Company's cancer results to date have
been directed towards prostate cancer. However, a number of evaluations by the
National Cancer Institute (NCI) and private laboratories have indicated that
this compound may have broad applicability against many types of cancers. In
addition to its cancer program, the Company has pre-clinical research programs
to prevent and treat bacterial and viral infections.
The Company has begun the process of finding a strategic partner for late stage
development and commercialization of its cancer application. However, the
Company will seek to accomplish Phase I human clinical studies before licensing
this application. The Company's strategy is to advance the Company's
applications as far as possible so that they are much more valuable before
licensing them to a large commercial partner.
During calendar 1999, the Company is planning to begin human clinical trials, to
assess D2A21's safety in patients whose cancer therapy has failed. In order to
meet this schedule, the Company is currently completing all of the efficacy,
toxicology, pharmcokinetic and chemistry and manufacturing tests necessary for a
new drug substance to get investigative new drug ("IND") approval from the
Federal Drug Agency ("FDA").
Prostate cancer, the second leading cause of cancer deaths in men in the United
States, affects 9.7 million Americans. Over 200,000 new cases are diagnosed each
year and more than 40,000 American men die of this disease annually. Carcinoma
of the prostate is the most commonly diagnosed cancer in men and the second most
common cause of cancer death in western civilization. It is predominately a
tumor of older men, which frequently responds to treatment when widespread and
may be cured when localized.
Currently therapeutic options include surgery, radiation therapy, hormonal
therapy and chemotherapy. The approach to treatment is influenced by the stage
of the disease, age and coexisting medical conditions. Surgery (radical
prostatectomy) and radiation are options for early stage cancer that has not
spread outside the prostate. Hormone therapy and chemotherapy are considered for
metastatic or recurring disease. The median age at diagnosis is 72 years. A
significant number of patients, especially when diagnosed at a more advanced
stage, relapse and develop incurable disseminated metastatic disease. None of
the current treatments for advanced disease provide significant benefit to
survival. Effective treatment modalities for patients with residual or
non-localized disease are clearly needed.
D2A21 has also demonstrated significant anti-tumor activity or solid tumors cell
lines, including lung, breast, ovarian, bladder, central nervous system and
melanoma. Additional studies in two laboratories indicates that prostate cancer
cell lines appear to be more susceptible to D2A21 than other solid tumor cell
lines. Therefore, the initial indication for this development plan is the
treatment of prostate cancer.
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D2A21 EFFICACY ANIMAL MODELS
D2A21, the Company's lead synthetic Peptidyl MIM, is undergoing evaluation in
several animal models of cancer, with the objective of optimizing dose and
schedule prior to entering into pre-IND safety studies. To date testing of D2A21
has promise as a potential anti-cancer agent, including the following:
o Significant in vitro anti-cancer activity against prostate, lung,
ovarian, breast, central nervous system and melanoma tumor cell lines
o Low dose (< 1mg/kg) anti-cancer activity in an aggressive model of
prostate cancer in vivo. Data indicates a benefit to survival, growth
retardation and/or regression of primary tumor and reduction in
metastases
o Equivalent activity when given by intratumoral, intraperitoneal,
intravenous or subcutaneous route of administration
At the University of Pittsburgh Cancer Institute, the Company has been achieving
positive results in testing its lead compound Peptidyl MIM D2A21, in a number of
tumor xenograft models. In experiments in the Dunning rat model of prostate
cancer, animals were injected with Mat-Ly-Lu (MLL) prostate adenocarcinoma
cells, a very aggressive prostate cancer cell line that produces large primary
tumors as well as lung metastases. Without successful treatment, mortality
usually occurs within 30 days.
Rats treated with D2A21 achieved a 60% reduction in the growth of primary tumors
and a significant reduction in the number of lung metastases. D2A21 was
administrated intravenously at a low dose of just 0.179 mg per injection that
was effective without causing toxicity to the animals. Importantly, the survival
rate increased from 25% for controls to 75% for D2A21 treated animals.
D2A21 has been effective in reducing tumors when administered by the following
systemic routes, which include: sub-coetaneous, intra-parentinal (IP) and
intravenous (IV). The Company is in the process of selecting the final dosage
schedule for D2A21 to complete the pre-clinical efficacy and toxicology tests.
The Company will also be finalizing product manufacturing and packaging of the
product relative to the clinical tests.
HUMAN CLINICAL TRIALS
It is the Company's plan to begin Phase I human clinical trials late in
calendar 1999. The major purpose of a Phase I study is to define a safe dose and
schedule of administration of D2A21. Generally, cancer patients eligible for
Phase I have confirmed malignancy for which no effective therapeutic options are
known. Although the emphasis of the study is safety rather than efficacy, it
would be of use to maximize the opportunity for recognizing therapeutic benefit.
The specific Phase I protocols are being developed with the Prostate and
Urologic Cancer Center at the University of Pittsburgh Cancer Institute. It is
anticipated that the University of Pittsburgh Cancer Institute will conduct the
Phase I clinical trials.
Phase II studies will be designed to assess the anti-tumor efficacy of D2A21.
Using the dose and schedule found to be safe in Phase I studies, D2A21 will be
given to groups of patients with prostate cancer. The selection of cancers to
study in Phase II is usually based upon preclinical efficacy studies and any
promising results in Phase I studies.
Once D2A21 has demonstrated adequate efficacy and safety in Phase II studies, it
will enter Phase III testing where it will be compared to generally accepted
therapies for efficacy and toxicity. Demegen anticipates licensing during or
after Phase II clinical trials.
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SUPPORT FOR THE DEMEGEN CANCER PROGRAM
The Company has received considerable outside support for its cancer program.
Researchers and clinicians at the University of Pittsburgh Cancer Institute,
Duke University Medical Center and the National Cancer Institute have given
time, research and counsel to help the Company develop this cancer therapeutic.
The Company has also received over $1.5 million in research grants from
non-profit cancer foundations and institutes from early 1993 to date. In
addition to direct financial support, numerous university and governmental labs
have conducted research with D2A21, at no charge to the Company, to confirm the
anti-tumor effectiveness of this compound in animal models.
ANTI-BACTERIAL APPLICATIONS
In addition to its cancer program, the Company is conducting pre-clinical
experiments to assess using its Peptidyl MIM's in development of anti-bacterial
therapeutics. Furthest along is the development of an intravaginal gel that
prevents the transmission of Chlamydia, a sexually transmitted disease (STD)
which affect the reproductive health of 4 to 8 million U.S. women each year. The
Company's efforts to develop this application have been extensively supported by
the following institutions, which include: the Sexually Transmitted Diseases
Branch at the National Institutes of Health (NIH), the Division of AIDS at the
NIH and the Contraceptive Research and Development Program (CONRAD) - which is
affiliated with USAID. In addition to the Company's $100,000 Small Business
Innovation Research Program ("SBIR") grant from the NIH for STD Prevention, the
NIH has also been indirectly funding the Company's related research at the
University of Pittsburgh for the last two years. In early 1999, the testing of
D2A21 for prevention of Chlamydia in a primate model is expected to begin.
The Company is also conducting tests to determine the effectiveness of its
Peptidyl MIM's in treating pulmonary multi-drug resistant bacterial infections,
in appropriate animal models. The Company has received an additional $100,000
SBIR grant from the NIH for its pulmonary infection pre-clinical program.
The Company has demonstrated antimicrobial activity against a broad spectrum of
bacterial pathogen. The Peptidyl MIM's have potent in vitro activity against
pathogens from species of: Staphylococcus, Pseudomonas, Enterococcus,
Streptococcus, E. coli, Gonococcus and Chlamydia The Company's compounds have
shown in vitro efficacy against all of these dangerous pathogens, as well as
methicillin-resistant Staphyococcus aureus (MRSA) and vancomycin-resistant
enterococcus (VRE). The Company has demonstrated that its Peptidyl mimes are
effective in increasing survival when injected sub-eschar into Pseudomonas
infected mouse model. In another animal model, the Company compound successfully
eliminated a protozoal infection (Chagas disease), when administered
intravenously in mice.
A major problem, which strongly encourages the development of new class of
antibiotics agents, is the fact that many common pathogens are becoming
resistant to the therapeutics that have treated patients for the last forty
years. Each year in the United States, about two million cases of infection are
contracted by people while they are in the hospital. Infection remains the
principal cause of death of hospitalized patients in the United State, and one
of the leading causes of all deaths throughout the world. Treatment of infection
is a rapidly increasing concern because of the exponential rate of emergence of
antibiotic-resistant bacteria, compounded by the lack of new antibiotic options
effective against these
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organisms. The Company is optimistic that their Peptidyl MIM's will be an
effective alternative to antibiotics in treating infection. If the Peptidyl
MIM's are effective the evolution of antibiotic-resistant bacteria will also
become a moot issue.
PHARMACEUTICAL DEVELOPMENT SCHEDULE
In addition to its prostate cancer therapeutic, the Company is working to
develop a number of other pharmaceutical products. After completing its first
Phase I prostate cancer trials, the Company presently intends to begin
additional clinical programs for other cancers.
Human clinical trials are typically conducted in three sequential phases which
may overlap. Phase I involves the initial introduction of the drug into human
subjects or patients where the product is tested for safety, dosage, tolerance,
absorption, metabolism, distribution and excretion. Phase II involves studies in
a limited patient population to (i) identify possible adverse effects and safety
risks, (ii) determine the efficiency of the product for specific, targeted
indications, and (iii) determine dosage tolerance and optimal dosage. When Phase
II evaluation demonstrates that the product may be effective and has an
acceptable safety profile, Phase III trials are undertaken to further evaluate
dosage and clinical efficacy and to further test for safety in an expanded
patient population at multiple clinical study sites. A pivotal Phase III trial
is an adequate and well-controlled study which provides the primary basis for
determining whether there is "substantial evidence" to support the claims of
effectiveness for new drugs and forms the basis for an NDA. The regulatory
authority or the sponsor may suspend clinical trials at any point in this
process if either entity concludes that clinical subjects are being exposed to
an unacceptable health risk, that the trials are not being conducted in
compliance with applicable regulatory requirements, or for other reasons.
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AGRICULTURAL PLANT GENES
The development of pharmaceutical applications using Peptidyl MIM's is the
Company's primary focus. However, over the past few years, as the breadth of the
technology was explored, the Company's agricultural genes were also very well
received by the agribusiness community. So much so that business opportunities
developed rapidly and a substantial value has already been achieved. The Company
intends to use the proceeds from the license of its agricultural application to
help fund pharmaceutical product development of its anti-cancer therapeutics.
The application of biotechnology to agricultural crops is directed to the
creations of differentiated, value-added plants and products which improve
production, extend shelf life, prevent pathogenic disease, enhance nutritional
value and reduce the negative environmental impact of potentially hazardous
chemicals. Genetically engineering crops reduces the time to develop new crops
through accelerated cross breeding of crops. In addition to speed, genetic
engineering enables the designer to introduce characteristics, in particular
pest and disease resistance, which would most likely not be feasible with
traditional techniques.
Perhaps the most fundamental driving force for these new crops is the basic
recognition that the world's population is growing by over 50 million people per
year. At the same time, as economies improve in developing countries, the demand
for food increases faster than the population, or their ability to produce it.
The president of a large agricultural biotechnology company has stated that the
output per acre will need to double in the next thirty years, just to maintain
the current levels of hunger and malnutrition.
DISEASE RESISTANT CROPS
In November 1997, the Company concluded a significant exclusive licensing
agreement with Mycogen Corporation to utilize the Company's antimicrobial plant
genes in developing disease resistant agricultural crops. Mycogen is a large
agricultural biotechnology company based in San Diego, California. In October
1998, The Dow Chemical Co. purchased the remaining share of Mycogen that it did
not already own thereby making Mycogen a wholly owned subsidiary of The Dow
Chemical Company. Dow Chemical is a $20 billion conglomerate with significant
business interests in the agricultural business sector.
The Company received over $1.2 million from Mycogen as an initial payment in
Fiscal 1997. Under the agreement, Mycogen will be responsible for all subsequent
development and commercialization costs to fully develop, protect and
commercialize this unique technology. Mycogen will also seek third parties for
commercialization in order to accelerate development and to expand the number of
different crops being commercialized.
In November 1998 the Company amended the aforementioned agreement with Mycogen
adjusting the milestone and related payments and minimum royalties. The
modification provided for an additional exclusive license for the Company's
agricultural nutrition technologies.
The Mycogen Agreement conveys to Mycogen all rights with regard to the
development and use of the technology. Mycogen has a three year period from the
date of the Agreement to pursue the commercialization of the technology covered
by the Agreement. After that time should Mycogen not successfully commercialize
a technology the Company has the right to bring possible interested parties to
Mycogen but Mycogen retains the rights to the technology until such time as
Mycogen grants those rights to a third party or return them to the Company.
Including disease resistance and nutrition, the revised agreement calls for over
$20 million in payments to the Company, as Mycogen commercializes the
agricultural technology, exclusive of royalties, for license fees, research
support and milestone payments.
The Mycogen milestone payments under the initial agreement (disease resistance)
are expected, based upon current discussions with Mycogen, to begin in 2002 for
regulatory approval or first sale. Additional milestone payments will be
received in 2002 - 2008 for the first commercial sale of certain crops and for
the first commercial sale of other crops not specified in the agreement. The
term of the initial agreement is the later of the expiration of the last patent
or the cessation of sales of products covered by the license.
The Mycogen milestone payments under the addendum (nutrition enhancement) are
expected, based upon current discussions with Mycogen, to begin in 1999 for the
achievement of technical feasibility benchmarks in monocots and dicots.
Additional milestone payments will be received in 2000 - 2008 for animal feeding
benchmarks, the first commercial sale of certain crops, for the first commercial
sale of other crops not specified in the agreement and the achievement of
cumulative gross margin benchmark sale of certain crops. The term of the
addendum is the later of the expiration of the last nutrition patent or the
cessation of sales of products covered by the license.
The structure of the Mycogen partnership is such that Mycogen assume nearly all
responsibilities and costs for product development, regulatory approval and
marketing. The Company will need relatively few resources to support this
licensee of its technology
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except that the services of Mr. Jesse Jaynes, the Company's Chief Scientist, and
two to four full time equivalent employees will provide technical assistance and
research support.
One example of the effectiveness of the Company's technology was demonstrated by
the U.S. Department of Agriculture ("USDA") against Erwinia carotvora, commonly
known as potato "soft rot". Soft rot affects tubers while in storage or in the
soil prior to harvest and can decay to seed tubers or seed pieces after
planting. Soft rots also cause the decay of numerous other fleshy fruits and
vegetables, such as cucumbers, onions, tomatoes and lettuce and some ornamental
plants, such as iris. Soft rot can cause extensive damage to potatoes in storage
within a few hours.
The experiments conducted to test efficacy of soft rot protection indicated that
those tubers which contain the Company's genes almost totally resisted rotting.
The test results indicate that after a five day incubation period, compared to
the control group, the amount of soft rot reductions achieved ranged from 85% to
96%. This is a highly significant result that has not been achieved before in
potatoes. Losses caused by soft rot diseases are estimated at 10% in the United
States or about $300 million, and often much higher in other countries.
Most transgenic development for crop protection is targeted at replacing
insecticides or increasing herbicide resistance. The Company believes its
success and patent position in controlling bacterial and fungal diseases is
unique. Fungicide expenditures in the United States and the world are $550
million and $4.1 billion, respectively. United States farmers purchase about $4
billion of seeds each year.
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NUTRITIONAL ENHANCED CROPS
In addition to disease resistance traits, the Company has invented "storage
protein" or nutrition genes, DNP, which contain all the essential amino acids
for healthy animal or human growth. The first field proof of this concept has
been obtained in sweet potatoes, in testing conducted under the direction of Dr.
C.S. Prakash, Professor and Director of the Center for Plant Biotechnology at
Tuskegee University. Sweet potatoes grown with the Company's nutrition genes
produce all of the essential amino acids required for daily consumption.
Remarkably, the overall protein levels in the sweet potatoes averaged over 16%
compared to the normal levels of less than 5%.
One of the crops which historically valued additional protein is wheat for food
uses. Standard wheat flour contains about 11% protein. Commercial users of flour
often add wheat gluten to achieve a higher protein content. Wheat with a higher
protein content, in the 14% to 17% range, can command premiums ranging from
$0.20 to $1.25 per bushel. Accordingly, a higher protein wheat offers a market
opportunity of several hundred million annually.
The Company's patented nutrition technology could also be very important for
U.S. and world animal feed producers. In the future, animal feed producers may
be able to obtain the essential amino acids they require, in constructing their
feed rations for poultry and swine, directly from corn, sorghum or even
soybeans. The savings on their feed bill could be substantial, in addition to
avoiding some of the problems that occur occasionally from the use of
animal-based ingredients in feed rations.
Plants are generally deficient in the essential amino acids that all animals
including humans need to grow and sustain health. Of the twenty essential amino
acids humans need, only about twelve are synthesized naturally, the other eight
must be ingested regularly to sustain health. Infants and young children, are
particularly at risk. Millions of young people die or suffer permanent mental
and physical damage yearly as a result of insufficient essential amino acid
intake. In developed countries, such crops could have considerable appeal to
vegetarians.
Worldwide, the market for the Company's nutrition genes could easily be $1
billion per year within ten years. This technology, another example of Dr.
Jaynes' design methodology, is also supported with a United States patent and a
number of additional filings.
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GOVERNMENT REGULATION
Drug Approval Process
Regulation by the governmental authorities in the United States and other
countries is a significant factor in the development, production and marketing
of the Company's proposed products. All of the Company's products will require
regulatory approval by governmental agencies prior to commercialization. In
particular, human therapeutic products are subject to rigorous preclinical and
clinical testing and other approval procedures in the United States by the FDA
and similar health authorities in foreign countries. Various federal statutes
and regulations also govern or influence the testing, manufacturing, quality
control, safety, labeling, storage, record-keeping and marketing of such
products. The process of obtaining these approvals and the subsequent compliance
with appropriate federal and foreign statutes and regulations require the
expenditure of substantial resources. Any failure by the Company or its
collaborators or licensees to obtain, or any delay in obtaining, regulatory
approval could adversely affect the marketing of any of the Company's products
and its ability to receive revenues therefrom. The Company has neither applied
for nor received regulatory approval to market any products.
The steps required before a pharmaceutical agent may be marketed in the United
States include (i) preclinical laboratory, in vivo and formulation studies, (ii)
the submission to the FDA of an IND, which must become effective before human
clinical trials may commence, (iii) adequate and well controlled human clinical
trials to establish safety and efficiency of the proposed drug in its intended
indication, (iv) the submission of a New Drug Application ("NDA") to the FDA,
and (v) the FDA approval of the NDA.
In order to clinically test, produce and market products for diagnostic or
therapeutic use, a company must comply with mandatory procedures and safety
standards established by the FDA and comparable agencies in foreign countries.
Before beginning human clinical testing of a potential new drug, a company must
file a IND and receive clearance from the FDA. The IND is a summary of the
preclinical studies which were carried out to characterize the drug, including
toxicity and safety studies, as well as an in-depth discussion of the human
clinical studies which are being proposed. Approval of a local institution
review board ("RIB") and informed consent of trial subjects is also required.
Human clinical trials are typically conducted in three sequential phases which
may overlap. Phase I involves the initial introduction of the drug into human
subjects or patients where the product is tested for safety, dosage, tolerance,
absorption, metabolism, distribution and excretion. Phase II involves studies in
a limited patient population to (i) identify possible adverse effects and safety
risks, (ii) determine the efficiency of the product for specific, targeted
indications, and (iii) determine dosage tolerance and optimal dosage. When Phase
II evaluation demonstrates that the product may be effective and has an
acceptable safety profile, Phase III trials are undertaken to further evaluate
dosage and clinical efficacy and to further test for safety in an expanded
patient population at multiple clinical study sites. A pivotal Phase III trial
is an adequate and well-controlled study which provides the primary basis for
determining whether there is "substantial evidence" to support the claims of
effectiveness for new drugs and forms the basis for an NDA. The regulatory
authority or the sponsor may suspend clinical trials at any point in this
process if either entity concludes that clinical subjects are being exposed to
an unacceptable health risk, that the trials are not being conducted in
compliance with applicable regulatory requirements, or for other reasons.
The results of product development, preclinical studies and clinical studies are
submitted to the FDA as part of an NDA for approval of the marketing and
commercial shipment of the product. The FDA may deny approval of an NDA if
applicable regulatory criteria are not satisfied, or may require additional
data. Even if such data is submitted, the FDA may ultimately decide that the NDA
does not satisfy its criteria for approval. Once issued, a product approval may
be withdrawn if compliance with regulatory standards is not maintained or if
problems occur after the product reaches the market. In addition, the
10
<PAGE> 12
FDA may require testing and surveillance programs to monitor the effect of
approved products which have been commercialized, and it has the power to
prevent or limit further marketing or a product based upon the results of these
post-marketing programs.
Satisfaction of these FDA requirements, or similar requirements by foreign
regulatory agencies, typically takes several years and the time needed to
satisfy them may vary substantially, based upon the type, complexity and novelty
of the drug product. The effect of government regulation may be to delay or to
prevent marketing of potential products for a considerable period of time and to
impose costly procedures upon the Company's activities. There can be no
assurance that the FDA or any other regulatory agency will grant approval for
any products being developed by the Company on a timely basis, or at all.
Success in preclinical or early stage clinical trials does not assure success in
later stage clinical trials. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations which could delay, limit
or prevent regulatory approval. If regulatory approval of a product is granted,
such approval may impose limitations on the indicated uses for which a product
may be marketed. Further, even if regulatory approval is obtained, later
discovery of previously unknown problems with a product may result in
restrictions on the product, including withdrawal of the product from the
market. Delay in obtaining or failure to obtain regulatory approvals would have
a material adverse affect on the Company's business. Marketing the Company's
products abroad will require similar regulatory approvals and is subject to
similar risks. In addition, the Company is unable to predict the extent of
adverse government regulation that might arise from future United States or
foreign governmental action.
Before the Company's products can be marketed outside of the United States, they
are subject to regulatory approval similar to that required 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 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 countries, the sales price of a product must also be approved. The
pricing review period often begins after market approval is granted. No
assurance can be given that, even if a product is approved by a regulatory
authority, satisfactory prices will be approved for the Company's products.
No assurance can be provided that the Company's INDs or NDAs will be
successfully reviewed by the FDA, or that similar applications will be
successfully reviewed by foreign regulatory authorities. Further, the FDA and
foreign authorities may at any time take legal or regulatory action against a
product or the Company is it concludes that a product has not complied with
applicable laws and regulations or that earlier evaluations of a product's
safety or effectiveness may not have been adequate or appropriate. Such action
may include, but is not limited to, restrictions on manufacture and shipment of
products, seizure of products, injunctions and civil and criminal penalties. The
FDA's policies may change and additional government regulations may be
promulgated which could prevent or delay regulatory approval of the Company's
potential products. Moreover, increased attention to the containment of health
care costs in the United States and in foreign markets could result in new
government regulations which could have a material adverse effect on the
Company's business. The Company is unable to predict the likelihood of adverse
governmental regulation which might arise from future legislative or
administrative action, either in the United States or abroad.
ENVIRONMENTAL REGULATIONS
The Company does not incur significant costs in complying with federal or state
environmental regulations due to the nature of its activities.
11
<PAGE> 13
COMPETITIVE CONDITIONS
There exists intense competition in the pharmaceutical and biotechnology
industries. The Company faced competition from a variety of sources, both direct
in indirect. There are at least seven other biotechnology companies that are
developing peptide compounds for antimicrobial or anti-cancer applications.
These companies include: Applied Microbiology, Cubist Pharmaceuticals,
Intrabiotics, Magainin Pharmaceuticals, Micrologix Biotech, Microcide
Pharmaceutical, Inc. and Xoma Corporation.
One company, appears to be the leader in getting a product into the marketplace
with the development of a topical infection treatment of diabetic foot ulcers.
It has been submitted to the FDA for NDA approval. Should it be approved, it
would be the first peptide based antibiotic approved by the FDA. Upon that
event, cationic peptides would be considered a new class of anti-infective
therapy. The Company believes that FDA approval may foster acceptance of other
peptide therapeutics. Also, with the increase of multi-drug resistant bacterial
strains, peptide therapeutics may soon be in high demand, since they utilize a
different mechanism of action than traditional antibiotics.
Based on the potency of its Peptidyl MIMs as reported to the Company by
independent medical collaborators, the Company believes that its Peptidyl MIMs
will be more effective than their competitors', at much lower concentrations.
The Company's competition appears to be focusing primarily on anti-bacterial
applications, and unlike the Company, has not reported similar successes in the
cancer area. Nor do these competitors have any agricultural products in their
pipeline. Given the Company's patent position in the agricultural area, the
Company feels it is in a strong position to dominate this area as compared to
the aforementioned competitors. To the best of the Company's knowledge, there
are few, if any, peptide biotechnology companies in the plant genetic arena.
In addition to peptide competitors, there are, of course, many companies working
to develop new antibiotics and cures for infectious diseases and cancers. This
bodes well for the Company since large pharmaceutical companies are actively
seeking new compounds. As the Company's product development progresses, its
technology becomes more appealing to a wider selection of potential partners.
TECHNOLOGY BASE
The Company's technology was designed by Dr. Jaynes, who has over fifteen years
of peptide design experience and is a biochemist by training. He is a Co-Founder
of the Company and serves as Vice President of Research. The Company believes
having a molecular architect as part of the management team distinguishes the
Company from its peptide biotech competitors which have typically in-licensed
their lead molecules. As a result, the Company has a structure and process in
place for creating a pipeline of new molecular product applications.
Peptides with lytic properties occur in nature and are part of the natural
immune systems of many plants, animals and insects. The Company's core science
is the ability to design molecules which are many times more powerful that those
occurring in nature, with minimal toxicity. The Company's Peptidyl MIMs range in
length from 17 to 40 amino acids and they have no sequence homology to the
peptides found in nature. In its discovery process, the Company has identified
and filed patents on a number of characteristics, which, when incorporated into
the design of the molecule, create compounds with unique properties. These
design "rules" include parameters for charge density, length, amphipathy,
hydrophobicity and spatial orientation. When organized, these characteristics
permit the ability to design molecules with increased specificity and
12
<PAGE> 14
activity, which means some Peptidyl MIMs are more effective against cancer than
bacteria, for example.
Understanding the rules for creating the desired properties an important aspect
of the Company's core technology. The Company has identified several thousand
different molecules which define each class of Peptidyl MIMs. This relatively
small number represents the spectrum of molecules with the most desirable
features and benefits compared to the hundreds of millions of potential
combinations and permutations which could theoretically be created.
The understanding of these core discoveries are currently being significantly
expanded. In a partnership with Mycogen, an extensive evaluation process is now
underway. Should this process yield new breakthroughs or discoveries, the
Company will retain all rights to non-agricultural applications.
MECHANISM OF ACTION
In general, the Peptidyl MIMs are believed to act by disrupting the membrane or
cell wall, thereby allowing fluids to enter the cell and cause the cell to be
destroyed or lysed. Because healthy human cells have a more complex cytoskeletal
structure, which a pathogenic cell does not possess, the healthy cell has the
ability to repair any damage. In the case of bacteria, this method of action
effectively precludes bacteria from mutating to avoid destruction, thereby
giving the Company's compounds a competitive advantage over most other
antibiotics where drug resistance is becoming a major problem. The Peptidyl MIMs
are also effective directly against cancer cells. Cancer cells are, in effect,
unhealthy cells, and therefore have weakened cytoskeletal structures. In the
case of cancer, the Company's in vivo results are better than the in vitro
results. Hence, additional mechanism of actions are being investigated.
For cancer, the general theory for mechanism of action of the Peptidyl MIMs has
been that of initial membrane disruption with subsequent cell lysis and death of
the patient or the cell. However, research results suggest that additional
factors come into play in the in vivo situation. The Company is accumulating
evidence which indicates that D2A21 may have anti-angiogenic properties in
addition to its lytic function. The anti-angiogenic property interferes with
tumor blood supply, and reduces the growth rate for the primary tumor
GENETIC ENGINEERING
The Company has designed plant genes that destroy many agricultural fungal and
bacterial pathogens once inserted transgenically into the genome of crops. The
crops then take on the disease resistant trait and are able to express the
peptide into future generations of the plant. The Company has constructed an
inventory of genes which are being used to incorporate disease resistance into
plants, securing good yields while reducing the use and cost of environmentally
undesirable chemicals.
Genetically engineering crops accelerates the traditional time consuming cross
breeding of crops. In addition to speed, genetic engineering enables the
designer to introduce characteristics, in particular pest and disease
resistance, which would likely not be feasible with traditional techniques.
Although plant genetic engineering still faces regulatory hurdles, there have
been significant recent breakthroughs in acceptability of biologically enhanced
crops. Bt genes (developed by Monsanto, Mycogen and others), which help resist
insects, are examples of the major efforts underway to genetically modify
plants.
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<PAGE> 15
The Company has also designed another type of plant gene, a custom designed
storage protein which has significant potential for improving animal feeds as
well as human nutrition, by improving the amino acid profile of various food and
feed crops. Recent independent results of this gene indicate that the total
protein content, not just the deficient amino acids, could be increased four
fold.
The principal goal in plant protein design has historically been to increase one
or two individual amino acids. The historic approach has generally not been
successful because they were unable to stabilize sufficient quantities of the
target proteins. Dr. Jaynes took a broader approach and built upon the
structural requisites he used to design proteins with anti-bacterial traits.
Dr. Jaynes designed protein molecules which when produced by the plant, would
produce the eight most essential amino acids needed by humans, and offsetting
those in which the crops, on average, were most deficient. A key step was to
create a molecular structure that mimics a natural plant storage protein's
ability to form stable aggregates and accumulate within the plant cell. This
design concept ASP (Artificial Storage Protein) achieved the goal of a
qualitative improvement in protein content. The structural arrangement also
facilitates the bioactivity of the essential amino acids by setting up targets
for the main digestive enzymes of the mammalian gut, and thereby breaking down
the protein into its constituent amino acids.
The design concept developed by Dr. Jaynes also accomplished a quantitative
increase in total protein content. Normally a plant produces a variety of
proteins. Many of these are broken down to accomplish various plant tasks and
the plant produces new proteins. The ASP gene reduces the "turnover" (loss of
protein) of the natural proteins within the plant, thereby allowing for greatly
increased protein content. The reasons given for the turnover reduction are not
yet understood, but the result of inserting an ASP gene yields significant
qualitative and quantitative improvement in protein content without degradation
of other important characteristics.
Building on the ASP success, Dr. Jaynes has established a design methodology for
optimizing a given crop for a given application, e.g. corn that satisfies the
specific feeding requirements of hogs.
PEPTIDYL MIM PRODUCTION
Peptides are currently produced using a chemical synthesis process. Using
synthesis, the Company's Peptidyl MIM's typically cost $1,200 to $5,000 per
gram, depending upon the volume and other characteristics. Large scale
production will lower this cost significantly. Nevertheless, for most
pharmaceutical application, because Peptidyl MIMs are active in very low
concentrations, even at this high cost level, the Peptidyl MIMs are expected to
be competitively priced.
The peptide for nonclinical and initial clinical development activities have
been manufactured by a third party vendor, using a manufacturing method based
upon currently available solid phase peptide synthesis technology. The
development of specifications and establishment of analytical methods is being
carried out jointly by MPS and the Company. The manufacturer selected by the
Company will perform quality control and stability testing of the drug
substance. For commercial quantities there are a number of companies with
capabilities to produce peptides on a large scale. The Company anticipates it,
or its licenses, will be able to contract for suitable large scale peptide
production. Implementation of all of the methods is the responsibility of the
manufacturer. The
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<PAGE> 16
Company has established a standard commercial relationship with a manufacturer
to produce the clinical supplies that the Company currently requires.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
The Company has filed a number of United States patent applications, as well as
corresponding applications in the PCT and foreign countries.. The Company's
patent strategy is to strive for broad coverage for a class of molecules for a
wide range of diseases in humans, animals and plants. The Company's lead
molecule, D2A21 is patented as a composition of matter. Additionally, the
Company has in excess of 40 molecules patented a compositions of matter.
For its agricultural applications, the Company has acquired the exclusive rights
to three U.S. and five international patents from Louisiana State University
("LSU"). The license from LSU expires in 2014. These patents include broad
claims for plants with bacterial and fungal resistance or enhanced nutrition.
Dr. Jaynes, the Company's Vice President of Research, was the principal
investigator on these patents when he was a professor and researcher at LSU.
These patents also carry early filing dates, thereby giving the Company a very
strong patent position in the disease resistant and nutrition enhanced plant
area. The Company has also been assigned Dr. Jaynes' exclusive rights to patents
related to has earlier work at LSU.
STATUS OF DEMEGEN PATENTS
<TABLE>
<CAPTION>
Patent # Title
- -------- -----
<S> <C>
5,561,107 Method of Enhancing Wound Healing by Stimulating Fibroblast
and Keratinocyte Growth in Vito, Utilizing Amphipathic Peptides
(expires October 1, 2013)
5,597,945 Plants Generically Enhanced for Disease Resistance (expires
January 28, 2014)
5,597,946 Method for Introduction of Disease and Pest Resistance into Plants
and Novel Genes Incorporated into Plants Which Code Therefore
(expires January 28, 2014)
5,717,064 Methylated Lysine-Rich Lytic Peptides and Method of Making Same by
Reductive Alkylation (expires February 10, 2015)
5,744,445 Method of Treating Pulmonary Diseases with Non-Naturally
Occurring Amphipathic Peptides (expires April 28, 2015)
5,773,413 Method of Combating Mammalian Neoplasias and Lytic Peptides
Therefor (expires February 10, 2015)
5,811,654 Plants genetically enhanced for nutritional quality (expires
July 25, 2006)
Pending Numerous other applications have been submitted
</TABLE>
EMPLOYEES
The Company currently has nine employees but also supports, directly or
indirectly, some twenty researchers at academic and other research institutions.
These academic and other research institutions are the recipients of SBIR grants
requested by the Company, are performing pre-clinical research and/or assisting
the Company with its study of its peptides.
15
<PAGE> 17
COMPANY HISTORY AND GENERAL INFORMATION
The Company was formed after the July 27, 1992 acquisition of the assets of The
Demeter Corporation by Excelsior Capital Corporation ("Excelsior"). Excelsior
was incorporated in Colorado on September 16, 1987. Excelsior acquired all of
the assets of The Demeter Corporation in exchange for 6,625,821 shares of
Excelsior's $0.001 par value common stock. The Demeter Corporation's assets
consisted of intangible assets related to various biotechnology applications in
the fields of human and animal health care, agricultural and commercial
chemicals. Subsequent to the acquisition, Excelsior changed its name to Demeter
BioTechnologies, Ltd. On September 18, 1998, the shareholders approved the
recommendation of the Company's Board of Directors to change the Company's name
to Demegen, Inc.
The Company is a "Development Stage Company" that designs synthetic
peptide/protein compounds and genes for pharmaceutical and agricultural
applications. Current development programs include a new treatment for prostate
cancer and sexually transmitted diseases, and two transgenic agricultural
applications - one to prevent plant diseases, the other to increase the
nutritional value of food and feed crops.
The Company has two licenses in place for its agricultural technology, disease
resistance and nutritional enhancement, to Mycogen which has produced historic
revenue streams and will continue to produce revenue as Mycogen proceeds towards
commercialization of these technologies. The Company is focusing its
pharmaceutical efforts upon the commercialization of its cancer therapeutic
which it expects to license to a major pharmaceutical firm in 2000-2001, when
the therapeutic will be either in Phase II or entering Phase III clinical
trials. While the Company does not have any formal agreements with
pharmaceutical firms at this time, it is hopeful that an agreement will be forth
coming once the cancer therapeutic is in Phase II Clinical testing.
The Company's offices and laboratory are located at 1051 Brinton Road,
Pittsburgh, PA 15221 and its telephone number is 412-241-2150. The Company
occupies 3,000 square feet of leased space. The lease is for a three year term,
expiring September 2001, at a monthly rental of $3793. Prior to the Company's
move to Pittsburgh in September 1998, the Company was located in Durham, North
Carolina.
ITEM 2 - FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The following table sets forth certain financial data for, and as of the end of,
the years ended September 30, 1998, 1997, 1996, 1995 and 1994 and for the period
December 6, 1991 (inception) to December 31, 1998:
<TABLE>
<CAPTION>
December 6
Year Ended September 30, 1991 (Inception)
------------------------------------------------------------------------- to December 31,
1998 1997 1996 1995 1994 1998
---- ---- ---- ---- ---- ----------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Grant and Other Income $ 1,376,918 $ 764,834 $ 271,777 $ 167,592 $ 79,000 $ 3,340,321
Total Expenses 3,370,671 1,708,607 2,841,255 3,041,431 1,847,428 14,661,256
</TABLE>
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<PAGE> 18
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net Loss (1,993,753) (943,773) (2,569,478) (2,873,839) (1,768,428) (11,320,935)
Net Loss per Share (dilutive) $ (0.09) $ (0.05) $ (0.17) $ (0.35) $ (0.15)
Dividends per Share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Weighted Average Number
of Common Shares
Outstanding 23,867,091 19,537,047 15,479,889 12,529,314 11,478,206
BALANCE SHEET DATA:
Cash & Cash Equivalents 1,686,658 $ 310,252 $ 19,266 $ 1,004 $ 38,843
Working Capital (deficiency) 1,329,541 (1,498,477) (2,754,591) (3,382,190) (1,576,040)
Total Assets 2,114,750 651,963 156,147 106,746 97,624
Long-term obligations -0- -0- -0- 13,899 16,869
Deficit accumulated during
development stage (11,501,136) (9,443,772) (8,499,999) (5,930,521) (3,056,682)
Redeemable convertible preferred
Stock 1,510,484 -0- -0- -0- -0-
Shareholder's Equity
(Deficit) (595,519) (1,158,216) (2,642,523) (3,293,313) (1,536,103)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
December 31,
-------------------------------------
1998 1997
------------ -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Grant and Other Income $ 642,400 $ 277,024
Total Expenses 525,810 509,014
Net Income (Loss) 116,590 (231,990)
Net Loss per Share (dilutive) $ 0.00 $ (0.01)
Dividends per Share $ 0.00 $ 0.00
Weighted Average Number of Common
Shares Outstanding 26,076,138 21,849,399
------------ -----------
</TABLE>
<TABLE>
<CAPTION>
As of
December 31,
1998
------------
<S> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents $ 1,798,257
Working Capital (deficiency) 1,479,374
Total Assets 2,160,517
Long-term obligations -0-
Deficit accumulated during
development stage (11,448,543)
Redeemable convertible preferred
Stock 1,574,481
Shareholder's Equity (Deficit) (57,037)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
GENERAL
Since commencement of operations in 1992, the Company has been engaged in
research and development activities, including conducting preclinical studies
and clinical trials, and recruiting its scientific and management personnel,
establishing laboratory facilities and raising capital. The Company has not
received any revenue from the direct sale of its products to the general public
but has received grant monies and license payments from other corporations from
the license of the Company's technology.
The Company is a "Development Stage Company" that designs synthetic
peptide/protein compounds and genes for pharmaceutical and agricultural
applications. Current development programs include a new treatment for prostate
cancer and sexually transmitted diseases, and two transgenic agricultural
applications - one to prevent plant diseases, the other to increase the
nutritional value of food and feed crops.
The Company has two licenses in place for its agricultural technology, disease
resistance and nutritional enhancement, to Mycogen which has produced historic
revenue streams and will continue to produce revenue as Mycogen proceeds towards
commercialization of these technologies. The Company is focusing its
pharmaceutical efforts upon the commercialization of its cancer therapeutic
which it expects to license to a large
17
<PAGE> 19
pharmaceutical producer.
RESULTS OF OPERATION:
DECEMBER 31 1998 VS 1997
In the quarter ended December 31, 1998 (Fiscal 1999) grants, license fees and
other income increased significantly to $0.6 million from $0.3 million in the
year earlier prior quarter ending December 31, 1997 (Fiscal 1998). this
increase was primarily due to a $0.35 million licensing fee and research
funding received from Mycogen Corporation ("Mycogen") as part of the
modification of its license agreement providing Mycogen with an additional
license for the Company's agricultural nutrition technologies. Additionally, a
cancer charity made a grant of $0.25 million during the Fiscal 1999 quarter as
part of an ongoing program to fund the Company's development of cancer fighting
drugs. During the Fiscal 1998 quarter a grant of $0.25 million was also
received from this fund. Additionally, the Company received $0.02 million of
interest on its cash balances.
Expenses remained relatively constant for the quarters at $0.5 million.
The Company did not have a federal or state income tax provision in either
Fiscal 1999 or 1998 due to the loss recorded in each year.
The amounts described above resulted net income of $0.1 million in the Fiscal
1999 quarter as compared to a net loss of $0.2 million for the Fiscal 1998
quarter.
SEPTEMBER 30 1998 VS 1997
In the year ended September 30, 1998 (Fiscal 1998) grants and other income
increased significantly to $1.4 million from $0.8 million in the year ended
September 30, 1997 (Fiscal 1997). This increase was due to a $0.9 million
licensing fee received from Mycogen Corporation ("Mycogen") as part of the
license entered into during Fiscal 1998. Additionally, a cancer charity made a
grant of $0.25 million during Fiscal 1998 as part of an ongoing program to fund
the Company's development of cancer fighting drugs. During Fiscal 1997 a grant
of $0.5 million was received from this fund. Additionally, the Company
recognized $0.1 million of revenue related to research expenses funded by
Mycogen and received $0.04 million of interest on its cash balances.
Research and development expenses increased to $0.9 million in Fiscal 1998 from
$0.6 million in Fiscal 1997 due to the Company's increased funding relative to
its cancer and sexually transmitted disease drug research. During Fiscal 1998
the Company focused its research and development on its cancer therapeutic
achieving positive results in the testing of its lead compound in a number of
models.
General and administrative expenses increased to $2.3 million in Fiscal 1998
from $0.9 million in Fiscal 1997. Included in general and administrative
expenses was a non-cash charge of $1.7 million for the issuance of below market
stock options issued to employees and directors during Fiscal 1998 that vested
during the year. Exclusive of the non-cash charge, general and administrative
expenses decreased by $0.25 million to $0.62 million due to decreased legal
costs and overall cost containment.
Interest expense decreased to $0.03 million in Fiscal 1998 from $0.17 million in
Fiscal 1997 due to the $1.6 million decrease in amounts payable to related
parties through the conversion of certain amounts to restricted stock and
forgiveness of certain amounts payable late in Fiscal 1997. The receipt of the
license fee from Mycogen in March 1998 put the Company in a cash positive
position and was used to eliminate the majority of interest bearing payables to
employees and directors. Additionally, the conversion and forgiveness of
employee debt in Fiscal 1997 eliminated a significant amount of liabilities
which were interest bearing.
Depreciation and amortization increased to $0.12 million in Fiscal 1998 from
$0.07 million in Fiscal 1997. The increase was primarily due to increased
amortization of the License Agreement with LSU which required an initial payment
of 700,000 shares (valued at $245,000) of the Company's common stock in May 1997
and the increase in amortization of capitalized patent costs associated with the
Company's product processes.
The Company did not have a federal or state income tax provision in either
Fiscal 1998 or 1997 due to the loss recorded in each year. An allowance was
recognized to offset the tax benefit until such time that the Company generates
taxable income.
The amounts described above resulted in a net loss of $2 million for Fiscal
1998. The net loss would have been $0.3 million if the aforementioned non-cash
charge was excluded
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<PAGE> 20
SEPTEMBER 30, 1997 VS 1996
In the year ended September 30, 1997 grants and other income increased
significantly to $0.8 million from $0.3 million in the prior year. This was due
to increased grant revenue, primarily from a cancer charity, as the Company
began demonstrating the commercial possibilities of the peptide.
Research and development and general and administrative expenses decreased by
$0.16 million and $0.76 million, respectively, due to a significant refocusing
of the Company's research efforts. During Fiscal 1997 the Company made the
strategic decision to primarily focus upon its Prostate cancer therapeutic.
Therefore, the Company entered into a license agreement with Mycogen relative
to its agricultural applications, and curtailed its research and development
efforts relative to other applications for its peptide.
Interest expense decreased by $0.25 million to $0.17 million due to the
settlements in Fiscal 1997 and 1996 where amounts payable and debt were either
extinguished or settled for a combination of cash and Common Stock of the
Company.
Depreciation and amortization doubled to $0.07 million due to an increase in
depreciation of property, plant and equipment. There was no amortization in
Fiscal 1996 as the Company has just begun capitalizing patent costs associated
with the Company's processes.
The Company did not have a federal or state income tax provision in either
Fiscal 1997 or 1996 due to the loss recorded in each year. An allowance was
recognized to offset the tax benefit until such time that the Company generates
taxable income.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL 1999
During the quarter ended December 31, 1998, the Company's cash and cash
equivalents increased by $0.1 million to $1.8 million. Net cash provided by
financing of $0.03 and net cash provided by operating activities $0.1 million
was partially offset by $0.02 million of net cash utilized by investing
activities.
Specifically, cash inflows from financing activities included $0.01 million was
realized from the exercise of stock options and a $0.02 million increase in
payables to related parties.
The $0.1 million of cash provided by operating activities consisted of the net
income of $0.12 million, $0.04 million of depreciation and amortization, and a
$0.4 million decrease in accounts receivable which was partially offset by a
decrease of $0.07 million in accounts payable and other liabilities.
The $0.01 million of cash utilized by investing activities relates to the
purchase of property, plant and equipment.
FISCAL 1998
During the year ended September 30, 1998, the Company's cash and cash
equivalents increased by $1.4 million to $1.7 million. Net cash provided by
financing of $1.6 million was partially offset by a $0.08 million of net cash
utilized by operating activities and $0.14 million of net cash utilized by
investing activities.
Specifically, cash inflows from financing activities included the $1.9 million
net proceeds from the issuance of preferred stock and warrant to the CEO Venture
fund in June 1998. Additionally, $0.09 million was realized from the exercise
of stock options. These sources of funds were partially offset by a $0.43
million decrease in payables to related parties.
The $0.14 million of cash utilized by operating activities consisted of the net
loss of $2 million and a decrease of $0.14 million decrease in accounts payable
and other liabilities offset by the $1.7 million of non-cash compensation
related to the issuance of below market stock options issued to employees and
directors that vested during the year, $0.12 million of depreciation and
amortization, $0.09 million of stock issued for services and a $0.18 million
increase in unearned revenue relating to the $0.3 million three year
administration fee paid to the Company in October 1997 by Mycogen.
The $0.14 million of cash utilized by investing activities relates to $0.05
million for the purchases of property, plant and equipment and $0.08 million of
patent costs capitalized as intangible assets in the current year.
FISCAL 1997
During the year ended September 30, 1997, the Company's cash increased by $0.3
million. Net cash provided by financing of $0.9 million was partially offset by
a $0.6
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<PAGE> 21
million of net cash utilized by operating activities and $0.07 million of net
cash utilized by investing activities.
Cash from financing activities was generated from $0.1 million net proceeds from
the issuance of the Company's Common Stock and $0.82 million increase in
payables to related parties due to services provided to the Company.
Cash utilized in operating activities was caused by the net loss of $0.94
million and a $0.2 million decrease in accounts payable and accrued expenses.
This was partially offset by $0.7 million of depreciation and amortization and
$0.48 million of stock issued for services rendered to the Company.
Cash utilized by investing activities was primarily due to a $0.08 million
increase in intangible assets due to the capitalization of patent related
expenses.
FISCAL 1996
During the year ended September 30, 1996, the Company's cash increased by $0.02
million. Net cash provided by financing of $1.65 million was almost fully offset
by a $1.58 million of net cash utilized by operating activities and $0.05
million of net cash utilized by investing activities.
Cash from financing activities was generated from $0.48 million net proceeds
from the issuance of the Company's Common Stock and $1.2 million increase in
payables to related parties due to services provided to the Company.
Cash utilized in operating activities was caused by the net loss of $2.57
million and a $0.15 million decrease in interest payable. This was partially
offset by $0.04 million of depreciation and amortization, and a $0.5 million
increase in accounts payable and accrued expenses and $0.54 million of stock
issued for services rendered to the Company.
Cash utilized by investing activities was primarily due to a $0.02 million
increase in intangible assets due to the capitalization of patent related
expenses and $0.03 million of capital expenditures.
Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer program
that is not Year 2000 compliant and has date sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000.
The Company processes its financial information on a commercially sold
accounting package. This package has been modified by the developer such that
they have represented to the Company that it is Year 2000 compliant. The
Company's payroll is processed by a third party processor who has notified the
Company that they are year 2000 compliant. The remaining computer applications
at the Company are not date sensitive and are primarily of a word processing,
data base or scientific research nature.
The Company has not and does not expect to perform an assessment of the Year
2000 preparedness of all of its third party relationships. In making this
decision the Company has considered that there are many vendors for the
products that they purchase should they have to change suppliers due to a Year
2000 problem. The Company has not selected an institution to perform its Phase
I clinical Tests. The issue of Year 2000 preparedness will be part of the
selection process at the time that the institution to handle the clinical
trials is selected.
In the worst case, a Year 2000 failure at one of the Company's vendors could
result in a delay in the availability of an item on order. Except for the
purchase of peptides from vendors, of which the Company keeps a sufficient
inventory to manage short-term requirements, all other items purchased from
third party vendors are of the nature of office supplies and miscellaneous
items. The unavailability of any of the aforementioned would result in the
purchase of the affected items from another vendor as none of these items are
vendor specific.
20
<PAGE> 22
Prospective Information
The Company believes that it has adequate liquidity to fund its operations in
Fiscal 1999. On a long term basis, it will be necessary for the Company to
access additional funding so that it can continue funding the Phase I and Phase
II testing of its therapeutic agents. This funding may be in the form of a
private placement of equity securities or a secondary issuance of securities
into the market.
ITEM 3 - DESCRIPTION OF PROPERTY
The Company's office and lab are located at 1051 Brinton Road, Pittsburgh, PA
15221. The Company occupies 3,000 square feet of leased space. The lease is for
a three year term, expiring September 2001 at a gross monthly rental, including
utilities, of $3,793. Prior to the Company's move to Pittsburgh in September
1998, the Company was located in Durham, North Carolina.
The Company fully utilizes its office space and expects that the laboratory will
be fully operational by the third quarter of Fiscal 1999.
The majority of the Company's application research is conducted by independent
labs, academic and research institutions and commercial partners. The Company's
laboratory focuses primarily on research related to the Company's core
technologies in assisting Mycogen in an ancillary capacity with the development
and commercialization of the agricultural technologies.
The Company believes that these facilities are adequate for its current needs.
ITEM 4 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1998, the ownership of the
Company's Common Stock and Convertible Preferred Stock by (i) each director of
the Company, (ii) all executive officers and directors of the Company as a
group, and (iii) all persons known by the Company to own more that 5% of the
Company's Common and Convertible Preferred Stock.
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------
Title of Number of
Name and Address Class Shares (1) % (1)
- ------------------ --------- ------------ -----
<S> <C> <C> <C>
Richard D. Ekstrom (2) Common 2,608,250 9.38%
1051 Brinton Road
Pittsburgh, PA 15221
Donald A. Guthrie, Ph.D. (3) Common 1,900,000 7.12%
1051 Brinton Road
Pittsburgh, PA 15221
Jesse M. Jaynes, Ph.D. (4) Common 2,172,726 7.84%
1051 Brinton Road
Pittsburgh, PA 15221
</TABLE>
21
<PAGE> 23
<TABLE>
<S> <C> <C> <C>
James E. Thornton (5) Common 733,001 2.79%
1051 Brinton Road
Pittsburgh, PA 15221
John Bridwell Common 972,601 3.72%
1051 Brinton Road
Pittsburgh, PA 15221
Alfonso Lovo-Cordero (6) Common 240,000 0.91%
1051 Brinton Road
Pittsburgh, PA 15221
Konrad Weis Ph.D. Common 200,000 0.77%
1445 Bennington Avenue
Pittsburgh, PA 15217
James Colker (7) Common 9,401,000 30.25%
2000 Technology Drive
Suite 160
Pittsburgh, PA 15219
Philip Sears Common 1,570,000 6.01%
4711 Tamarisk Drive
Oklahoma City, OK 73142
All Directors and Officers Common 18,227,578 51.61%
as a group (8 persons)
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities & Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of December 31, 1998, are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated in the footnotes to this table and pursuant to applicable community
property laws, the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock beneficially owned.
(2) Includes 1,700,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable.
(3) Includes 555,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable.
(4) Includes 1,600,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable and 15,000 shares of Common Stock owned
by Mr. Jaynes' minor child over which he claims beneficial ownership.
(5) Includes 200,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable and 2,000 shares of Common Stock owned by
Mr. Thornton's minor grand-children over which he claims beneficial ownership.
(6) Includes 190,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable
(7) Mr. Colker is the Managing General Partner of the CEO Venture Fund III
("CEO") and, therefore, has beneficial ownership over the Company's Convertible
Preferred Stock
22
<PAGE> 24
and related Warrant held by the Fund. The 4,444,444 shares of Convertible
Preferred Stock are convertible into 4,444,444 shares of the Company's Common
Stock. Additionally, CEO has a Warrant to purchase 4,965,556 shares of the
Company's Common Stock at an exercise price of $0.45 per share. The Warrant
expires on June 14, 2008.
ITEM 5 - DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND OFFICERS
The Company's executive officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Position Director Since
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Richard D. Ekstrom 54 Chairman of the Board of 1996
Directors and President
Jesse M. Jaynes, Ph.D. 47 Vice President of Research 1992
and Director
John Bridwell 66 Director 1999
James Colker 71 Director 1998
Donald A. Guthrie, Ph.D. 72 Director, formerly Executive 1992
Vice President until 1996
Alfonso Lovo-Cordero, LL.D. 71 Director 1992
Konrad M. Weis, Ph. D. 70 Director 1998
James E. Thornton 67 Vice President of Agriculture
</TABLE>
All directors were elected at the annual stockholders meeting on January 22,
1999 for a one year term.
Richard D. Ekstrom has served as Chairman of the Board of Directors and
President of the Company since January 1996. Additionally, Mr. Ekstrom was Chief
Financial officer from December 1994 until August 1998. Mr. Ekstrom holds a B.A.
from Cornell University and an M.B.A. from Boston University. From 1990 through
1991, Mr. Ekstrom was President of Cost Containment Corporation and from 1993
through 1994, he was Chief Operating Officer of Preferred Solutions Inc., both
of which were start-up pharmacy benefit management companies. Mr. Ekstrom is the
founder of Prescription
23
<PAGE> 25
Price Watch, a buying guide for pharmacy benefit programs. From 1968 to 1990, he
was employed by Westinghouse Electric Corporation where he served in a variety
of management positions, including controller, manufacturing manager and
corporate staff positions
Jesse M. Jaynes, Ph.D. is Co-founder of the Company. He has served as Vice
President of Research since 1992. He is the Company's Chief Scientist and the
inventor of the core technologies. He holds an AS. In Biology from the College
of Eastern Utah, a BS in Zoology from Southern Utah State University and earned
his doctorate in BioChemistry at Brigham Young University. He completed post
doctoral fellowships in the Department of Plant Pathology at Montana State
University and the Plant Growth Laboratory at the University of California,
Davis before joining the faculty at Louisiana State University. Dr. Jaynes was
the first to demonstrate that lytic peptides were active against pathogens other
than bacteria and to successfully introduce antimicrobial and nutrition storage
genes into plants. He has authored over seventy-five papers and over thirty
meeting abstracts on peptides.
John Bridwell has been President of Ditch Witch of Oklahoma for the past twenty
years. Presently, he is involved with an Oklahoma health care company; Health
Heaven, Shepard Mall Partnership, Riva Finance Co. and the City of Edmond
Economic Development. He also currently serves as director of First Enterprise
Bank of Oklahoma City
James Colker is the Managing General partner of the CEO Venture Fund since 1985.
He is also chairman of the Pittsburgh Biomedical Development Corporation, the
Pennsylvania Technology Council and trustee of Penn's Southwest Association, as
well as a board member of a number of small advanced technology companies.
Previously, Mr. Colker was Chairman and President of Contraves Goerz
Corporation.
Donald A. Guthrie, Ph.D. is Co-founder of the Company and currently retired.
From 1992 until his retirement in 1996 he was Executive Vice President of the
Company. Previously, he has served as Vice President, Science and Engineering,
Gulf South Research Institute, Manager, New Product Planning, Ciba Geigy
Corporation and Vice President, Corporate Development, Lord Corporation. Dr.
Guthrie is a Founding Member of the Licensing Executives Society and is a former
member of the Pennsylvania Science/Engineering Foundation and a former trustee
of Edinboro College.
Alfonso Lovo-Cordero, LL.D., for the past 8 years has been the President and
Founder of ALCOR International Consultants, which specializes in agricultural
and pharmaceutical business development between the United States and the
developing world. Dr. Lovo was the former Head of State (President) of Nicaragua
from 1972 to 1975. He also served as Secretary of Agriculture of Nicaragua form
1968 to 1972. Dr. Lovo was the former President of numerous FAO (United Nations)
conferences throughout the world related to agriculture.
Konrad M. Weis, Ph.D., retired in 1991 as President and Chief Executive Officer
of Bayer USA Inc., the North American subsidiary of Bayer AG, a chemical,
pharmaceutical and information technology company. Dr. Weis is currently on the
Board of Directors of Michael Baker Corporation, Titan Pharmaceuticals, Inc. and
Visible Genetics Inc, In addition, he is a life trustee of Carnegie Mellon
University and the Carnegie Museums of Pittsburgh.
24
<PAGE> 26
James E. Thornton has served as Vice President of Agriculture since 1993. Mr.
Thornton is a graduate of the University of Denver in International Relation and
of the Senior Managers Program at the John F. Kennedy School of Government at
Harvard University. He was Assistant to the Secretary of Agriculture in the
Kennedy and Johnson Administrations and directed several federal committees on
growth management and agricultural issues. He also served as Associate
Administrator of the Farmer's Home Administration. In the 1980's, Mr. Thornton
was Chief Operating Officer for the Joint Agricultural Consultative Corporation
(JACC), an international agribusiness group facilitating joint ventures between
United States agricultural companies and similar entities in eleven developing
nations.
At the September 18, 1998 Special Meeting of the Shareholders an amendment to
the Company's Articles of Incorporation which, among other matters, reduced the
size of the Board to six members effective with the next Annual Meeting
currently scheduled for January 1999. The amendments provide that holders of
Preferred Stock will have the right to elect two directors; one director will be
elected by all stockholders (preferred and common); and three directors will be
elected solely by the Common Shareholders.
At the October 1998 Board of Directors meeting the Board was expanded to seven
members for one year with the consent of the holder of the Preferred Stock, as
permitted by the Amendments; the seventh member will be solely elected by the
Common Stockholders.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board comprises leading scientists from
several disciplines. The Company frequently consults with its Scientific
Advisory Board on research and development and strategies and techniques. The
member of the Company's Scientific Advisory Board are as follows:
Paul L. Kornblith, M.D., is President and Founder of Precision Therapeutics. Dr.
Kornblith serves as an Adjunct Professor in the School of Health and
Rehabilitation Sciences at the University of Pittsburgh. Dr. Kornblith also
serves as Vice Chairman and Professor of Neurosurgery and Co-Director of the
University of Pittsburgh's Brain Tumor Center. He also serves on the editorial
boards of five other cancer and
25
<PAGE> 27
nuerosurgical journals. Previously, Dr. Kornblith served as Chief of the
Surgical Neurology Branch, NINCDA, and the National Institute of Health (NIH).
Roger A. Laine, Ph. D., is a Professor of BioChemistry and Molecular Biology and
Director of the LSU Mass Spectrometry Facility at Louisiana State University.
Dr. Laine serves as President and Founder of Anomeric, Inc. He was previously
the Scientific Founder of Glycomed, now part of Ligand Pharmaceuticals.
Wayne F. Tompkins, Ph.D., is Professor in the Department of Microbiology,
Pathology and Parasitology at North Carolina State University. Dr. Tompkins also
serves as the Immunology Programs Coordinator at North Carolina State. He
received his Ph.D. in Virology and Immunology from the University of Wisconsin.
Dr. Tompkins is the co-developer of the Feline Immunodeficiency Virus (FIV) cat
model, an accepted animal model for testing potential HIV therapeutics
Paul Zorner, Ph.D., is senior scientist of the Global Industrial Biochemistry
Platform at the Dow Chemical Co. and was formerly vice president of product
development at Mycogen. Dr. Zorner has had over 20 U.S. patents issues. He is
also Chairman of the strategic planning committee, member of the publication
board and member of the sustainable agricultural committee of the Weed Science
Society of America.
PRINCIPAL SCIENTIFIC COLLABORATORS
The Company's primary scientific collaborators are as follows:
Cancer Therapeutics
Robert H. Getzenberg, Ph.D. Co-Director, Prostate & Urologic Cancer
Center, University of Pittsburgh Center Institute, Pittsburgh, PA
Cary N. Robinson, M.D., Urologist/Oncologist Associate Professor of
Urology, Duke University Medical School, Durham, NC
Bacterial Preventatives & Therapeutics
Sharon Hillier, Ph.D. Associate professor of Obstetrics, Gynecology &
Reproduction, Magee-Womens Research Institute at the University of
Pittsburgh Medical Center, Pittsburgh, PA
Crop Disease Resistance and Nutrition Enhancement
William Belknap, Ph.D. Plant Physiologist, Agricultural Research
Center, United States Department of Agriculture, Albany, CA
C.S. Prakash, Ph.D. Professor and Director of the Center of Plant
Biotechnology at Tuskegee University, Tuskegee, AL
CARY N. ROBERTSON, M.D., is urologist and Assistant Professor of
Medicine at Duke University Medical Center in Durham, North Carolina.
Dr. Robertson's laboratory has tested the Company's compounds for
anti-cancer activity in vitro and in animal experiments, since
1996. The Company does not have any service contracts or formal
relationship with Dr. Robertson or Duke University Medical Center.
ROBERT GETZENBERG, PH.D., is the Co-Director of the Prostate &
Urologic Cancer Center at the University of Pittsburgh Cancer
Institute. Dr. Getzenberg is testing Company compounds to determine
their efficiency against prostate cancer. The Company has a contract
with the University of Pittsburgh to support its prostate cancer
research, providing $15,000 per month to Dr. Getzenberg's lab. This
agreement can be terminated upon 60 day notice.
SHARON HILLIER, PH.D., is an Associate Professor of Obstetrics,
Gynecology & Reproductive Sciences at Magee-Womens Hospital at the
University of Pittsburgh Medical Center. Dr. Hillier is testing
Company compounds to develop a female controlled sexually transmitted
disease preventative gel. Dr. Hillier has not received any funding
from the Company and she is not under any service contract; nor is
Magee-Women's Hospital.
WILLIAM BELKNAP, PH.D. is a Research Scientist at the USDA, Albany CA
Agricultural Research Center. He has been testing the Company's
agricultural genes under at Cooperative Research and Development
Agreement (CRADA) that the Company has with the USDA. The Company has
assigned the rights to this Research and Development Agreement to
Mycogen, under the terms of our license agreement.
C.S. PRAKASH. PH.D., is a Professor and Director of the Center of
Plant Biotechnology at Tuskegee University in Alabama. Dr. Prakash is
developing nutrition-enhanced sweet potatoes with the Company's plant
genes. Dr. Prakash serves as consultant to the Company for its
agricultural projects, and receives a fee of $1,000 per month.
26
<PAGE> 28
ITEM 6 - COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the total remuneration to be paid to the
President and all executive officers of the Company whose total salary exceeds
$100,000
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Awards Payouts
------------------- --------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other All
and Annual Restricted LTIP Other
Principal Compen- Stock Options/ Pay- Compen-
Position Year Salary Bonus sation Awards SARS outs sation
($)(a)(b) ($) ($) ($)(c) (#)(d) ($) ($)(e)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard D
Ekstrom 1998 $ 120,000 -- -- -- 1,600,000 -- --
President 1997 $ 10,000 -- -- -- -- -- --
1996 $ -0- -- -- $ 15,075 600,000 -- --
Jesse M
Jaynes 1998 $ 120,000 -- -- -- 1,600,000 -- $3,833
Vice President 1997 $ 10,000 -- $ 17,000 -- -- -- --
1996 $ -0- -- -- -- -- -- --
James E
Thornton 1998 $ 120,000 -- -- -- 300,000 -- --
Vice President 1997 $ 120,000 -- $ 18,000 -- 200,000 -- --
1996 $ 106,000 -- 28,000 $ 15,075 -- -- --
</TABLE>
a) Represents fiscal years ended September 30.
b) In 1998 Mr. Thornton received $60,000 in the form of cash compensation
with the remaining $60,000 in the form of deferred compensation. The
deferred compensation shall accrue interest at 6% per annum and shall
be paid out in equal monthly installments of $3,500 beginning the next
month after the final payment has been made by the Company to Mr.
Thornton under his employment agreement. In 1997 Mr. Thornton agreed to
accept $140,000 due him for services and expenses in the form of
deferred compensation, payable in accordance with the aforementioned
agreement.
c) The Restricted stock issued to Messrs. Ekstrom and Thornton in Fiscal
1996 consisted of 25,000 shares (valued at $0.603 per share) for a
bonus
d) All options are fully vested. The options issued in Fiscal 1998 are at
an exercise price of $0.05 per share and expire on March 5, 2008. The
options issued in Fiscal 1997 are at an exercise price of $0.875 per
share and expire on October 2, 2001. The options issued in Fiscal 1996
are at an exercise price of $0.15 per share and expire on October 31,
2000.
e) Represents premiums on $1 million life insurance policy on the life of
Dr. Jaynes whose beneficiary is Dr. Jaynes' family.
Options Granted In Last Fiscal Year
The following table shows the options that have been granted to the Executive
Officers of the Company in the prior Fiscal Year.
27
<PAGE> 29
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
Value at Assumed
Annual Rates
Number of % of Total of Stock Price
Securities Options Appreciation for
Underlying Granted to Option Term
Options Employees Exercise -------------------------------
Name Granted in Fiscal Price Expiration
Year (%) ($/Sh) Date 0% 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C> <C>
Richard D.
Ekstrom 1,600,000 27.5% 0.05 03/05/08 $528,000 $910,000 $1,497,000
Jesse M
Jaynes 1,600,000 27.5% 0.05 03/05/08 $528,000 $910,000 $1,497,000
James E
Thornton 300,000 5.2% 0.05 03/05/08 $ 99,000 $171,000 $ 281,000
</TABLE>
a) The market price as of the date of grant was $0.38 per share
b) All options are fully vested
c) Potential realizable value is based on the assumption that the Common
Stock appreciates at the annual rates shown (compounded annually) from
the date of grant until the expiration of the option term These assumed
rates of appreciation are mandated by the rules of the Securities and
Exchange Commission and do not represent the Company's estimate or
projection of the future Common Stock price. There can be no assurance
that any of the values reflected in this table will be achieved.
AGGREGATE OPTIONS EXERCISES IN LATEST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options at at Fiscal Year-End
Shares Value Fiscal Year-End 1998
Acquired On Realized
Name Exercise (#) ($)(b) Exercisable Exercisable
- ---- ------------ ------ ----------- -----------
<S> <C> <C> <C> <C>
Richard D.
Ekstrom 500,000 $165,000 1,700,000 $382,000
Jesse M.
Jaynes -0- N/A 1,600,000 $416,000
James E.
Thornton 300,000 $104,400 200,000 -$0-
</TABLE>
a) All options were vested, therefore, there were no unexercisable
options.
b) Based upon the difference between the market value of the Common Stock
at time of exercise and exercise price.
c) Based upon market value of Common Stock at September 30, 1998
28
<PAGE> 30
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Richard Ekstrom, James E. Thornton
and Dr. Jesse Jaynes.
Mr. Ekstrom, Chairman of the Board of Directors and President, has a one year
employment agreement with the Company effective June 1, 1998. The agreement
automatically renews unless either he or the Company provides notice not to
renew to the other party 90 days prior to the expiration date. The agreement
provides that Mr. Ekstrom receive an annual base salary of $120,000.
Additionally, Mr. Ekstrom is eligible for performance based bonuses at the sole
discretion of the Board of Directors and to participate in any Stock Option
Plans established by the Company.
As an incentive to further the commercial applications of the Company's peptide
technology, the Company agreed that during the term of the agreement and
renewals that Mr. Ekstrom will receive a bonus of not less than $5,000 and not
greater than $50,000 for each IND of the Company submitted to the FDA. The
determination of amount of each IND Bonus is at the sole discretion of the Board
of Directors; provided, however, that if an IND is submitted to the FDA on or
before May 31, 1999, the IND Bonus for that submission shall not be less than
$25,000. In the event that the Company terminates Mr. Ekstrom's employment
without cause, the Company shall pay Mr. Ekstrom his salary for six months from
the date of termination.
The Company maintains a $1,000,000 life insurance policy upon Mr. Ekstrom for
the benefit of the Company.
Mr. Jaynes, Vice President of Research, has a five year employment agreement
with the Company effective June 1, 1998. The agreement automatically renews
unless either the employee or the Company provides notice to the other party 90
days prior to the expiration date. The agreement provides that Mr. Jaynes
receive an annual base salary of $120,000. Additionally, Mr. Jaynes is eligible
for performance based bonuses at the sole discretion of the Board of Directors
and to participate in any Stock Option Plans established by the Company.
As an incentive to further its research and the development of patent worthy
compounds, processes and/or methodology, the Company agreed that during the term
of the agreement and renewals that Mr. Jaynes will receive a Patent Registration
Bonus for each invention made (solely or jointly) by him which results in the
issuance of one or more United States or Foreign patents with potential
commercial applications. For Patents applied for after January 1, 1998 and
issuing on or after June 30, 1999, the amount of the Patent Registration Bonus
shall not less than $25,000 and not greater than $50,000. The determination of
the amount of the Patent Registration Bonus is at the sole discretion of the
Board of Directors. In the event that the Company terminates Mr. Jaynes'
employment without cause, the Company shall pay Mr. Jaynes his salary for six
months from the date of termination.
Additionally, the Company maintains a $1,000,000 life insurance policy upon Mr.
Jaynes for the benefit of his wife and children and another $1,000,000 life
insurance policy upon Mr. Jaynes for the benefit of the Company.
Mr. Thornton, Vice President of Agriculture, has a two year employment agreement
with the Company effective August 1, 1998, expiring August 31, 2000. The
agreement provides that Mr. Thornton receive an annual base salary of $60,000.
Additionally, Mr. Thornton is to receive in the form of deferred compensation,
$5,000 for each month of employment from August , 1998 until termination. The
deferred compensation shall accrue interest at 6% and shall be paid out in equal
monthly installments of $3,500
29
<PAGE> 31
beginning the next month after the final payment has been made by the Company to
Mr. Thornton under the terms of the Compensation Release Agreement dated
September 1997.
Additionally, $168,000 of payments due Mr. Thornton for services rendered in
previous years were deferred and are payable over the 48 months after his
retirement from the Company. This amount can be converted into shares of the
Company's Common Stock at $1 per share at Mr. Thornton's discretion.
The three executives noted above, along with four other officers, employees and
directors, share in a $185,000 bonus pool payable upon the Company achieving a
royalty milestone. The aforementioned bonus amounts may be received in the form
of Common Stock of the Company at a conversion price of $1 per share at the
option of the employee.
COMPENSATION OF DIRECTORS
The directors of the Company are reimbursed for expenses that they incur in
attending the Board of Directors' meeting.
During Fiscal 1998, the members of the Company's Board of Directors received the
following options to purchase shares of the Company's Common Stock for $0.05 per
share. The options expire March 8, 2008:
<TABLE>
<CAPTION>
Director Options to Purchase
- -------- -------------------
<S> <C>
Don Guthrie 530,000 shares
George Keeney (A) 150,000 shares
Alfonso Lovo-Cordero 150,000 shares
Antonio Maggioni (A) 150,000 shares
</TABLE>
(A) Messrs. Keeney and Maggioni did not stand for reelection as Directors
at the Company's Annual Meeting of Stockholders on January 22, 1999.
COMPENSATION OF SCIENTIFIC ADVISORY BOARD
The members of the Scientific Advisory Board receive, upon appointment, options
to purchase 5,000 shares of the Company's Common Stock at $0.45 per share. The
right to purchase the shares vests immediately and the option is exercisable
over the next five years. Additionally, each member receives $1,000 for each
meeting attended.
In October 1998 the four members were appointed to the Scientific Advisory
Board, therefore, options to purchase a total of 20,000 shares of the Company's
Common Stock were issued.
STOCK OPTION PLANS
On May 12, 1998, the Board of Directors unanimously approved the adoption of the
Stock Option Plan (the "Plan") for the issuance of up to 3 million shares of the
Company's Common Stock in accordance with the terms of the Plan subject to the
approval of the shareholders as part of the January 1999 Annual Meeting. Once
approved by the shareholders, all options issued prospectively under the Plan
will qualify as Incentive Stock Options as defined by the Internal Revenue Code
30
<PAGE> 32
Purpose
The Board of Directors believes that the attraction and retention of employees,
consultants and non-employee directors is essential to the Company's growth and
success. The purpose of the Plan is to encourage stock ownership by selected
employees, consultants and by non-employee directors and to provide them with
additional incentives to remain with the Company and increase their efforts on
its behalf.
The Plan is the only long-term incentive plan which the Company provides for its
employees, consultants and non-employee directors. The Board of Directors
believes that stock options are a superior incentive to motivate employees,
consultants and non-employee directors to act and think like owners of the
Company and to exert their best efforts on behalf of the Company and its
shareholders. Additionally, the Board of Directors believes that such long-term
incentive plans are essential for the Company to remain competitive in its
compensation practices and to continue to attract, retain and motivate
outstanding employees and non-employee directors.
Eligibility to Receive Options and Awards
All employees, consultants and non-employee directors of the Company are
eligible to be granted options under the Plan.
Administration, Amendment and Termination
The Plan is administered by the Board of Directors and/or by a duly appointed
committee of the Board. The Board and/or its duly appointed committee has the
sole discretion to determine the employees and consultants to whom options are
to be granted, the number of shares to be subject to such options and the terms,
conditions and any performance criteria for the options.
Without shareholder approval, no amendment may be made to the Plan to increase
the limit on the aggregate number of shares subject to the Plan (except for
adjustments resulting from stock splits and similar events), to extend the term
of an option beyond 10 years from the date of its grant, or otherwise to
increase materially the benefits accruing to participants under the Plan. In
substantially all other respects, the Plan can be amended, modified, suspended
or terminated by the Board of Directors or the Committee.
Options
Option agreements may provide for progressive vesting of the stock options
received by the optionee. Currently vesting periods of zero to three years have
been included in option agreements. However, option agreements do not restrict
the Company's right to terminate such employment at any time.
The price of the shares subject to each option is set by the Board and/or
Committee shall, in the case of Incentive Stock Options, be not less than the
fair market value on the date of the granting of the Option and, in the case of
Nonqualified Stock Options shall be not less than 85% of the fair market value
on the date of the granting of the Option. Additionally, no Incentive Stock
Option shall be granted at an exercise price less than 110% of the fair market
value on the date of the grant of the Option to an Optionee who at the time the
Incentive Stock Option is granted owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company
The Board and/or Committee shall have the power to set the time within each
Option shall be execrable or the event upon the occurrence of which all or a
portion of each Option shall be execrable and the term of each Option, provided,
however, that (i) no Option shall be execrable after the expiration of ten years
after the date such Option is granted, and (ii) no Incentive Stock Option
granted to a holder of more than 10% of the outstanding voting
31
<PAGE> 33
stock of the Company shall be execrable after the expiration of five years after
the date the Option is granted.
ITEM 7 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS WITH AFFILIATED PARTIES
None
ITEM 8 - LEGAL PROCEEDINGS
None
ITEM 9 - MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS' COMMON EQUITY AND
RELATED MATTERS
The Company's Common Stock has been quoted on the Over-the-Counter Bulletin
Board since 1994 under the symbol "DBOT". The following table sets forth, based
upon information received from the National Quotation Bureau, the high and low
bid prices for the Common Stock for the quarters indicated. The quotations
represent bid between dealers and do not include retail mark-up, mark-down or
commissions, and do not represent actual transactions.
<TABLE>
<CAPTION>
Fiscal December 31 March 31 June 30 September 30
- ------ ----------- -------- ------- ------------
<S> <C> <C> <C> <C>
1999
High $0.51
Low $0.21
1998
High $0.77 $0.60 $0.68 $0.50
Low $0.43 $0.34 $0.31 $0.25
1997
High $0.91 $0.47 $0.88 $0.69
Low $0.31 $0.20 $0.27 $0.32
</TABLE>
At February 28, 1999 there were 502 holders of record of 26,261,899 share of
Common Stock, exclusive of holders which maintain their ownership in
"Street-Name" at brokerage houses, and one holder of record of 4,444,444 shares
of Preferred Stock. The Company estimates that there are another 1,500
stockholders which hold their ownership in street name.
32
<PAGE> 34
SHARES ELIGIBLE FOR SALE
Sales in the market of substantial amounts of currently outstanding Common Stock
could have an adverse effect on the price of the Common Stock. At October 31,
1998 15,211,269 shares of Common Stock are freely trading shares with the
remainder of 10,905,630 shares of Common Stock currently subject to restrictions
as to their resale. Most of the shares subject to restrictions merely require
the holder of the Common Stock to have the Transfer Agent remove the restrictive
legend as the required holding period has expired. A total of 24,590,913 shares
of the 26,116,889 shares of Common Stock currently issued and outstanding are,
or within the next 12 months will be, eligible for resale, subject, in certain
cases, to the applicable volume and other limitations set forth in Rule 144 of
the Securities Act. The remaining 1,525,976 shares of Common Stock are held by
Messrs. Ekstrom and Jaynes (collectively "Principal Shareholders") and subject
to a Shareholder Agreement (the "Agreement"), dated, June 15, 1998, among the
Company, the CEO Venture Fund III ("CEO") and Messrs. Ekstrom and Jaynes. The
Agreement restricts the transfer and resale of shares of the Company's Common
Stock held by the Principal Shareholders by providing CEO with the right of
first refusal on all share sales by the Principal Shareholders. Additionally,
the Principal Shareholders may not enter into a transaction that reduces their
shareholdings by more than 50% without notifying CEO and upon termination each
Principal Shareholder the Company shall have the option to repurchase up to 50%
of that Principal Shareholder's holdings.
Additionally, at any time and at the option of CEO, CEO would receive 4,444,444
shares upon the conversion of the Preferred Shares that they hold into Common
Stock. The Company has granted registration rights to CEO relative to the
aforementioned Common Shares so that those shares would become freely trading
upon the Registration Statement filed by the Company covering those shares of
Common Stock being declared effective by the Securities and Exchange Commission.
DIVIDENDS
The Company anticipates that for the foreseeable future, earnings will be
retained for the development of its business. Accordingly, the Company does not
anticipate paying dividends on the Preferred Stock or Common Stock in the
foreseeable future. The payment of future dividends will be at the sole
discretion of the Company's Board of Directors and will depend upon. among other
things, future earnings, capital requirements, the general financial condition
of the Company and general business conditions. Refer to the discussion of the
Preferred Stock on Page 37 for a more detailed description of the Preferred
Stock dividend.
ITEM 10 - RECENT SALES OF UNREGISTERED SECURITIES
FISCAL 1999
COMMON SHARES
In October 1998, the Company received $12,500 from the exercise of stock options
for 250,000 shares (exercise price of $0.05 per share) held by an employee.
FISCAL 1998
COMMON SHARES
During the Fiscal Year ending September 30, 1998, the Company received $87,500
from the exercise of stock options (exercise price of $0.05 per share) held by
officers, employees and directors. The exercises occurred from April to
September 1998 and
33
<PAGE> 35
consisted of 500,000 shares by Richard Ekstrom, 250,000 shares by Thomas Roane,
550,000 shares by Bruce Guthrie, 300,000 shares by James Thornton, 150,000
shares by George Keeney. Additionally, 1,975,000 shares were issued (at a
current market price of $0.36 per share) in January 1998 to settle the claims of
a former employee, 85,000 shares were issued to two purchasers of the Company's
Common Stock in Fiscal 1997 to compensate them for a subsequent equity sale at a
price below their purchase price and 207,500 shares as compensation for services
rendered (average current market price of $0.33 per share).
PREFERRED SHARES
In June 1998, the Company issued 4,444,444 shares of Preferred Stock to the CEO
Venture Fund III for net proceeds of $1,943,873 (net of $56,127 of expenses
incurred in connection with the issuance). The Preferred Shares are convertible
into 4,444,444 shares of Common Stock. The proceeds were utilized by the Company
to fund current operations.
FISCAL 1997
COMMON SHARES
During the Fiscal Year ending September 30, 1997, the Company received proceeds
from the sale of 906,750 shares of Common Stock (average price of issuances of
$0.36 per share). The proceeds were utilized to fund operations. Additionally,
the Company issued 700,000 shares to Louisiana State University in exchange for
a patent and technology license, 145,000 in exchange for the cancellation of
redemption rights held by Mr. Ekstrom, 533,980 shares in settlement of debts
including 225,000 shares issued to Richard Ekstrom, 522,308 shares as
compensation for services rendered the Company and 150,000 shares to settle
legal claims. The current market price at the time of the issuance of the shares
discussed in the preceding sentence ranged from $0.33 to $0.46 per share.
FISCAL 1996
COMMON SHARES
During the Fiscal Year ending September 30, 1996, the Company received proceeds
from the sale of 531,750 shares of Common Stock (average price of issuances of
$0.703 per share). The proceeds were utilized to fund operations. Additionally,
the Company issued 3,780,153 shares in settlement of outstanding debt or other
obligations, 300,000 shares to settle legal claims, 600,000 shares to settle an
employment agreement with James Ladd (former President of the Company), 463,000
shares as compensation for services rendered the Company and 367,500 shares to
replace 210,000 shares of their freely trading Common Stock that they made
available to the Company. The current market price at the time of the issuance
of the shares discussed in the preceding sentence ranged from $0.474 to $0.78
per share.
ITEM 11 - DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The Company has authorized for issuance 140,000,000 share of capital stock, of
which 40,000,000 share are designated as preferred stock, $0.001 par value and
100,000,000
34
<PAGE> 36
share are designated as common stock, $0.001 par value. The following is a brief
description of the Preferred and Common Stock.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders except for the
election of two directors. Additionally, all holders of Preferred Stock are
entitled to vote their shares on a one share for one share basis on all matters
submitted for the approval of the Common Shareholders. In all matters other than
the election of Directors, when a quorum is present at any stockholders'
meeting, the affirmative vote of the majority of shares present in person or
represented by proxy shall decide any question before such meeting. Directors
are elected by a plurality of the votes of the shares present in person or
represented by proxy at a stockholders' meeting. The Board of Directors of the
Company currently consists of eight members but effective with the Annual
Meeting on January 22, 1999 it will be reduced to six members. The Board of
Directors is divided into three classes of Directors serving one-year terms and
until their successors are elected and qualified. The holders of Preferred Stock
have the right to elect two of the members of the Board of Directors, the Common
Shareholders and Preferred Stockholders elect one member of the Board of
Directors; and the Common Shareholders elect three members of the Board of
Directors. At the October 16, 1998 meeting of the Board of Directors the Board
of Directors was expanded to seven members for one year with the Common
Stockholders electing this additional member of the Board of Directors.
The holders of Common Stock are not entitled to cumulative voting rights with
respect to the election of Directors, and, as a consequence, minority
stockholders will not be able to elect Directors on the basis of their votes
alone. Subject to preferences that are applicable to the outstanding shares of
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor.
In the event of a liquidation, dissolution or winding up of the Company, holders
of the Common Stock would be entitled to share ratably in all assets remaining
after payment of liabilities and the satisfaction of any liquidation preference
of any then outstanding series of Preferred Stock, including the Convertible
Preferred Stock. Holders of Common Stock have no preemptive rights and no right
to convert their Common Stock into any other securities. There are no redemption
or sinking fund provisions applicable to the Common Stock.. All outstanding
shares of Common Stock are fully paid and nonassessable.
As of November 1, 1998, there were 26,116,899 shares of Common Stock outstanding
(excluding 4,444,444 shares of Common Stock issuable upon the conversion of
4,444,444 shares of Convertible Preferred Stock) held of record by 502
stockholders. Options to purchase 5,095,000 shares of Common stock were
outstanding and 4,965,556 shares of Common Stock issuable upon the conversion of
the Stock Warrant held by the holder of the of Convertible Preferred Stock.
TRANSFER AGENT
The Transfer Agent and Registrar for the Company's Common Stock is American
Securities Transfer and Trust Company
35
<PAGE> 37
PREFERRED STOCK
The Company has 4,444,444 shares of Convertible Preferred Stock outstanding. The
Convertible Preferred Stock is convertible into 4,444,444 shares of Common
Stock. The following description of the preferences, limitations and relative
rights of the Convertible Preferred Stock is qualified in its entity by
reference to the Restated Articles of Incorporation of the Company which is
filed as an exhibit to this Registration Statement.
DIVIDENDS The holders of the Convertible Preferred Stock are entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, dividends at the rate of $0.036 per share,
semi-annually, on each outstanding share of Convertible Preferred Stock, Such
dividends have a priority over any dividends paid on the Common Stock. Dividends
on the Convertible Preferred Stock are cumulative and the right to such
dividends shall accrue to holders of Convertible Preferred Stock until declared
by the Board of Directors. The Company does not anticipate declaring any cash
dividends in the foreseeable future.
LIQUIDATION PREFERENCE In the event of any liquidation, dissolution or winding
up of the Company, the holders of Convertible Preferred Stock shall be entitled
receive the greater of $0.45 per share of Convertible Preferred Stock, plus all
unpaid and accrued dividends thereon, computed to the date payment thereof is
made available or the amount the holders of such shares of Convertible Preferred
Stock would otherwise be entitled had each such share of Convertible Preferred
Stock been converted into Common Stock, as discussed in the following paragraph,
immediately prior to such liquidation, dissolution or winding up.
CONVERSION Each share of Convertible Preferred Stock is convertible at any time,
at the option of the holder thereof, into such number of fully paid and
nonassessable shares of Common Stock as shall be determined by multiplying the
number of shares of Convertible Preferred Stock so to be converted by $0.45 and
dividing the result by the conversion price of $0.45 per share. In addition, if
at any time the Company shall effect a firm commitment underwritten public
offering of shares of Common Stock in which the aggregate price paid for such
shares by the public shall be at least $8,000,000, then effective immediately
before the closing of the sale of such shares by the Company pursuant to such
public offering, all outstanding shares of Convertible Preferred Stock shall
automatically convert to share of Common Stock.
REDEMPTION The shares of Convertible Preferred Stock shall be redeemable on a
voluntary basis at the election of any holder of shares of Convertible Preferred
Stock upon at least 90 days notice to the Company, the Company shall redeem from
such holder on or at any time after May 31, 2003, 2004 and 2005 up to one-third
of the shares of Convertible Preferred Stock held by such holder, with the
intent that, should any holder so elect, at any time after May 31, 2005, the
total number of shares held by such holder would be subject to redemption. The
Convertible Preferred Stock to be redeemed shall be paid for in cash at an
amount equal to the greater of (I) $0.45 per share plus, in the case of each
share, an amount equal to all accruing dividends unpaid thereon (whether or not
declared), or (ii) such amount per share as would have been payable has each
such share been converted to Common Stock immediately prior to the actual date
of redemption.
VOTING RIGHTS The holders of shares of Convertible Preferred Stock vote on
matters on an as converted basis, ie. each share of Preferred Stock has one vote
as does each owner of a share of Common Stock.
WARRANTS The holder of the Convertible Preferred Stock has a warrant to purchase
4,965,556 shares of Common Stock of the Company at $0.45 per share of Common
Stock. The Warrant is exercisable, in whole or in part, through June 14, 2008.
The Company may call the Warrant at any time after December 31, 1998 provided
the Company's Common Stock has been in excess of $1.50 per share for each of the
forty consecutive trading days immediately preceding the date of the call.
36
<PAGE> 38
Upon receipt of the call, the Warrant holder shall have sixty days to elect to
exercise all or a portion of this Warrant. Upon such exercise, in addition to
receiving the number of shares of Common Stock to which the holder shall be
entitled, the holder of the Warrant also shall receive a new Warrant
("Replacement Warrant"). The Replacement Warrant shall be exercisable for one
share of Common Stock for every two shares of Common Stock purchased in response
to the aforementioned call. The exercise price of the Replacement Warrant is
$1.50 per share and the term of the Replacement Warrant shall be the longer of
two years from the date of the issuance or the balance of the original term of
the Warrant.
ITEM 12 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with the Colorado Business Corporation Act (the "Act"), the
Company's Articles of Incorporation (the "Articles") contain provisions which
provide indemnification rights to officers, directors, employees and agents of
the Company ("Potential Indemnitees"), subject to certain limitations set forth
in the Act and in the Articles. A Potential Indemnitee has a right of mandatory
indemnification by the Company if he is successful on the merits in defense of
any proceeding brought against him for actions taken on behalf of the Company.
Under the Articles, the Corporation may indemnify a Potential Indemnitee if the
Board of Directors shall determine that Potential Indemnitee acted in good faith
and in a manner he reasonably believed to be in the best interests of the
Company, and with respect to any criminal action or proceeding had no reasonable
cause to believe his conduct was unlawful. The Company may advance a Potential
Indemnitee the expense incurred in defense of any action upon receipt of an
agreement of the Potential Indemnitee to repay the expenses unless it is
determined that he is entitled to indemnification under the Articles. In
addition, the Articles also provide that the directors of the Company shall not
be liable to the Company or its stockholders to the fullest extent permitted by
the Act.
ITEM 13 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to Item 13 is contained in the Company's financial
statements and is set forth herein beginning on page F-1.
ITEM 14 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL MATTERS
Not applicable
ITEM 15 - FINANCIAL STATEMENTS AND EXHIBITS
a. Each of the following items are contained in the Company's financial
statements and are set forth herein beginning on page F-1.
(i) Report of Ernst & Young LLP, Independent Auditors
37
<PAGE> 39
(ii) Balance Sheet as of September 30, 1998 and 1997 and December
31, 1998 (unaudited)
(iii) Statement of Operations for the Years Ended September 30,
1998, 1997 and 1996 and for the period December 6, 1991
(inception) to September 30, 1998 and for the Quarter Ended
December 31, 1998 and 1997 (unaudited) and for the period
December 6, 1991 (inception) to December 31, 1998 (unaudited)
(iv) Statement of Stockholders' Equity for the Years Ended
September 30, 1998, 1997 and 1996 and for the period
December 6, 1991 (inception) to September 30, 1998 and for the
Quarter Ended December 31, 1998 and 1997 (unaudited) and for
the period December 6, 1991 (inception) to December 31, 1998
(v) Statement of Cash Flows for the Years Ended September 30,
1998, 1997 and 1996 and for the period December 6, 1991
(inception) to September 30, 1998 and for the Quarter Ended
December 31, 1998 and 1997 (unaudited) and for the period
December 6, 1991 (inception) to December 31, 1998 (unaudited)
(vi) Notes to Financial Statements
b. Exhibits
3.1 Articles of Incorporation of the Company, as amended
3.2 Amended and Restated By-laws of the Company
4.1 Specimen of Common Stock Certificate
4.2 Stock Purchase Agreement, dated June 15, 1998, between the Registrant
and the Principal Shareholders of the Registrant and the CEO Venture
Fund III
4.2.1 Terms of Convertible Preferred Stock
4.3 Warrant to Purchase Common Stock, dated June 15, 1998, between the
Registrant and the Registrant and the CEO Venture Fund III
4.4 Shareholders' Agreement, dated June 15, 1998, by and among the Company,
Richard Ekstrom, Jesse Jaynes and the CEO Venture Fund III
10.1 License and Royalty Agreement, effective May 1, 1997, between the
Registrant and Louisiana State University*
10.2 Restated Demeter-Mycogen License and Royalty Agreement, effective
September 23, 1997, between the Registrant and Mycogen Corporation*
10.3 Addendum to Restated Demeter-Mycogen License and Royalty Agreement,
effective November 13, 1998, between the Registrant and Mycogen
Corporation*
10.4 Employment Agreement, dated June 15, 1998, between the Registrant and
Richard D. Ekstrom
10.4-1 Employment Agreement, dated November 1, 1995, between the Registrant
and Richard D. Ekstrom
10.5 Employment Agreement, dated June 15, 1998, between the Registrant and
Jesse M. Jaynes
38
<PAGE> 40
10.6 Employment Agreement, dated June 15, 1998, between the Registrant and
James E. Thornton
10.7 Compensation Release Agreements dated September 19, 1997:
a) Richard D. Ekstrom
b) Bruce A. Guthrie
c) Donald A. Guthrie
d) Jesse M. Jaynes
e) D. Thomas Roane
f) A. Lee Caldwell
g) James E. Thornton
10.8 Consulting Agreement between the Company and Progressive Media Group,
Inc., dated February 12, 1998
10.9 Settlement Agreement between the Company and Philip Sears dated
January, 1998
10.10 Settlement Agreement dated September 11, 1996, among the Company and
Gordon Julian and Sirius Enterprises, Inc.
10.11 Technology Transfer, Support and Royalty Assignment Agreement dated
February 19, 1992, between the Company and Dr. Jesse M. Jaynes
10.12 Letter of Understanding dated November 13, 1996 between the Company and
Pacific West Cancer Fund
10.13 Stock Option Agreements dated March 6, 1998
a) Richard D. Ekstrom
b) Bruce A. Guthrie
c) Donald A. Guthrie
d) Jesse M. Jaynes
e) D. Thomas Roane
f) A. Lee Caldwell
g) Alfonso Lovo-Cordero
h) Antonio Maggioni
i) George N. Keeney
j) James E. Thornton
k) Ute Schweb
10.14 Stock Option Agreements dated November 2, 1996
a) Bruce A. Guthrie
b) Thomas Roane
c) Alfonso Lovo-Cordero
d) Antonio Maggioni
e) George N. Keeney
f) James E. Thornton
10.15 Stock Option Agreements dated September 1, 1997
a) Donald A. Guthrie
b) Alfonso Lovo-Cordero
c) Antonio Maggioni
d) George N. Keeney
39
<PAGE> 41
10.16 Stock Option Agreements dated September 18, 1998
a) Roger A. Laine, Ph.D.
b) Wayne F. Topkins, Ph.D.
c) Paul Zorner, Ph.D.
d) Paul L. Kornblith, M.D.
10.17 Settlement Agreement dated, September 25, 1996 between the Company and
The Peregrine Group
10.18 Compensation Release Agreement dated September 19, 1997 between the
Company and Richard D. Ekstrom relative to the cancellation of the
Share Repurchase Agreement and the issuance of 145,000 shares of the
Company's Restricted Stock
10.19 Settlement Agreement and Mutual Release between the Company and James
Ladd dated December 31, 1996 with subsequent Letter Agreement of
December 31, 1997 between the Company and James Ladd
10.20 1998 Stock Option Plan
10.21 Sample Employee Nondisclosure, Noncompete and Developments Agreement
10.22 The Company's United States Patents
a) Patent # 5,561,107 Method of Enhancing Wound Healing by Stimulating
Fibroblast and Keratinocyte Growth in Vivo, Utilizing Amphipathic
Peptides
b) Patent #5,597,945 Plants Generically Enhanced for Disease Resistance
c) Patent #5,597,946 Method for Introduction of Disease and Pest
Resistance into Plants and Novel Genes Incorporated into Plants Which
Code Therefore
d) Patent #5,717,064 Methylated Lysine-Rich Lytic Peptides and Method of
Making Same by Reductive Alkylation
e) Patent #5,744,445 Method of Treating Pulmonary Diseases with
Non-Naturally Occurring Amphipathic Peptides
f) Patent #5,773,413 Method of Combating Mammalian Neoplasias and Lytic
Peptides Therefor
g) Patent # 5,811,654 Plants genetically enhanced for nutritional quality
10.23 Settlement Agreement, dated September 17, 1996, between the Company and
John Bridwell
24 Power of Attorney
27. Financial Statement Schedules
* Confidential Treatment Requested
40
<PAGE> 42
SIGNATURES
In accordance with Section 12 of the Securities and Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Demegen, Inc.
Date: April 27, 1999
By: /s/ Richard D. Ekstrom
---------------------------------
Richard D. Ekstrom
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
registrations statement has been signed below by the followings persons on
behalf of the registrant and in the capacities and on the dates indicated.
Date: April 27, 1999 By: /s/ Richard D. Ekstrom
-----------------------
Richard D. Ekstrom
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Date: April 27, 1999 By: /s/ Jesse M. Jaynes, Ph.D.
---------------------------
Jesse M. Jaynes, Ph.D.
Vice President and Director
Date: March 27, 1999 By: /s/ James Colker
-----------------
James Colker
Director
Date: April 27, 1999 By: /s/ Donald A. Guthrie, Ph.D.
-----------------------------
Donald A. Guthrie, Ph.D.
Director
Date: April 27, 1999 By: /s/ John Bridwell
------------------
John Bridwell
Director
Date: April 27, 1999 By: /s/ Alfonso Lovo-Cordero, LL.D.
--------------------------------
Alfonse Lovo-Cordero, LL.D.
Director
Date: April 27, 1999 By: /s/ Konrad M. Weis, Ph.D.
--------------------------
Konrad M. Weis. Ph.D.
Director
41
<PAGE> 43
[ERNST & YOUNG LLP LETTERHEAD]
Report of Independent Auditors
Board of Directors
Demegen, Inc.
We have audited the accompanying balance sheets of Demegen, Inc. (a development
stage company) as of September 30, 1998 and 1997, and the related statements of
operations, shareholders' deficit, and cash flows for the years ended September
30, 1998, 1997, and 1996, and for the period from December 6, 1991 (inception)
through September 30, 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. The financial statements for the
period from December 6, 1991 (inception) through September 30, 1994, were
audited by other auditors whose report dated November 10, 1994, expressed an
unqualified opinion on those statements and included an explanatory paragraph
regarding the entity's ability to continue as a going concern, that is not
included in our current report as the result of additional financing obtained by
the Company. The financial statements for the period December 6, 1991
(inception) through September 30, 1994, include total revenues and net loss of
$1,116,800 and $3,056,682, respectively. Our opinion on the statements of
operations, shareholders' deficit, and cash flows for the period December 6,
1991 (inception) through September 30, 1998, insofar as it relates to amounts
for prior periods through September 30, 1994, is based solely on the report of
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Demegen, Inc. (a development stage company) at
September 30, 1998 and 1997, and the results of its operations and its cash
flows for the years ended September 30, 1998, 1997, and 1996, and for the period
from December 6, 1991 (inception) through September 30, 1998, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
October 29, 1998 (except for Note 12,
as to which the date is November 13, 1998)
F-1
<PAGE> 44
Demegen, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30 December 31
1998 1997 1998
-------------------------------------------- -----------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,686,658 $310,252 $1,798,257
Accounts receivable 59,929 -- 17,292
Prepaid expenses and other current assets 11,859 1,450 5,685
-------------------------------------------- -----------------
Total current assets 1,758,446 311,702 1,821,234
Property and equipment:
Furniture and equipment 38,440 32,168 38,440
Computer hardware and software 113,416 65,661 128,325
-------------------------------------------- -----------------
151,856 97,829 166,765
Less accumulated depreciation and amortization (94,271) (63,447) (103,269)
-------------------------------------------- -----------------
57,585 34,382 63,496
Intangible assets:
Licenses 245,000 245,000 245,000
Patents 183,504 98,894 183,504
-------------------------------------------- -----------------
428,504 343,894 428,504
Less accumulated amortization (129,785) (38,015) (152,717)
-------------------------------------------- -----------------
298,719 305,879 275,787
-------------------------------------------- -----------------
Total assets $2,114,750 $651,963 2,160,517
============================================ =================
</TABLE>
F-2
<PAGE> 45
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31,
1998 1997 1998
-------------------------------------------- -----------
(Unaudited)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Payable to employees and directors $ 110,933 $ 1,415,263 109,169
Accounts payable 178,232 333,919 122,440
Unearned revenue 91,668 -- 91,669
Other liabilities 48,072 60,997 18,579
-------------------------------------------- ----------
Total current liabilities 428,905 1,810,179 341,857
Payable to employees and directors 178,400 -- 196,400
Unearned revenue 91,665 -- 68,748
Other 27,426 -- 36,068
-------------------------------------------- -----------
Total liabilities 726,396 1,810,179 643,073
Commitments and contingency
Redeemable convertible preferred stock, $.001 par value--
40,000,000 shares authorized; 4,444,444 shares issued
and outstanding 1,510,484 -- 1,574,481
Shareholders' deficit:
Common stock, $.001 par value--100,000,000 shares
authorized; 26,116,899, 25,866,899 and 21,849,399 shares
issued and outstanding at December 31, 1998 and
September 30, 1998 and 1997, respectively. 25,867 21,849 26,117
Warrants 497,000 -- 497,000
Additional paid-in capital 10,856,139 8,263,707 10,868,389
Deficit accumulated during the development stage (11,501,136) (9,443,772) (11,448,543)
-------------------------------------------- -----------
Total shareholders' deficit (122,130) (1,158,216) (57,037)
-------------------------------------------- -----------
Total liabilities and shareholders' deficit $ 2,114,750 $ 651,963 2,160,517
============================================ ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 46
Demegen, Inc.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 6, 1991
(INCEPTION) TO
YEAR ENDED SEPTEMBER 30 SEPTEMBER 30
1998 1997 1996 1998
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income:
License $ 906,651 $ 100,000 $ -- $ 1,006,651
Grant and other 425,398 664,834 271,777 1,646,401
Interest 44,869 -- -- 44,869
-------------------------------------------------------------------------------
Total income 1,376,918 764,834 271,777 2,697,921
Expenses:
Research and development 880,965 596,772 754,059 3,979,205
General and administrative 2,338,817 866,910 1,623,443 8,887,728
Interest 28,295 172,356 424,205 979,584
Depreciation and amortization 122,594 72,569 39,548 288,929
-------------------------------------------------------------------------------
Total expenses 3,370,671 1,708,607 2,841,255 14,135,446
-------------------------------------------------------------------------------
Net loss (1,993,753) (943,773) (2,569,478) (11,437,525)
Preferred dividend and accretion
amounts (63,611) -- -- (63,611)
-------------------------------------------------------------------------------
Net loss applicable to common stock
$(2,057,364) $ (943,773) $(2,569,478) $(11,501,136)
===============================================================================
Net loss per common share, basic and
diluted $ (0.09) $ (0.05) $ (0.17)
===========================================================
Weighted average common stock
outstanding 23,867,091 19,537,047 15,479,889
===========================================================
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED DECEMBER 6, 1991
DECEMBER 31, (INCEPTION) TO
----------------------------------------- DECEMBER 31,
1998 1997 1998
----------------------------------------- -------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Income:
License $ 350,000 $ -- $ 1,356,651
Grant and other 272,917 277,024 1,919,318
Interest 19,483 -- 64,352
----------------------------------------- -------------------
Total income 642,400 277,024 3,340,321
Expenses:
Research and development 320,455 292,980 4,299,660
General and administrative 172,552 172,067 9,060,280
Interest 873 15,735 980,457
Depreciation and amortization 31,930 28,232 320,859
----------------------------------------- -------------------
Total expenses 525,810 509,014 14,661,256
----------------------------------------- -------------------
Net income (loss) 116,590 $ (231,990) (11,320,935)
Preferred dividend and accretion
amounts (63,997) -- (127,608)
----------------------------------------- -------------------
Net income (loss) applicable to
common stock $ 52,593 $ (231,990) $(11,448,543)
========================================= ===================
Net per common share,
basic and diluted $ 0.00 $ (0.01)
=========================================
Weighted average common stock
outstanding 26,076,138 21,849,399
=========================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 47
'
Demegen, Inc.
(A Development Stage Company)
Statements of Shareholders' Deficit
<TABLE>
<CAPTION>
COMMON STOCK
AVERAGE ---------------------------------
PRICE
PER SHARE SHARES AMOUNT WARRANTS
-------------- ---------------- ---------------- --------
<S> <C> <C> <C> <C>
Capital contributed by a shareholder -- $ -- --
Proceeds from the sale of unrestricted shares contributed by
shareholders in exchange for restricted shares $.62 439,045 439 --
Payment of debt with stock warrants -- -- --
Payment of interest with stock warrants -- -- --
Issuance of receivable from officer -- -- --
Net loss for the year -- -- --
---------------- ---------------- --------
Balance at September 30, 1993 11,182,616 11,183 --
Proceeds from the sale of unrestricted shares by shareholders
in exchange for restricted shares .75 691,738 692 --
Issuance of stock for consulting services 1.54 58,336 58 --
Issuance of stock subscriptions for loan origination fee 1.14 131,250 131 --
Payment of interest with stock warrants -- -- --
Net loss for the year -- -- --
---------------- ---------------- --------
Balance at September 30, 1994 12,063,940 12,064 --
Proceeds from the sale of restricted common shares 1.06 192,133 193 --
Issuance of restricted shares in exchange for unrestricted
shares contributed by shareholders 171,694 172 --
Proceeds from the sale of unrestricted shares contributed by
shareholders in exchange for restricted shares 2.18 -- -- --
Issuance of restricted shares for payment of services/compensation .89 402,251 402 --------
Issuance of warrants -- -- --
Payment of interest with stock warrants -- -- --
Net loss for the year -- -- --
---------------- ---------------- --------
Balance September 30, 1995 12,831,018 12,831 --
Proceeds from the sale of common shares .70 683,250 683 --
Issuance of shares for payment of services/compensation .60 890,868 891 --
Issuance of shares in settlement of outstanding debt
and other obligations .47 4,468,285 4,468 --
Payment of interest with warrants -- -- --
Net loss for the year -- -- --
---------------- ---------------- --------
Balance at September 30, 1996 18,873,421 18,873 --
Proceeds from the sale of restricted and unrestricted common shares .36 340,000 340 --
Issuance of shares for payment of services/compensation .41 1,178,258 1,178 --
Issuance of shares in exchange for patent and technology license .35 700,000 700 --
Issuance of restricted shares in exchange for unrestricted
shares contributed by shareholders 162,720 163 --
Exchange of amounts due to related parties for restricted shares .33 450,000 450 --
Exchange of redemption right of related party for additional
restricted shares .33 145,000 145 --
Settlement of amounts due to related parties through debt
forgiveness and issuance of shares -- -- --
Net loss for the year -- -- --
---------------- ---------------- --------
Balance at September 30, 1997 21,849,399 21,849 --
Proceeds from exercise of stock options $.05 1,750,000 1,750 --
Compensation expense from Stock option activity -- -- --
Issuance of warrants -- -- 497,000
Dividends on redeemable convertible preferred stock -- --
Accretion of redeemable convertible preferred stock -- -- --
Issuance of shares for payment of collaborators $.47 20,000 20 --
Settlement of employee litigation $.36 1,975,000 1,975 --
Issuance of shares for services $.47 187,500 188 --
Issuance of additional shares to venture capital funds and
individual investors 85,000 85 --
Net loss for the year -- -- --
---------------- ---------------- --------
Balance at September 30, 1998 25,866,899 $25,867 497,000
================ ================ ========
Dividends on redeemable convertible preferred stock (unaudited) -- -- --
Accretion of redeemable convertible preferred stock (unaudited) -- -- --
Proceeds from exercise of Stock options (unaudited) $.05 250,000 250 --
Net income for 3 month period ended December 31, 1998 (unaudited) -- -- --
---------------- ---------------- --------
Balance at December 31, 1998 (unaudited) 26,116,899 $26,117 497,000
================ ================ ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 48
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PAID-IN RECEIVABLE DEVELOPMENT
CAPITAL FROM OFFICER STAGE TOTAL
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital contributed by a shareholder $ 123,700 $ -- $ -- $ 123,700
Proceeds from the sale of unrestricted shares contributed by
shareholders in exchange for restricted shares 272,461 -- -- 272,900
Payment of debt with stock warrants 33,333 -- -- 33,333
Payment of interest with stock warrants 17,774 -- -- 17,774
Issuance of receivable from officer -- (65,117) -- (65,117)
Net loss for the year -- -- (1,044,154) (1,044,154)
--------------------------------------------------------------
Balance at September 30, 1993 759,949 (65,117) (1,288,254) (582,239)
Proceeds from the sale of unrestricted shares by shareholders
in exchange for restricted shares 517,708 -- -- 518,400
Issuance of stock for consulting services 89,942 -- -- 90,000
Issuance of stock subscriptions for loan origination fee 149,869 -- -- 150,000
Payment of interest with stock warrants 56,164 -- -- 56,164
Net loss for the year -- -- (1,768,428) (1,768,428)
--------------------------------------------------------------
Balance at September 30, 1994 1,573,632 (65,117) (3,056,682) (1,536,103)
Proceeds from the sale of restricted common shares 204,807 -- -- 205,000
Issuance of restricted shares in exchange for unrestricted
shares contributed by shareholders (172) -- -- --
Proceeds from the sale of unrestricted shares contributed by
shareholders in exchange for restricted shares 349,304 65,117 -- 414,421
Issuance of restricted shares for payment of services/compensation 357,681 -- -- 358,083
Issuance of warrants 11,625 -- -- 11,625
Payment of interest with stock warrants 127,500 -- -- 127,500
Net loss for the year -- -- (2,873,839) (2,873,839)
--------------------------------------------------------------
Balance September 30, 1995 2,624,377 -- (5,930,521) (3,293,313)
Proceeds from the sale of common shares 479,817 -- -- 480,500
Issuance of shares for payment of services/compensation 536,359 -- -- 537,250
Issuance of shares in settlement of outstanding debt
and other obligations 2,113,054 -- -- 2,117,522
Payment of interest with warrants 84,996 -- -- 84,996
Net loss for the year -- -- (2,569,478) (2,569,478)
--------------------------------------------------------------
Balance at September 30, 1996 5,838,603 -- (8,499,999) (2,642,523)
Proceeds from the sale of restricted and unrestricted common shares 104,660 -- -- 105,000
Issuance of shares for payment of services/compensation 477,629 -- -- 478,807
Issuance of shares in exchange for patent and technology license 244,300 -- -- 245,000
Issuance of restricted shares in exchange for unrestricted
shares contributed by shareholders (163) -- -- --
Exchange of amounts due to related parties for restricted shares 149,550 -- -- 150,000
Exchange of redemption right of related party for additional
restricted shares (145) -- -- --
Settlement of amounts due to related parties through debt
forgiveness and issuance of shares 1,449,273 -- -- 1,449,273
Net loss for the year -- -- (943,773) (943,773)
--------------------------------------------------------------
Balance at September 30, 1997 8,263,707 -- (9,443,772) (1,158,216)
Proceeds from exercise of stock options 85,750 -- -- 87,500
Compensation expense from stock option activity 1,699,440 -- -- 1,699,440
Issuance of warrants -- -- -- 497,000
Dividends on redeemable convertible preferred stock -- -- (40,000) (40,000)
Accretion of redeemable convertible preferred stock -- -- (23,611) (23,611)
Issuance of shares for payment of collaborators 9,360 -- -- 9,380
Settlement of employee litigation 710,217 -- -- 712,192
Issuance of shares for services 87,750 -- -- 87,938
Issuance of additional shares to venture capital funds and
individual investors (85) -- -- --
Net loss for the year -- -- (1,993,753) (1,993,753)
--------------------------------------------------------------
Balance at September 30, 1998 $10,856,139 $ -- $(11,501,136) $ (122,130)
==============================================================
Dividends on redeemable convertible preferred stock (unaudited) -- -- (40,000) (40,000)
Accretion of redeemable convertible preferred stock (unaudited) -- -- (23,997) (23,997)
Proceeds from exercise of Stock options (unaudited) 12,250 -- -- 12,500
Net income for 3 month period ended December 31, 1998 (unaudited) -- -- 116,590 116,590
--------------------------------------------------------------
Balance at December 31, 1998 (unaudited) 10,868,389 -- (11,448,543) (57,037)
==============================================================
</TABLE>
F-6
<PAGE> 49
Demegen, Inc.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 6, 1991
(INCEPTION)
YEAR ENDED SEPTEMBER 30 TO SEPTEMBER 30
1998 1997 1996 1998
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,993,753) $(943,773) $(2,569,478) $(11,437,525)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 122,594 72,569 39,548 288,929
Stock issued for services 97,318 478,807 537,250 1,729,058
Loss on disposals of equipment -- 17,722 -- 17,722
Issuance of stock options to employees and
directors 1,699,440 -- -- 1,699,440
Warrants issued for interest -- -- 84,996 286,434
Notes payable issued for services -- -- -- 58,194
Write-off of intangible assets -- -- -- 6,626
Changes in operating assets and liabilities:
Accounts receivable (59,929) -- -- (59,929)
Prepaid expenses and other current assets (10,409) 23,363 (21,847) (11,859)
Unearned revenue 183,333 -- -- 183,333
Accounts payable and other liabilities (141,186) (206,861) 497,204 1,208,710
Interest payable -- -- (146,888) --
-------------------------------------------------------------------------------
Net cash used in operating activities (102,592) (558,173) (1,579,215) (6,030,867)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (54,027) (3,595) (29,478) (173,218)
Cash received on equipment disposals -- 9,643 -- 9,643
Intangible assets (84,610) (79,532) (19,362) (183,504)
-------------------------------------------------------------------------------
Net cash used in investing activities (138,637) (73,484) (48,840) (347,079)
CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from issuance of equity
instruments 1,943,873 105,000 480,500 4,309,500
Proceeds from exercise of stock options 87,500 -- -- 87,500
Proceeds from notes payable -- -- -- 1,127,500
(Decrease) increase in payable to employees
and directors (413,738) 817,643 1,189,011 2,600,798
Payments on notes payable -- -- (23,194) (60,694)
-------------------------------------------------------------------------------
Net cash provided by financing activities 1,617,635 922,643 1,646,317 8,064,604
-------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 1,376,406 290,986 18,262 1,686,658
Cash and cash equivalents at beginning of
period 310,252 19,266 1,004 --
-------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,686,658 $ 310,252 $ 19,266 $ 1,686,658
===============================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ 14,080 $ -- $ -- $ 21,642
===============================================================================
NONCASH ACTIVITIES
Common stock issued in satisfaction of related
party payable $ 712,192 $ -- $ -- $ 712,192
===============================================================================
Dividends on redeemable convertible preferred
stock $ 40,000 $ -- $ -- $ 40,000
===============================================================================
Accretion of redeemable convertible preferred
stock $ 23,611 $ -- $ -- 23,611
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED DECEMBER 6, 1991
DECEMBER 31, (INCEPTION)
----------------------------------------- TO DECEMBER 31,
1998 1997 1998
----------------------------------------- ------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 116,590 $(231,990) $(11,320,935)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 31,930 28,231 320,859
Stock issued for services -- -- 1,729,058
Loss on disposals of equipment -- -- 17,722
Issuance of stock options to employees and
directors -- -- 1,699,440
Warrants issued for interest -- -- 286,434
Notes payable issued for services -- -- 58,194
Write-off of intangible assets -- -- 6,626
Changes in operating assets and liabilities:
Accounts receivable 42,637 (275,000) (17,292)
Prepaid expenses and other current assets 6,174 1,450 (5,685)
Unearned revenue (22,916) 252,083 160,417
Accounts payable and other liabilities (76,643) 57,763 1,132,067
Interest payable -- -- --
-------------------------------------------------------------------------------
Net cash used in operating activities 97,772 (167,463) (5,933,095)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (14,909) (32,815) (188,127)
Cash received on equipment disposals -- -- 9,643
Intangible assets -- (1,450) (183,504)
-------------------------------------------------------------------------------
Net cash used in investing activities (14,909) (34,265) (361,988)
CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from issuance of equity
instruments -- -- 4,309,500
Proceeds from exercise of stock options 12,500 -- 100,000
Proceeds from notes payable -- -- 1,127,500
(Decrease) increase in payable to employees
and directors 16,236 (61,601) 2,617,034
Payments on notes payable -- -- (60,694)
-------------------------------------------------------------------------------
Net cash provided by financing activities 28,736 (61,601) 8,093,340
-------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 111,599 (263,329) 1,798,257
Cash and cash equivalents at beginning of
period 1,686,658 310,252 --
-------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,798,257 $ 46,923 $ 1,798,257
===============================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ 873 $ 2,742 $ 22,515
===============================================================================
NONCASH ACTIVITIES
Common stock issued in satisfaction of related
party payable $ -- $ -- $ 712,192
===============================================================================
Dividends on redeemable convertible preferred
stock $ 40,000 $ -- $ 80,000
===============================================================================
Accretion of redeemable convertible preferred
stock $ 23,997 $ -- 47,608
===============================================================================
</TABLE>
See accompanying notes.
F-7
<PAGE> 50
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements
September 30, 1998
(Information as of December 31, 1998 and for the
Three Months Ended December 31, 1998 and 1997 is unaudited)
1. HISTORY AND NATURE OF THE BUSINESS
Demeter BioTechnologies, Ltd. was formed after the July 27, 1992 acquisition of
the assets of The Demeter Corporation by Excelsior Capital Corporation
("Excelsior"). Excelsior was incorporated in Colorado on September 16, 1987.
Excelsior acquired all the assets of The Demeter Corporation in exchange for
6,625,821 shares of Excelsior's $.001 par value common stock. The Demeter
Corporation's assets consisted of intangible assets related to various
biotechnology applications in the fields of human and animal health care,
agriculture, and commercial chemicals.
For accounting purposes, the acquisition was treated as a reverse acquisition
whereby The Demeter Corporation acquired Excelsior Capital Corporation. The
historical financial statements prior to the acquisition are those of The
Demeter Corporation utilizing the capital structure of Excelsior. However, The
Demeter Corporation had no operating activities from the date of inception,
December 6, 1991, through July 27, 1992. Likewise, Excelsior had no operating
activities prior to December 6, 1991.
On September 18, 1998, the Board of Directors of the Company ratified the
shareholder vote changing the Company's name from Demeter BioTechnologies, Ltd.
to Demegen, Inc. (the "Company").
The Company designs unique molecules which have antimicrobial characteristics,
but with low toxicity and benign environmental impact. The Company's products,
called MIMS(TM) (Membrane Interactive Molecules), are peptides (small proteins)
or peptide-like molecules. Their primary feature is their ability to destroy a
wide range of bacteria, viruses, fungi, protozoa, and cancer cells at low
concentrations without harming healthy cells. The Company also designs genes
which, when incorporated into a plant, have the ability to confer disease
resistance or improve nutritional value. The Company uses university, corporate,
and governmental strategic alliance partners to determine efficacy in treating a
specific pathogen and then licenses the use of the compounds for that
application. If successful, the Company's primary source of revenues will be
from supplying the compounds to licensees, royalties, and research grants. The
Company has licensed substantially all of its plant agricultural technologies to
Mycogen Corporation.
INTERIM FINANCIAL INFORMATION
The financial information at December 31, 1998 and for the three months ended
December 31, 1998 and 1997 is unaudited, but includes all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the financial position at such date and
the operating results and cash flows for those periods. Operating results for
the three months ended December 31, 1998 are not necessarily indicative of the
results that may be expected for the entire year.
F-8
<PAGE> 51
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists principally of currency on hand, demand
deposits at commercial banks, and liquid investment funds having a maturity of
three months or less at the time of purchase.
RECLASSIFICATIONS
Certain amounts reflected in the prior period financial statements have been
reclassified in order to conform with the fiscal 1998 presentation.
PREOPERATING COSTS
Costs incurred during the developmental stage, such as expenses associated with
research and development, raising capital, establishing markets, and developing
sources of supply, are expensed as incurred.
COMMON STOCK ISSUED FOR OTHER THAN CASH
Services purchased and other transactions settled in the Company's common stock
are recorded at the estimated fair value of the stock issued if that value is
more readily determinable than the fair value of the consideration received.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives (generally three to five
years) of the individual assets. Depreciation expense amounted to $30,824,
$34,554, and $39,598 during 1998, 1997, and 1996, respectively. Accelerated
depreciation methods are used for income tax purposes.
F-9
<PAGE> 52
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets include patent costs and purchased license agreements and are
stated at cost, net of accumulated amortization. Amortization is calculated
using the straight-line method over estimated useful lives ranging from 3 to 17
years. The Company assesses on an ongoing basis the recoverability of the cost
of its patents and licenses by determining its ability to generate future cash
flows sufficient to recover the recorded amounts over the remaining useful lives
of the assets. This process necessarily involves significant management
judgment. The Company currently anticipates fully recovering the recorded cost
of these assets and, accordingly, no valuation adjustment has been recognized to
date. Because of the development stage nature of the Company, significant
uncertainty exists as to whether revenue expectations will be met. Should the
Company determine in the future that permanent diminution in value of the
intangibles has occurred, a charge against operating results would be recorded.
GRANT AND OTHER INCOME
The terms of grant agreements may restrict the use of grant funds to certain
activities and costs.
During the quarter ending December 31, 1998 and fiscal years 1998 and 1997, the
Company received grant proceeds of $250,000 (unaudited), $250,000 and $500,000,
respectively, from the Pacific West Cancer Fund in support of the Company's
cancer research efforts. The funds were recognized as revenue upon receipt as
the contract did not contain any penalties, successful outcomes clauses or
refunding provisions.
The Company received approximately $79,000, $85,000 and $50,000 in fiscal 1998,
1997 and 1996 under research agreements with the National Institute of Health
and the National Science Foundation. Revenue was recognized as the research
funds were expended.
LICENSE AND SUPPORT
License fees are recognized at the time that the agreement is entered into as
the earning process is complete and the Company has no future performance
obligations. Support fees are recognized ratably over the contract period as the
related costs are incurred.
Milestone payments will be recognized upon the achievement of the related
criteria by the respective license subject to a reasonable assurance that the
milestone payment will be forthcoming.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"). SFAS No. 123 permits the Company to continue accounting for stock-based
compensation as set forth in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB Opinion No. 25"), provided the
Company discloses the pro forma effect on net income and earnings per share of
adopting the full provisions of SFAS No. 123. Accordingly, the Company continues
to account for stock-based compensation under APB Opinion No. 25 and has
provided the required pro forma disclosures.
F-10
<PAGE> 53
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. INCOME TAXES
The Company accounts for income taxes using the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities.
Significant components of the Company's deferred tax asset at September 30,
1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
* Compensation expense on unexercised
stock options $ 454,000 --
* NOL carry forwards 2,251,000 1,974,000
* Excess book amortization 35,000 10,000
----------- ----------
Total deferred tax asset $ 2,740,000 1,984,000
Valuation allowance (2,740,000) 1,984,000
----------- ----------
Net deferred tax assets $ 0 $ 0
</TABLE>
Net operating losses totaling approximately $5,900,000 are currently available
and begin to expire in 2007. Deferred tax liabilities relate to differences in
the financial and tax carrying amounts of fixed assets.
A valuation allowance has been provided for the entire deferred tax asset
amount until such time that the Company demonstrates the ability to produce
taxable income.
4. RELATED PARTY TRANSACTIONS
During 1997, the Company reached agreements with certain current and former
employees related to amounts payable to these individuals for primarily wages.
The amounts payable to these individuals at August 31, 1997 of approximately
$2,200,000 were reduced to approximately $646,000 at September 30, 1997
primarily through the exchange of amounts accrued and payable for shares of the
Company's common stock. The Company has recorded the issuance of shares as a
contribution of capital from certain of its officers, management, and key
employees at the value per share as negotiated in the agreements. Accordingly,
common stock and additional paid-in capital increased by approximately
$1,600,000 related to the agreement. The agreements also provide for either the
payment of bonuses totaling $185,000 or the issuance of 185,000 shares of the
Company's common stock at $1.00 per share to the employees in future years
should target levels of license and/or royalty revenues be achieved.
During 1996, the Company converted the majority of its notes payable to
shareholders through the issuance of common stock. Pursuant to the terms of
these settlements, notes payable of $1,091,667, accrued interest of $361,094,
and outstanding warrants covering 1,832,194 shares of common stock, valued at
$319,767 were satisfied through the issuance of 3,755,285 shares of the
Company's restricted common stock. The value assigned to the common stock issued
was based upon the amounts contained in the respective debt agreements relative
to the forgone debt and related accrued interest and the value of the warrants
were based upon debt and interest payments exchanged for warrants in prior
years.
In December 1996, a former employee filed a claim against the Company for
payment of back compensation, payment of outstanding promissory notes, and for
termination provisions of his employment contract. The Company filed for
arbitration, as called for in the employment contract. In October 1997, the
Court stayed the litigation and ordered the parties to proceed with
F-11
<PAGE> 54
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
arbitration. In January 1998, the matter was settled with the issuance of
1,975,000 shares of the Company's common stock and a cash payment of $30,000.
The expenses related to this settlement were recorded in fiscal 1997 and prior
years.
5. COMMON STOCK
Included in the common stock account balances at September 30, 1998 and 1997 are
425,000 and 855,950 restricted shares for which the Company has received
consideration, either in cash or services provided, but has not yet issued the
restricted share certificates to the shareholders.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In June 1998, the Company issued 4,444,444 shares of redeemable convertible
preferred stock ("preferred stock") and warrants for net proceeds of $1,943,873
(net of $56,127 of expenses incurred in connection with the issuance). Of the
total proceeds $497,000 was allocated to warrants as the estimated fair value.
The holders of the preferred stock are entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available therefore,
dividends at the rate of $0.036 per share, semiannually, on each outstanding
share of convertible preferred stock. Such dividends have a priority over any
dividends paid on the common stock. Dividends on the preferred stock are
cumulative and the right to such dividends shall accrue to holders of
convertible preferred stock until declared by the Board of Directors. The
Company has accounted for the cumulative semiannual dividends through periodic
accretion to the preferred stock.
In the event of any liquidation, dissolution, or winding up of the Company, the
holders of preferred stock shall be entitled to receive the greater of $0.45 per
share, plus all unpaid and accrued dividends thereon, or the amount the holder
of the shares of the preferred stock would otherwise be entitled to receive had
each such share been converted into common stock immediately prior to such
liquidation, dissolution or wind-up.
Each share of preferred stock is convertible at any time, at the option of the
holder thereof, into an equal number of fully paid and nonassessable shares of
common stock. In addition, if at any time the Company shall effect a firm
commitment underwritten public offering of shares of common stock in which the
aggregate price paid for such shares by the public shall be at least $8,000,000,
then effective immediately before the closing of the sale of such shares by the
Company pursuant to such public offering, all outstanding shares of preferred
stock shall automatically convert to common stock.
F-12
<PAGE> 55
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
The shares of preferred stock shall be redeemable at the election of the holder
upon at least ninety days notice to the Company. The Company shall redeem from
the holder on or at any time after May 31, 2003, 2004, and 2005, up to one-third
of the shares of preferred stock held by the holder, with the intent that,
should the holder elect, at any time after May 31, 2005, the total number of
shares held by the holder would be subject to redemption. The preferred stock to
be redeemed shall be paid for in cash at an amount equal to the greater of (i)
$0.45 per share plus, in the case of each share, an amount equal to all accruing
unpaid dividends (whether or not declared), or (ii) such amount per share as
would have been payable had each such share been converted to common stock
immediately prior to the actual date of redemption.
The shares of preferred stock vote on matters on an as-converted basis; i.e.,
each share of preferred stock has one vote, as do each owner of a share of
common stock.
The holder of the preferred stock has a warrant to purchase 4,965,556 shares of
common stock of the Company at $0.45 per share. The warrant shall be
exercisable, in whole or in part, through June 14, 2008. The Company may call
the warrant at any time after December 31, 1998, provided the Company's common
stock has been in excess of $1.50 per share for each of the forty consecutive
trading days immediately preceding the date of the call.
Upon receipt of the call, the call holder shall have sixty days to elect to
exercise all or a portion of this warrant. Upon such exercise, in addition to
receiving the number of shares of common stock to which the holder shall be
entitled, the holder of the warrant also shall receive a new warrant
("replacement warrant"). The replacement warrant shall be exercisable for one
share of common stock for every two shares of common stock purchased in response
to the aforementioned call. The exercise price of the replacement warrant is
$1.50 per share, and the term of the replacement warrant shall be the longer of
two years from the date of the issuance or the balance of the original term of
the warrant.
7. STOCK OPTIONS AND WARRANTS
The Company granted stock options to certain employees and directors during the
year ended September 30, 1998 at a $0.05 per share exercise price, which was
below the fair value based upon management's estimate of the fair value of the
stock issued at the date of grant. The shares were fully vested at September 30,
1998, and a $1,699,440 noncash charge was recognized to reflect the compensation
value of the options issued. All of these options expire in 2008.
F-13
<PAGE> 56
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
The Company granted stock options to certain employees and directors during the
years ended September 30, 1996 and 1997 at exercise prices which approximated
fair value at the date of grant. Options granted to an officer in 1996 vested
200,000 shares each at the date of issuance and November 1, 1996, with the
remaining options vesting on November 1, 1997.
Options granted during the year ended September 30, 1997 vested immediately.
A summary of the Company's stock option activity is at follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE FAIR VALUE
----------------------------------------------------------------
<S> <C> <C> <C>
Options granted during year 600,000 $0.15 $0.03
----------------------------------------------------------------
Balance at September 30, 1996 600,000 $0.15 $0.03
Options granted during year 425,000 $0.77 $0.17
----------------------------------------------------------------
Balance at September 30, 1997 1,025,000 $0.41 $0.09
Options granted during year 5,820,000 $0.05 $0.27
Options exercised for common stock during year
(1,750,000) $0.05 $0.27
----------------------------------------------------------------
Balance at September 30, 1998 5,095,000 $0.12 $0.23
================================================================
Granted during quarter 50,000 $0.45 $0.45
Options exercised for common stock during quarter (250,000) $0.05 $0.27
----------------------------------------------------------------
Balance at December 31, 1998 4,895,000 $0.13 $0.24
================================================================
</TABLE>
As of December 31, 1998, September 30, 1998 and 1997, 4,865,000, 5,095,000 and
825,000, respectively, of the options were vested and exercisable.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
options pricing model with the following weighted average assumptions for fiscal
1998, 1997, and 1996: risk-free interest rate of 6%; dividend yield of 0%; and
volatility factors of the expected market price of the Company's common stock of
0.97, 1.24, and 2.47 in fiscal 1998, 1997, and 1996, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics
F-14
<PAGE> 57
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Changes in the subjective input assumptions can materially affect the fair value
estimate, and therefore, the existing models do not necessarily provide a
reliable single measure of the fair value of employee stock options. Had the
compensation cost of the Company's stock option plans been determined based on
the fair value at the date of grant for awards in 1998, 1997, and 1996
consistent with the provisions of SFAS No. 123, the Company's net loss would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30 QUARTER ENDED DECEMBER 31,
1998 1997 1996 1998 1997
-------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
Net income (loss) available to common stock:
As reported $(2,057,364) $ (943,773) $(2,569,478) $52,593 $(231,990)
Pro forma $(3,593,498) $(1,370,617) $(2,597,900) $52,593 $(231,990)
Basic and diluted earnings per share:
As reported $(0.09) $(0.05) $(0.17) $ 0.00 $ (0.01)
Pro forma $(0.15) $(0.07) $(0.17) $ 0.00 $ (0.01)
</TABLE>
At September 30, 1998, there were outstanding warrants to purchase 4,000 shares
of the Company's common stock at an exercise price of $2.50 per warrant. The
warrants expire December 31, 1999. Additionally, the holder of the preferred
stock holds a warrant to purchase common stock (refer to Note 6 for additional
information).
8. COMMITMENTS
The Company leases its office and laboratory facilities under a three-year lease
expiring September 30, 2001 at a monthly rental of $3,793. During 1998, 1997,
and 1996, the Company incurred rent expense totaling $34,105, $45,100, and
$48,540, respectively.
During 1996, the Company received equity investments totaling $285,000 from a
venture capital fund and/or its individual investors. The Company has issued an
aggregate of 577,000 shares
F-15
<PAGE> 58
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
8. COMMITMENTS (CONTINUED)
related to these investments. The Company has subsequently issued 85,000
additional shares during 1998 as the per share price in the Company's next round
of financing was less than $.50 per share.
During 1997, the Company entered into a license agreement with a university to
obtain certain patent rights. In exchange for the license of the patents, the
Company issued common stock. The value assigned to the patents was based upon
management's estimate of the fair value of the stock issued. In addition, the
Company is obligated to pay certain royalties under the terms of the agreement
for each licensed product. The agreement requires minimum royalty payments to
maintain the license of the patents. The Company paid $45,000 in royalty
payments pursuant to this agreement in 1998.
9. MARKETING
In December 1997, the Company entered into a license agreement with Mycogen
Corporation whereby the Company licensed substantially all rights for disease
prevention and treatment for agricultural applications. The Company received a
license issue fee of $950,000, consisting of $700,000 for the rights to licensed
patents and the Company's technology in the field of activity, $200,000 for the
rights to the Company's patents and technology for use in formulated licensed
products and $50,000 for the right of first refusal through September 30, 1998
to obtain an exclusive license to the Company's Nutrition Patents and
Technology. These payments were recognized as revenue in fiscal 1998, as the
earnings process was complete according to the terms of the contract.
The agreement also provided that the Company receive $300,000 to provide Mycogen
with support services of personnel for a joint research effort for a three year
period. This was classified as unearned revenue on the balance sheet and is
being amortized into revenue, on a straight-line basis, over the three year life
of the support services commitment.
The agreement also provides for milestone payments (amounts based upon Mycogen's
attainment of certain contract defined outputs measures) to be made to the
Company by Mycogen upon 1) regulatory approval or first sale of any type of
product by Mycogen, 2) additional payment for first commercial sale of certain
crops by Mycogen and 3) additional payment for first commercial sale of any
other crop within the field of activity by Mycogen. The Company will also
receive royalties on all sales by Mycogen and all sublicenses entered into by
Mycogen. Minimum annual royalties are due beginning January 1, 2003 through 2014
and are recoupable against the aforementioned royalties due from Mycogen.
Mycogen will undertake management of future development, regulatory approvals,
seed production and marketing. The companies will also undertake a joint
agricultural research effort, as discussed above, to identify new molecular
designs. Mycogen may unilaterally terminate this agreement without cause.
10. NET LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30 QUARTER ENDED DECEMBER
1998 1997 1996 1998 1997
------------------------------------------------- -------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income loss $(1,993,753) $ (943,773) $(2,569,478) 116,590 (231,990)
Preferred stock dividends and accretion
amounts (63,611) -- -- (63,997) --
------------------------------------------------- ------------------------
Numerator for basic earnings per
share--income available to common
stockholders (2,057,364) (943,773) (2,569,478) 52,593 (231,990)
Denominator:
Denominator for basic and earnings per
share--weighted average shares 23,867,091 19,537,047 15,479,889 26,076,138 21,849,399
------------------------------------------------- ------------------------
Basic and diluted earnings per share $ (0.09) $ (0.05) $ (0.17) $ 0.00 $ (0.01)
================================================= ========================
</TABLE>
At September 30, 1998, the Company had 5,095,000 options outstanding for the
purchase of the Company's Common Stock at exercise prices ranging form $0.05
per share to $0.77 per share. Additionally, the 4,444,444 shares of Redeemable
Convertible Preferred Stock are convertible into the Company's Common Stock on a
1 for 1 basis. Furthermore, the holder of the Redeemable Convertible Preferred
Stock holds a warrant for 4,965,556 shares of the Company's Common Stock at an
exercise price of $0.45 per share. These potentially dilutive securities were
not included in the calculation of dilutive earnings per share because the
effect would be anti-dilutive.
F-16
<PAGE> 59
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
11. SUBSEQUENT EVENT
The Mycogen Agreement was amended on October 11, 1998 to provide Mycogen with an
additional license for the Company's agricultural nutrition technologies. The
Company received a minimum annual royalty of $200,000 at the execution of the
contract. Additionally, the Company received an initial payment of $150,000 with
an additional $150,000 to be received six months after the contract execution.
The research funding is to increase by $50,000 annually over the remaining four
years of the funding term. These payments were currently recognized as revenue
as the earnings process was complete according to the terms of the contract and
the payments are not subject to recoupment by Mycogen.
The agreement also provides for milestone payments (amounts based upon Mycogen's
attainment of certain contract defined output measures) to be made to the
Company by Mycogen upon 1) technical feasibility benchmark payments for certain
products developed by Mycogen, 2) animal feeding benchmark in certain animal
studies by Mycogen 3) additional payment for first commercial sale of certain
crops by Mycogen, 4) additional payment for first commercial sale of any other
crop within a contractually defined field of activity by Mycogen and 5)
additional payments for achievement of cumulative gross margin benchmark for
sale of certain crops by Mycogen. The Company will also receive royalties on all
sales by Mycogen and all sublicenses entered into by Mycogen. Minimum annual
royalties cease upon the achievement of certain of the aforementioned
benchmarks.
In addition, Mycogen will be responsible for all development and
commercialization costs, Mycogen is now owned by the Dow Chemical Company.
F-17
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
KNOW BY ALL MEN BY THESE PRESENTS, that the undersigned director of
Demegen, Inc., a Colorado Corporation, does make, constitute and appoint RICHARD
D. EKSTROM, with full power and authority his true and lawful attorney-in-fact
and agent, for him and his name, place and stead in any and all capacities, to
sign the Initial Report of Demegen, Inc. on Form 10/A for the period ended
September 30, 1998, and to file such Initial Report, so signed, with all
exhibits thereto, with the Securities and Exchange Commission, hereby further
granting unto said attorney-in-fact full power and authority to do and perform
any and all acts and things requisite and necessary to be done in and about the
premises as fully to all intents and purposes as he might or could do in person;
the undersigned hereby ratifies and confirms all that said attorney and agent,
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, THE UNDERSIGNED HAS HEREUNTO SET HIS HAND AND SEAL THIS
23rd day of April, 1999.
/s/ Jesse M. Jaynes (SEAL)
--------------------------------------
Jesse M. Jaynes, Ph.D., Director
<PAGE> 2
POWER OF ATTORNEY
KNOW BY ALL MEN BY THESE PRESENTS, that the undersigned director of
Demegen, Inc., a Colorado Corporation, does make, constitute and appoint RICHARD
D. EKSTROM, with full power and authority his true and lawful attorney-in-fact
and agent, for him and his name, place and stead in any and all capacities, to
sign the Initial Report of Demegen, Inc. on Form 10/A for the period ended
September 30, 1998, and to file such Initial Report, so signed, with all
exhibits thereto, with the Securities and Exchange Commission, hereby further
granting unto said attorney-in-fact full power and authority to do and perform
any and all acts and things requisite and necessary to be done in and about the
premises as fully to all intents and purposes as he might or could do in person;
the undersigned hereby ratifies and confirms all that said attorney and agent,
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, THE UNDERSIGNED HAS HEREUNTO SET HIS HAND AND SEAL THIS
23rd day of April, 1999.
/s/ James Colker
(SEAL)
- --------------------------------------
James Colker, Director
<PAGE> 3
POWER OF ATTORNEY
KNOW BY ALL MEN BY THESE PRESENTS, that the undersigned director of
Demegen, Inc., a Colorado Corporation, does make, constitute and appoint RICHARD
D. EKSTROM, with full power and authority his true and lawful attorney-in-fact
and agent, for him and his name, place and stead in any and all capacities, to
sign the Initial Report of Demegen, Inc. on Form 10/A for the period ended
September 30, 1998, and to file such Initial Report, so signed, with all
exhibits thereto, with the Securities and Exchange Commission, hereby further
granting unto said attorney-in-fact full power and authority to do and perform
any and all acts and things requisite and necessary to be done in and about the
premises as fully to all intents and purposes as he might or could do in person;
the undersigned hereby ratifies and confirms all that said attorney and agent,
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, THE UNDERSIGNED HAS HEREUNTO SET HIS HAND AND SEAL THIS
23rd day of April, 1999.
/s/ Donald A. Guthrie
(SEAL)
- --------------------------------------
Donald A. Guthrie, Ph.D., Director
<PAGE> 4
POWER OF ATTORNEY
KNOW BY ALL MEN BY THESE PRESENTS, that the undersigned director of
Demegen, Inc., a Colorado Corporation, does make, constitute and appoint RICHARD
D. EKSTROM, with full power and authority his true and lawful attorney-in-fact
and agent, for him and his name, place and stead in any and all capacities, to
sign the Initial Report of Demegen, Inc. on Form 10/A for the period ended
September 30, 1998, and to file such Initial Report, so signed, with all
exhibits thereto, with the Securities and Exchange Commission, hereby further
granting unto said attorney-in-fact full power and authority to do and perform
any and all acts and things requisite and necessary to be done in and about the
premises as fully to all intents and purposes as he might or could do in person;
the undersigned hereby ratifies and confirms all that said attorney and agent,
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, THE UNDERSIGNED HAS HEREUNTO SET HIS HAND AND SEAL THIS
23rd day of April, 1999.
/s/ John Bridwell
(SEAL)
- --------------------------------------
John Bridwell, Director
<PAGE> 5
POWER OF ATTORNEY
KNOW BY ALL MEN BY THESE PRESENTS, that the undersigned director of
Demegen, Inc., a Colorado Corporation, does make, constitute and appoint RICHARD
D. EKSTROM, with full power and authority his true and lawful attorney-in-fact
and agent, for him and his name, place and stead in any and all capacities, to
sign the Initial Report of Demegen, Inc. on Form 10/A for the period ended
September 30, 1998, and to file such Initial Report, so signed, with all
exhibits thereto, with the Securities and Exchange Commission, hereby further
granting unto said attorney-in-fact full power and authority to do and perform
any and all acts and things requisite and necessary to be done in and about the
premises as fully to all intents and purposes as he might or could do in person;
the undersigned hereby ratifies and confirms all that said attorney and agent,
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, THE UNDERSIGNED HAS HEREUNTO SET HIS HAND AND SEAL THIS
23rd day of April, 1999.
/s/ Alfonse Love-Cordero
(SEAL)
- --------------------------------------
Alfonso Lovo-Cordero, LL.D, Director
<PAGE> 6
POWER OF ATTORNEY
KNOW BY ALL MEN BY THESE PRESENTS, that the undersigned director of
Demegen, Inc., a Colorado Corporation, does make, constitute and appoint RICHARD
D. EKSTROM, with full power and authority his true and lawful attorney-in-fact
and agent, for him and his name, place and stead in any and all capacities, to
sign the Initial Report of Demegen, Inc. on Form 10/A for the period ended
September 30, 1998, and to file such Initial Report, so signed, with all
exhibits thereto, with the Securities and Exchange Commission, hereby further
granting unto said attorney-in-fact full power and authority to do and perform
any and all acts and things requisite and necessary to be done in and about the
premises as fully to all intents and purposes as he might or could do in person;
the undersigned hereby ratifies and confirms all that said attorney and agent,
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, THE UNDERSIGNED HAS HEREUNTO SET HIS HAND AND SEAL THIS
23rd day of April, 1999.
/s/ Konrad M. Weis (SEAL)
- --------------------------------------
Konrad M. Weis, Ph.D., Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
BALANCE SHEET AT DECEMBER 31, 1998 AND STATEMENT OF OPERATIONS FOR THE THREE
MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,798,257
<SECURITIES> 0
<RECEIVABLES> 17,292
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,821,234
<PP&E> 166,765
<DEPRECIATION> 103,269
<TOTAL-ASSETS> 2,160,517
<CURRENT-LIABILITIES> 341,857
<BONDS> 0
0
1,574,481
<COMMON> 26,117
<OTHER-SE> (83,154)
<TOTAL-LIABILITY-AND-EQUITY> 2,160,517
<SALES> 0
<TOTAL-REVENUES> 642,400
<CGS> 0
<TOTAL-COSTS> 525,810
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 116,590
<INCOME-TAX> 0
<INCOME-CONTINUING> 116,590
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116,590
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
