FORM 10-SB 12(g)/A
Amendment No. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the
Securities Exchange Act of 1934
BIOLABS, INC.
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(Name of Small Business Issuer in its charter)
NEW YORK
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1A-3033 KING GEORGE HIGHWAY, SURREY B.C. CANADA V4P 1B8
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (604)542-0820
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Securities to be registered under Section 12(b) of the Act:
Title of each class to be so registered Name of each exchange
on which each class is
to be registered
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Securities to be registered under Section 12(g) of the Act:
Common Stock, Par Value $0.0001
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(Title of class)
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PART I
Item 1. Description of Business.
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BioLabs, Inc. a New York corporation, having its principal place of business in
Surrey, British Columbia, Canada (herein, the "Company") is a development stage
company formed to manufacture and market certain cancer therapy tests developed
by others. The Company was previously known as Flexx Realm, Inc. Flexx Realm had
no business.
The Company entered into a joint venture agreement dated as of November 4, 1998
with an unrelated entity, Biotherapies Incorporated ("Biotherapies") to develop
and commercialize a Mammastatin Serum Assay Test (the "MSA Test"). The joint
venture operates as a Michigan Limited Liability corporation. The name of such
entity is Biomedical Diagnostics, LLC, and is herein referred to as the "Joint
Venture" or "JV". The Company also owns a six (6%) percent minority interest in
Biotherapies.
The Company has no revenue from operations, is in a start-up phase with its
existing assets and has no significant assets, tangible or intangible, other
than the opportunities for the Joint Venture disclosed herein. The Company
continues to have significant obligations with respect to the Joint Venture and
Biotherapies. In order to complete its obligations, the Company will require
additional financing. The Company expects to need to place additional securities
with investors in registered offerings or exempt transactions in order to raise
the capital required for its activities until such time as the Joint Venture and
the Company can generate revenues from operations. None of the Company's current
officers are employed directly by the Company. Although such officers are
engaged substantially full-time for the Company, in accordance with Canadian
practice, they are employed by the Company through a personal services holding
company. The Company has three full-time persons engaged through the holding
Company, and one other administrative employee, employed directly. (See Item 6:
"Executive Compensation").
There is no assurance that the Company will ever earn revenue, operate
profitably or provide a return on investment to its security holders. The
Company's activities to date have consisted primarily of efforts to raise funds;
establish a joint venture relationship with Biotherapies for the manufacture and
sale of the MSA Test; and acquire an equity interest in Biotherapies. As
currently structured, the Company proposes to derive all its revenue from its
50% partnership in the Joint Venture. A critical part of the Company's business
plan requires the Company to fund
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50% of the cost to develop, manufacture, market and distribute the MSA Test.
There can be no assurance that the Company will be able to successfully raise
the capital required, when required, to meet its proportionate costs in the
future. See "Risk Factors."
* * * * *
The MSA Test is a blood test to determine breast cancer risk through the
detection and measurement of Mammastatin blood levels. Mammastatin is a
naturally occurring human protein found in the blood of over 85% of healthy
women and absent in the blood of over 90% of breast cancer patients. Clinical
trials for the MSA Test ate scheduled to begin during the fourth quarter of
1999, and conclude prior to the end of the second quarter of 2000. The results
of these trials will be submitted in an application to the United States Food
and Drug Administration ("FDA") for approval of the MSA Test as a medical
device. It is anticipated that this application will be submitted by the second
quarter of 2000 with FDA action with respect to the application expected during
the fourth quarter of 2000. Based on such timetable, the MSA Test is not
expected to be launched in North America until the first quarter of 2001. The
Company believes it has adequate current cash resources, if appropriately
allocated, to continue operations as is for approximately 18 months. The
potential insufficiency of funds is a significant risk factor.
In the event that the Joint Venture receives FDA approval to manufacture and
distribute the MSA Test as a medical device, the MSA Test will be subject to
continuing regulation by the FDA and certain state agencies, including routine
inspection by the FDA and a host of regulatory requirements that generally apply
to medical devices marketed in the United States, including labeling
regulations, quality system regulations, the Medical Device Reporting regulation
and the FDA's prohibitions against promoting products for an unapproved or
"off-label" uses. Unanticipated changes in existing regulatory requirements or
adoption of new requirements could have a materially adverse effect on BioLabs'
business, financial condition and results of operations. BioMedical Diagnostics'
failure to comply with applicable regulatory requirements could result in
enforcement action by the FDA, which could have a material adverse effect on the
business, financial condition and results of operations of the Joint Venture and
the Company.
Final product development, manufacturing, marketing, sales and distribution of
the MSA Test is expected to require a significant amount of capital. Under the
terms of the Joint Venture Agreement, each member of the Joint Venture is
obligated to fund its 50%
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portion of additional capital requirements. The Company will require additional
capital to meet such obligations. The Company intends to finance its portion of
these expenses through the proceeds of the sales of securities by future private
placements of securities or registered public offering transactions. In the
event that the Company is unable to raise its 50% portion of Joint Venture
expenses, the Company's interest in the Joint Venture may be reduced to 30%.
Under the terms of the Joint Venture Operating Agreement, as amended, the
Company agreed to make $1,500,000 of capital contributions to the JV, all of
which have been paid. The last $500,000 was paid on August 9, 1999. All amounts
set forth herein are in U.S. Dollars. Further, under terms of the Joint
Operating Agreement, as amended, the Company agreed to make capital
contributions totaling $3,500,000 to Biotherapies Inc. in connection with the
ongoing development of products using the Mammastatin technology. In August,
1999, the Company paid $1,500,000 of this commitment, leaving a balance of
$2,000,000 to be paid as follows:
a. $1,000,000 (to be used exclusively for the ongoing
development of products utilizing the Mammastatin
technology) within 60 days after completion by
Biomedical Diagnostic LLC (the Joint Venture) of
diagnostic clinical trials for some form of the
Mammastatin Serum Assay in the United States.
b. $1,000,000 (to be used exclusively for the ongoing
development of products utilizing the Mammastatin
technology) within 30 days after the date that
Biomedical Diagnostic LLC (the Joint Venture) first
achieves in the aggregate $100,000 in gross revenue
from any sale or license of the Mammastatin Serum
Assay (post-completion of the diagnostic clinical
trials).
Thus, as of October 28, 1999, the Company has contributed:
a. To Biomedical Diagnostics LLC - $1,500,000. This
contribution completes the obligation to Biomedical
Diagnostics;.
b. To Biotherapies Inc. - $1,500,000. A balance of
$2,000,000 is payable under certain circumstances as
set forth above.
Full clinical trials for Mammastatin at the MD Anderson Cancer
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Center in Houston, TX have commenced. In addition, the JV is making necessary
arrangements to assemble and collect a large data base required for the MSA
Test. However, revenues are not expected to be realized until clinical trials
are completed, and FDA approval is granted, and marketing or licensing of the
MSA test on a commercial basis is feasible. The Company is obligated to pay
$2,500,000 to Biotherapies for exclusive on-going product development after the
Joint Venture completes clinical trials and obtains necessary regulatory
approvals for the manufacturing and marketing of some form of the MSA test in
the United States. $500,000 of such amount was previously paid on August 9,
1999; $1,000,000 is due within 60 days of completion of diagnostic clinical
trials; and the final $1,000,000 is due 30 days after the Joint Venture has
achieved $100,000 or more in gross revenue, derived from any sale or license of
the MSA and subsequent to the completion of the diagnostic clinical trials for
some form of the MSA test in the United States.
Although the Company is currently exploring licensing opportunities
which would, if consummated, enable it to pay such sums to Biotherapies, when
due, without future capital raise-ups, there can be no assurance thereof. The
potential insufficiency of funds is a significant risk factor. The Company is
unable to assure that sufficient funds will be available, when necessary, to
meet its obligations to Biotherapies, or that such funds, if available, will be
available on terms and conditions which are favorable to pre-existing investors
in the Company. The failure of the Company to meet its obligations to
Biotherapies, when due, can result in a dilution of the Company's interest in
the Joint Venture.
Within fourteen (14) days after the Joint Venture obtains the regulatory
approvals, the Company is required to issue Biotherapies 5% of the Company's
total outstanding shares of all classes on a fully diluted basis. This amount,
when incurred will constitute an additional investment cost in the Company's
participation in the Joint Venture. The Company also intends to seek other
commercial relationships relating to cancer therapy treatments and other
biotechnology projects. There is no assurance that any such relationships will
be established or, if established, that any such transactions or relationships
will be profitable or effective for the Company. See BUSINESS - "Risk Factors".
The Company closed its convertible Preferred Share offering, on August 30, 1999,
when it raised an additional $4,166,490. Of such amount, $1,000,000 was paid to
the Joint Venture and $500,000 was paid to Biotherapies, each on August 9, 1999.
After meeting all current obligations the Company currently has approximately
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$1,400,000 of cash on hand, plus approximately $850,000 set aside in a separate
trust account. No further contribution payments are due to Biotherapies or the
Joint Venture until the Joint Venture reaches certain critical milestones. Based
on the current status, Management believes that it has adequate current cash
resources, if appropriately allocated, to continue current operations as is, for
approximately 18 months. The Company's viability after 18 months is dependent on
the achievement of certain commercialization goals and milestones by the Joint
Venture, and, even then, continued viability may be dependent at least for the
same undetermined period, on the Company's ability to attract additional
investment capital from qualified individuals and institutions. Unless the
Company is capable of securing an underwriter for a registered offering of its
securities, management expects to restrict its future capital raising activities
to qualified accredited investors and institutions.
Biotherapies-Background
The Company owns a limited six percent (6%)stock interest in Biotherapies. This
discussion of Biotherapies is provided solely to educate the reader concerning
the background of the Company's technical partner in the Joint Venture. The
reader is cautioned not to confuse the activities or capacities of Biotherapies
with those of the Company. The Company does not possess the technical expertise
of Biotherapies.
Dr. Paul Ervin Jr., the founder of Biotherapies, has been a director of the
Company in the past, but he did not stand for re-election at the Company's 1999
Annual General Meeting, and will instead accept a senior position on the
Scientific Advisory Board for the Company.
Dr. Ervin had previously discovered the Mammastatin protein in 1987 at the
University of Michigan Cancer Center (now known as the Karamasoff Cancer Center
in Detroit, Michigan). Dr. Ervin observed that under certain laboratory
conditions that Mammastatin decreased the growth rate of breast cancer cells.
During his Ph.D. training from 1987 to 1994, Dr. Ervin continued his research
which resulted in the issuance of a patent to the University of Michigan in
1990, entitled Mammastatin Biochemical Characteristics. Dr. Ervin ultimately
discovered that Mammastatin is a naturally occurring human protein that has been
linked to the growth of normal mammary tissue layer cells in culture. Further,
that Mammastatin can be identified in female blood serum and Mammastatin levels
vary in the serum of healthy women during menstrual cycles. Additionally,
preliminary research indicated
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that Mammastatin is a growth inhibitory protein that may be a normal regulator
of breast cell growth which does not affect the growth of other cells.
Mammastatin requires the addition of a phosphate group to be active. Cancer
cells have an excess of the enzyme that removes the phosphate group. Mammastatin
is not active and levels are low in over 90% of breast cancer samples analyzed;
while it is active in all of the normal breast cells analyzed.
A gene for Mammastatin has since been isolated and identified. Dr. Ervin has
been successful in cloning the gene and is now preparing for synthetic
production for further research. In 1997, Biotherapies was given permission to
administer natural Mammastatin to Stage IV breast cancer patients on a
compassionate basis.
Biotherapies subsequently developed a quantitative assay for measuring
Mammastatin in blood serum, known as the MSA test. The assay in all its forms is
believed by management to be a viable system for measuring the quantity of
Mammastatin protein in a liquid, and thereby provide a reliable indicator of the
potential presence or likely absence of breast cancer cells.
The Joint Venture has been formed to commercialize the MSA test, subject to the
FDA approval process. The Joint Venture envisions development of a "Kit" which
would allow antibody based detection of the Mammastatin protein. Components of
the Kit may include, in addition to antibodies and protein, substrates to
develop color from the serum assay, membrane to immobilize serum proteins, an
apparatus to perform the blot, a scanner to read the blot, and a software
program and computer to interpret the blot. In this context, substrates refers
to a substance or medium to be acted upon by the antibodies. The substrates will
provide the foundation from which the quantification of Mammastatin levels may
be carried out. Membrane refers to a thin pliable material that will be used as
a filter to separate or immobilize serum proteins. Neither the MSA Test nor its
component parts or the exact procedure to be followed has been finalized.
Through the Company's 50% ownership interest in the Joint Venture, the Company
is partially funding the development of the MSA Test for breast cancer.
Biotherapies provided certain intellectual property to the Joint Venture and
also granted to the Joint Venture, the exclusive world wide rights to
manufacture, market and distribute the MSA Test.
The manufacturing and sale of pharmaceuticals is a highly competitive industry
dominated by a handful of large firms. As such, it is expected that the Joint
Venture will not manufacture the MSA test kit in-house, but instead will
sub-license these
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rights to a major pharmaceutical company. The Joint Venture has had preliminary
discussions with two major pharmaceutical companies for potential sub-license
agreements for the manufacture, distribution, and/or sale of the MSA Test.
The expected cost to bring the MSA Test to market will be determined, in part,
by the terms and conditions of a potential sub-licensing agreements. The cost to
introduce the MSA Test into the larger clinical diagnostic market is not
pre-determinable and may far exceed the Company's current resources.
Acceptance of the MSA test by clinicians, pathologists, oncologists, physicians
and their patients will depend on BioMedical Diagnostic's ability to (i)
increase the level of awareness of Mammastatin ("MSA") Blood Test among women,
as well as laboratories and physicians who are expected to order the MSA test;
(ii) educate both the general public and medical community regarding the
benefits of early diagnosis of breast cancer with the MSA test; (iii) provide
data demonstrating clinical correlations to disease diagnosis and outcomes
detected by MSA tests; (iv) obtain third-party payor approval of and
reimbursement for the MSA tests. Mammastatin Replacement Therapy
Biotherapies also holds the exclusive rights to patents pertaining to the use of
Mammastatin as a therapeutic for breast cancer. The Company has no direct
interest in Mammastatin as a therapeutic remedy, and will only participate in
the commercialization thereof solely through its 6% ownership interest in
Biotherapies.
Biotherapies Mammastatin therapeutic remedy has been approved by the FDA for
their "Fast Track" program. Biotherapies has begun Phase I/II clinical trials at
the M.D. Anderson Cancer Center, in Houston. The Mammastatin therapeutic
clinical trials will, the Company anticipates, conclude no earlier than mid-2001
and FDA approval is expected to take at least another six to nine months.
Accordingly, Mammastatin Replacement Therapy is not expected to be launched as a
commercial product until mid-2002 or later.
The sale of pharmaceuticals is a highly competitive industry dominated by a
handful of large firms. As such, it is expected that Biotherapies will
sub-license the distribution, marketing and sales rights to its Mammastatin
Replacement Therapy to a major pharmaceutical company. At present, Biotherapies
is conducting a preliminary search of major pharmaceutical companies for
potential sub-license agreements for the distribution, marketing and sale of the
Mammastatin Replacement Therapy.
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Involvement with University of Michigan
Biotherapies president, Dr. Paul Ervin, was the University of Michigan's
principal investigative scientist with respect to Mammastatin. Biotherapies has
sole proprietary licenses from the University of Michigan with respect to
Mammastatin protein, and has patents pending for related product applications.
The Company has no business or other relationship with the University of
Michigan.
The Mammastatin technology, including the MSA Test is protected by two existing
patents granted pursuant to Dr. Ervin's work at the University of Michigan.
Biotherapies manages the patent process. Both Biotherapies and the Joint Venture
intend to patent all practical patentable extensions of the existing technology.
In cooperation with the University of Michigan, Biotherapies has the following
patents and licenses on the Mammastatin technology:
Exclusive license from the University of Michigan on all of the University's
existing Mammastatin technology patents, subject to reimbursement of past patent
costs ($15,000 per year) and royalties: 15% on any sub-license revenues, and 4%
on any direct sales revenues.
Submittal of U.S. and international patent applications in October 1997, on
behalf of the University of Michigan for:
1. The DNA sequence that codes for Mammastatin.
2. The synthetic reproduction of the Mammastatin protein.
Submittal of U.S. and international patent applications in 1998 by Biotherapies
on behalf of the University of Michigan for:
1. The Mammastatin blood testing methodology.
2. Use of healthy human mammary tissues for Mammastatin production.
TABLE NO. Mammastatin Patent and License Holders
<TABLE>
<CAPTION>
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| Patent Application | Patent Holder | Licensee | Exclusive User |
| | | | |
|-----------------------------------|--------------------------|------------------|------------------------------|
| <S> | <C> | <C> | <C> |
| 1. Mammastatin blood test (MSA) | University of Michigan | Biotherapies | Joint Venture |
| (submitted 1996; pending) | | | |
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</TABLE>
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<TABLE>
<CAPTION>
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| <S> | <C> | <C> | <C> |
| 2. Mammastatin DNA sequence and | University of Michigan | Biotherapies | To Be Determined by |
| synthetic reproduction (submitted | | | Biotherapies ("TBD") |
| 1996; pending) | | | |
|-----------------------------------|--------------------------|------------------|------------------------------|
| 3. Mammastatin method to treat | University of Michigan | Biotherapies | TBD |
| breast cancer (submitted 1996; | | | |
| pending) | | | |
|-----------------------------------|--------------------------|------------------|------------------------------|
| 4. Mammastatin analog in other | University of Michigan | Biotherapies | TBD |
| | | | |
| epithelial tissues (submitted | | | |
| 1999; pending) | | | |
|-----------------------------------|--------------------------|------------------|------------------------------|
| 5. Mammastatin analog in prostate | University of Michigan | Biotherapies | TBD |
| (submitted 1999; pending) | | | |
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</TABLE>
Intellectual Property
The Mammastatin technology, including the MSA test is, in the opinion of
management, covered by two patent applications filed in 1996. All patent
applications have been assigned to the University of Michigan according to the
terms of the licensing agreement for the Mammastatin technology between
Biotherapies and the University of Michigan. Biotherapies manages the patent
process. Both Biotherapies and the Joint Venture intend to patent any and all
novel extensions of the existing technology.
There can be no assurance that the patent applications will ultimately be
granted or that the patents, if granted, will fully protect Biotherapies, the
Company, or the Joint Venture from other competition. Both Biotherapies and the
Joint Venture will have to incur considerable costs in the future to obtain
patent protection in other countries, if any protection can be obtained at all.
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Foreign patent applications on the one granted U.S. Patent have been applied for
in multiple jurisdictions throughout the world. Patent protection is limited in
duration. The Mammastatin blood test ("MSA") patent pending licenced to the
Joint Venture will, if granted, have a 20 year life. There is no assurance that
any such patent protection will be issued, or that, if issued to Biotherapies,
that it will adequately protect the Company or the Joint Venture.
Contributions to the Joint Venture/Governance
Under the terms of the Operating Agreement, Biotherapies' contribution to the
Joint Venture is an exclusive, non-assignable, non-sub-licensable, royalty free
world-wide sub-license to use all of Biotherapies' rights under the License
Agreement with the University of Michigan, for the development, manufacturing,
marketing and sale of the MSA test. The Joint Venture owns all improvements,
including modifications and enhancements as well as any new product or material
which performs substantially the same function as the MSA test, but does so
through a different method or process.
So long as the Joint Venture remains in effect, the Company will be notified of
any opportunities for the development or commercialization of any other
diagnostic or screening test developed by Biotherapies.
The Joint Venture is managed by four committee members, two of whom were
appointed by the Company and two appointed by Biotherapies. Each member has one
vote. The committee has the power and authority to make all of the ordinary and
usual decisions concerning the business of the Joint Venture, including the
hiring of key officers. Tie votes are resolved by the President of Biotherapies,
currently, Mr. Tom Trimmer.
The Joint Venture Management Committee must refer the sale or hypothecation of
all or substantially all of the assets of the Joint Venture, capital
expenditures or major commitments in excess of $250,000, non-arms-length
transaction or issuance of any additional Joint Venture interests directly to
the Joint Venture partners. As currently constituted, any such transaction
requires the Company's consent.
The Joint Venture Agreement has no fixed term for expiry and both the Company
and Biotherapies can engage in competing technologies or business to the MSA
test. Either member of the Joint Venture may sell or encumber all or part of its
interest in the Joint Venture to another party by first granting the non-selling
member
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a 30 day right of first refusal.
Additional Capital Requirements of the Joint Venture
In the event that additional capital is required by the Joint Venture, each
member of the Joint Venture is obligated to fund its 50% portion of the total
requirements. The Company will require additional capital to fund its portion of
such expenses. The Company is not aware as whether Biotherapies has the
financial capacity to pay its portion of the Joint Venture expenses. Should
either member of the Joint Venture fail to fund the shortfall within 60 days of
the due date, the other member has the option to fund the shortfall and
correspondingly dilute the non-funding member's ownership interest in the Joint
Venture. The Company currently has no way of raising its portion of the Joint
Venture capital otherwise than through the sale of securities by future private
placements or registered public offering transactions. The Company is
registering its Common Stock under the Exchange Act in order to facilitate the
possibility of such future registered offerings. The Company may suffer
significant dilution of its Joint Venture interest if it fails to meet its share
of the Joint Venture Capital Requirements.
Subject to income tax regulations, and generally accepted accounting principles
and practices, the Joint Venture intends to allocate Joint Venture profits or
losses for each fiscal year in a manner that would cause each member's adjusted
capital account balance at the end of the year to equal the amount that would be
distributed to the members under a hypothetical liquidation of the Joint
Venture. In determining hypothetical liquidation values, the Agreement presumes
that all of the Joint Venture's assets would be sold at fair market value net of
liabilities. The allocation of "profits" and "losses" within the Joint Venture
is neither an accounting thereof, nor does it imply a distribution, but is only
an internal bookkeeping system. With respect to distributions, see next
paragraph. Except in the event of certain extraordinary transactions, the costs
of this annual allocation are expected to be nominal, under $10,000 per annum.
It is intended that the Joint Venture will distribute operating cash flow, if
any, each calendar quarter. Operating cash flow is the gross cash proceeds
generated by the Joint Venture's operations less expenses, working capital,
interest and principal payments on Joint Venture debt, capital asset purchases
and contingencies, all as determined by the committee. Operating cash flow will
also include a deduction for royalty payments due to the University of Michigan.
Operating cash will not include a deduction for depreciation and amortization of
capital equipment. There is no
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specific mechanism for operating cash flow, previously paid out, to be
re-collected from the Joint Venture members.
The FDA Approval Process
The FDA approval process is being managed by Biotherapies, which has retained a
team of expert regulatory and legal advisors. In 1997, the FDA accepted the
Mammastatin proof of concept studies and approved the therapeutic product under
the "Fast Track" program, under which new products of life threatening diseases
can be approved in less than two years. The proof of concept study involved a
sample of 1000 blood samples and correlated low Mammastatin levels with the
incidence of breast cancer.
In 1998, Biotherapies received approval from the FDA to commence Phase I and II
clinical trials at the University of Texas, MD Anderson Cancer Center in
Houston, Texas. The trial protocols were completed in early 1999 and the program
was started in May, 1999. Phase I and II clinical trials will utilize naturally
produced Mammastatin and are likely to be completed in mid-2000. If Phase I and
II are successful, Biotherapies will still have to complete one or more Phase
III trials prior to obtaining FDA approval to commercially launch the product.
Phase III trials will involve the use of recombinant or synthetic Mammastatin
because of the limited production capability of natural Mammastatin. Phase III
testing will primarily focus on long term safety and efficacy and may take
several years.
In the United States, commercialization and sale of either therapeutic products
or diagnostic/screening tests are subject to review and authorization procedures
by the FDA. Generally, any proposed drug or medical device must pass each phase
of a multi- phase process, designed to prove safety, efficacy and effectiveness
over a sufficient sample. Regulatory authorities have a broad discretion when
granting or denying approvals. There is no assurance that the MSA Test will be
sanctioned for use. The FDA could impose additional product testing on the
therapeutic, and in the case of the MSA test, may require additional testing.
Any failure to obtain FDA approval for the MSA test, or to obtain it on a timely
basis, can be significantly adverse to the Company, which would be left without
products or revenues of any kind. As the Company is currently structured, it is
entirely dependent on timely FDA approval of the MSA test, of which there is no
assurance.
The MSA screening test will likely be subject to a less stringent
trial process because it is not an in-vitro therapeutic, but rather a blood
test. The Company anticipates that the duration of the test period will be
approximately 6-9 months. The Joint Venture is
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currently in the process of reviewing the requirements governing the test under
a 510K application or a PMA application with FDA. Under a 510K, the FDA would,
if accepted, sanction the use of the test and approve limitations on the wording
and terms of use of the product. A PMA (Pre Market Approval) application, if
required, may necessitate more stringent testing in a controlled clinical
environment. Biotherapies, on behalf of the Joint Venture, has identified the
Toronto General Hospital Cancer Centre to conduct a 1000 sample range test and a
subsequent correlation test utilizing a similar sample size.
The sample range test will consist of 500 healthy women and 500 breast cancer
patients to determine normal Mammastatin ranges. Histories will be available for
each patient. Measurement of Mammastatin levels will be made, and a
determination as to whether the levels correspond with the patient history. The
correlation test will consist of 1000 blood samples absent of patient history.
The purpose of the correlation test is to seek to identify from blood samples
only those patients who have tumors or breast cancer. The sample range and
correlation tests are designed to prove the efficacy of the MSA screening test
as a measurement and diagnostic tool.
The international jurisdictions in which the Joint Venture intends to market the
MSA test have similar legislation and regulations governing the sale of the
therapeutic products and cancer screening tests. Any failure to comply with
these provisions could result in immediate cessation of sales and distribution
activities.
Laws and regulations of the United States and other jurisdictions are subject to
change. There can be no assurance that any such change would not adversely
affect the Joint Venture, and the Joint Venture's proposed business. Any such
new laws or change in regulations could have an adverse impact on the operations
of the Company, and the Joint Venture's ability to obtain FDA approval for the
MSA Test and its ability to operate its business.
Industry Overview
Despite a multiplicity of new drugs and advanced technologies, cancer remains
one of the major causes of death in developed countries. For 1998, the American
Cancer Society estimated new breast cancer incidence alone at 180,300 with
43,900 related deaths in the USA. Breast cancer is a leading cause of cancer
mortality among women in the USA and the developed world. While the rate of
incidence increase is greatest in women under age 50, most cases occur after age
50.
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Breast cancer, like other cancers, is a disease of abnormal cell growth.
Typically, the cells which line the milk producing ducts in the breast are the
cells that become cancerous. These cells undergo a controlled cycle of growth
and death during each menstrual cycle. The growth of these cells is thought to
be stimulated by the action of steroid hormones such as estrogen and
progesterone. Abnormal growth causes a dense accumulation of cells in a small
area, which is the early formation of a tumor and quite possibly breast cancer.
This abnormal growth or mutation, that ultimately leads to breast cancer, can be
passed in a hereditary manner (believed to be approximately 10% of all cases) or
may be caused by mutating environmental agents. Environmental agents that are
thought to cause mutation include radiation, synthetic chemicals, pesticides and
diets which generate a large amount of activated chemicals. Cancer incidence
rates also increase dramatically with age. The aging population is associated
with increasing health care expenditure for cancer diagnosis and management in
the USA and worldwide.
In most cancer cases, the disease is first diagnosed via patient complaint, or
discomfort, or the detection of lumps in abnormal tumor development.
In the past, cancer was primarily diagnosed via tissue biopsy, sample culture or
x-ray, or mammography. Recent advances permit cancer detection through the
identification of specific markers or screens in the body fluids of patients.
Tumor markers or screening tests are defined as either substances or antibodies
that can be measured quantitatively to detect the presence of a cancer. Such
tests can also establish the extent of tumor growth before treatment, to predict
prognosis, and to monitor therapeutic response.
The tumor marker and screening test industry has grown significantly over the
past several years due to increased awareness of the benefits of early
detection, and the FDA's reclassification of tumor marker tests as Class II
devices, in September, 1996. The reclassification allows manufacturers to submit
pre-market notification 510(K) to the FDA. The US market for immunoassay tumor
marker and screening tests is believed to have been in excess of $200 million in
1998 for existing products, and is expected to continue to grow significantly.
Current penetration rates in other developed countries are lower but are also
expected to grow at similar, if not better, rates with increased awareness.
The Company believes that the MSA screening test will be functionally similar to
the existing PSA test for prostrate cancer,
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in that it is an immunoassay test, utilizing blood serum, that screens for
levels of a key growth inhibiting protein.
Competition
Competition to the Biotherapies proposed therapeutic product consists of more
conventional treatments such as surgery, chemotherapy and radiation. In
addition, several other non-invasive therapeutics also exist, which are
manufactured and marketed by large multinational pharmaceutical companies. The
industry is dominated by four large competitors with Abbot Laboratories having
the major share (approximately 53%). The large companies are able to offer a
wide variety of tests for different cancers, and offer instrumentation giveaways
and other commercial incentives in exchange for test sales which the Company, as
presently structured, would be unable to provide. Such industry leaders also
have substantially greater resources, including capital and manpower, than the
Company.
Additional competition through better or improved products may arise while
Biotherapies completes its clinical trials. While the Company believes that
Biotherapies' Mammastatin therapeutic has the potential to prove to be superior
to other treatments currently in existence, there is no assurance thereof, or
that the product will not face severe competition from existing products and
procedures or other products and procedures developed in the future, which could
significantly impact the Company's performance. The reclassification of tests by
the FDA has resulted in a significant expansion in the number of new products
submitted to the FDA for clearance.
Competition in the tumor marker and screening test immunoassay market is
dependent primarily upon efficacy including, sensitivity of the test to a
particular cancer type (i.e. the number of false readings).
Currently, management is not aware of any direct competition to the proposed MSA
immunoassay screening test, but there can be no assurance that such competition
will not develop in the near future.
History and Organization
The Company is a New York corporation which was incorporated on September 19,
1994, under the name Flexx Realm Inc. Flexx Realm was incorporated in September
of 1994. Current management of the
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Company was not then associated with the Company. To the best knowledge of such
management, Flexx Realm did not carry on any tangible business at the time
current management first became associated with the Company in 1996. The Joint
Venture with Biotherapies was consummated in November of 1998. In anticipation
of the current focus, the name was changed to BioLabs, Inc. on August 19, 1998.
The Company began focusing on the biotechnology industry in 1998. In November,
1998, the Company entered into the Joint Venture with Biotherapies.
Employees
The Company is in the start-up phase of its operations, none of the Company's
principal officers are employed directly by the Company. As of August, 1999, the
Company had four full time employees, one employed in administration, and the
three officers employed indirectly through the arrangement with Tynehead
Capital.
RISK FACTORS
Lack of Prior Operations and Experience. The Company has no revenue from
operations, is in a start-up phase with its existing assets and has no
significant assets, tangible or intangible, other than the opportunities for the
Joint Venture disclosed herein. There can be no assurance that the Company will
generate revenues in the future. There is no assurance that the Company will be
able to operate profitably in the future, if at all.
Need for Additional Financing. The Company continues to have significant
obligations with respect to the Joint Venture and Biotherapies. In order to
complete its obligations, the Company will require additional funding within
approximately 18 months. Further, the Joint Venture may require additional
operating capital by the year 2001, for which the Company and Biotherapies are
required to contribute equally. The Company believes it has sufficient funds to
carry its own expenses for approximately eighteen months or until the Joint
Venture has reached the point of commercialization of the MSA Test. There can be
no assurance that the Company will obtain additional financing for the Joint
Venture's current and future operations or capital needs on favorable terms, if
at all. If the Company fails to provide its proportionate share with respect to
capital calls for the Joint Venture, its interest therein may be substantially
diluted.
Uncertain Market/Government Regulations. Biotherapies' therapeutic product
requires FDA approval in the USA and will likely undergo a series of long term
clinical trials. The product will have to
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likely go through similar testing in foreign jurisdictions. The MSA test is
also subject to successful completion of limited trials in the USA and requires
standardization with respect to methods of use and packaging, subject to FDA
approval. There can be no assurance that the tests and trials will ultimately be
successful or that the product can be commercialized in its current form, or
approved for use, in either the USA or any other foreign jurisdiction.
Dependence on One Product/FDA Approval. The size of the Company makes it
unlikely that the Company will be able to commit its funds to other business
opportunities, until and unless it has first succeeded in some way with the MSA
Test, to which there is no assurance. Any failure to obtain FDA approval for the
MSA test, or to obtain it on a timely basis, can be significantly adverse to the
Company, which would be left without products or revenues of any kind. As the
Company is currently structured it is entirely dependent on timely FDA approval
of the MSA test, of which there is no assurance.
Reliance on Biotherapies and Dr. Ervin. As currently structured, the Company's
potential for future success is completely dependent upon the Joint Venture,
Biotherapies and Dr. Paul Ervin. No officer or director has any long term
employment agreement. There can be no assurance that Dr. Ervin will remain
associated with the Company.
Competition. Even if the MSA test can be successfully developed, and approved by
the FDA, and marketed, the Company is likely to face intense competition from
very large, well established firms in the medical and biotechnology industries.
These entities typically have significantly more resources and well established
track records. Many of these competitors are in a better position to attract
clientele. The Company, Biotherapies and the Joint Venture will likely have to
form alliances or further joint ventures in order to successfully penetrate the
marketplace. There can be no assurance that a competitor will not develop
similar or superior products nor that the Company will be successful in
competing in the marketplace.
Other Interests of Management. The officers and directors, including Dr. Ervin,
have other interests to which they may devote time and each may continue to do
so, notwithstanding the fact that additional management time may be necessary to
conduct the business of the Company.
History of Losses. The Company has incurred net losses of $1,007,958 and
$191,118 for the fiscal years ended December 31,
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1998 and 1997 respectively. There can be no assurance that the Company will
operate profitably in the near future or at all.
Negative Net Worth. The Company had a negative net worth of $415,622 and
$393,896 as at December 31, 1998 and 1997 respectively. There is no assurance
that the Company will be able to attract the capital it needs for its current
business opportunities given that negative Net Worth.
Negative Cash Flow. The Company has no current income or likely source of
current income in the immediate future. Management and consulting fees,
including legal and accounting fees, are currently costing the Company in excess
of Seventy Thousand ($70,000) Dollars monthly. The Company will be required to
place additional securities in new financings to make up for such negative cash
flow. Such transactions may have a negative or depressing effect on the trading
prices for the Company's publicly-traded securities.
Preferred Stock/Registration Requirements. From November of 1998 to August 30,
1999, the Company sold 2,000,000 shares of Convertible Preferred Stock to 19
persons. The Convertible Preferred Stock is convertible into Common Stock on a
1:1 basis. Under certain circumstances, the Company may be obligated to register
the Common Stock underlying the Convertible Preferred Stock for resale by the
holders, or the holders may otherwise become eligible to resell such shares
without registration. The existence of the Common Stock underlying the
Convertible Preferred, and/or any registration thereof, may have a negative or
depressing effect on the trading prices for the Company's publicly-traded
securities.
No Likelihood of Dividends. The Company has never paid any cash or other
dividend on either its Common or Preferred Stock. At present, the Company does
not anticipate paying dividends in the foreseeable future and intends to devote
any earnings to the development of the Company's businesses. Investors who
anticipate the need for income from their investment should refrain from
purchasing the Company's Stock.
Lack of Listing. The Company's securities are traded on the NASD Bulletin Board.
Continuation of such trading will be dependent, in part, on the Company's
ability to timely file required reports under the Securities Exchange Act of
1934 in the future. The Bulletin Board is not a national securities exchange.
The Bulletin Board does not provide holders of the Company's securities with the
liquidity which would or could be available, if the Company's common stock were
listed on a national securities exchange, or the NASDAQ electronic market.
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Penny Stock. The Company may be subject to the SEC's "penny stock" rules if our
common stock trades below $5.00 per share. These rules require the delivery
prior to any penny stock transaction of a disclosure schedule explaining the
penny stock market and all associated risks and impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors, which are generally defined as
institutions or an investor with a net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 together with the spouse. For these types
of transactions the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. In addition, broker-dealer and the registered
representative and current quotations for the securities they offer. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in our common stock which
could severely limit its market price and liquidity.
Indemnification and Exclusion of Liability of Directors and Officers. So far as
permitted by law, the Company's Certificate of Incorporation and By-Laws provide
that the Company will indemnify its directors and officers against expenses and
liabilities they incur to defend, settle or satisfy any civil or criminal action
brought against them on account of their being or having been Company directors
or officers unless, in any such action, they are adjudged to have acted with
gross negligence or to have engaged in willful misconduct. As a result of such
provisions, stockholders may be unable to recover damages against the directors
and officers of the Company for actions taken by them which constitute
negligence or a violation of their fiduciary duties, which may reduce the
likelihood of stockholders instituting derivative litigation against directors
and officers and may discourage or deter stockholders from suing directors,
officers, employees and agents of the Company for breaches of their duty of
care, even though such action, if successful, might otherwise benefit the
Company and its stockholders.
Item 2. Management's Discussion and Analysis of Plan of Operation.
The Company is in a start-up phase with respect to its assets and operations. On
November 11, 1998, the Company entered into the Joint Venture with Biotherapies.
Management believes that revenues will not be generated by the Joint Venture
prior to the year 2000, if then. Accordingly, the financial results of the last
two fiscal years are not indicative of future years, if and when the Joint
Venture begins to produce revenues. All amounts set forth are in U.S. Dollars.
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In the next twelve months, the Company basically intends to monitor the clinical
progress of the Joint Venture, stay attuned to commercial developments relating
to the MSA Test in particular, and other medical/scientific bases for
non-invasive cancer testing and therapy, and related areas, and explore one or
more patented sublicense arrangements with established entities in the
pharmaceutical and medical industry. The Company believes that it has sufficient
funds to reach the point of commercialization, or to carry its own expenses for
approximately eighteen months. The Company has no plans for the purchase or sale
of any plants or significant equipment, and does not anticipate any significant
change in the number of employees. The Company does not directly engage in
research and development activities. The Joint Venture undertakes such
activities. The Joint Venture is currently adequately funded, per the Company's
contractual commitments for the research and development activities which it
contemplates for the next twelve months.
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Results for the fiscal year ended December 31, 1998 ("FY 98") reflect a loss of
$1,077,958 compared to a loss for the fiscal year ended December 31, 1997 ("FY
97") of $191,118. The greater loss incurred in FY 98 was primarily attributable
to costs associated with the Company's start-up and organization activities
related to the raising of capital to proceed with its investment in Biotherapies
and the joint venture. Similar costs and activities are being incurred and
undertaken in the current year.
General and administrative expenses for FY 98 were $1,080,811 compared to
$191,118 for FY 97. The major general and administrative expenses for the
Company were legal and accounting fees, management and consulting fees, and
travel expenses. Legal and accounting expenses increased by $89,176 in
connection with the Company's 504 offering, and the Biotherapies agreements.
Listing and share transfer fees increased from a nil amount to $37,802 as the
Company prepared for its listing on the Bulletin Board in February, 1999.
Management and consulting fees increased by $625,656 from $112,176 for FY 97 to
$737,832 for FY 98. The increase was primarily due to the Company's use of
external consultants to investigate, evaluate, negotiate and finance the
agreements with Biotherapies. Travel expenses also increased from $35,017 in FY
97 to $149,671 in FY 98, also related to the Company's activities associated
with the completion of the joint venture with Biotherapies, and its capital
raising and related activities.
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Tynehead Capital Corp. supplied funds to the Company to maintain the Company's
operations dating back to February, 1996, and prior to the time that the Company
had raised funds from any third party. The notes reflecting such loans, dating
back to 1996, were issued from time to time as made therein October of 1998. The
Company at that time had no tangible assets or operations. The conversion figure
of $0.25 was fixed before the Joint Venture Agreement was made, and was
considered to be conservative and appropriate in light of the circumstances then
existent.
Liquidity and Capital Resources. As of December 31, 1998, the Company had cash
of $82,153 compared to $402 as of December 31, 1997. On December 31, 1998, the
Company had a net working capital deficit of $1,346,248. However, $414,000 of
this deficiency are preferred stock subscriptions (i.e. amounts received for
Class A preferred stock where the shares were issued subsequent to December 31,
1998) and $872,500 is accrued liabilities which were converted to common stock
equity in 1999. Accordingly, in the opinion of management such liabilities do
not adversely impact cash flow. Without such liabilities, the net working
capital deficit as of December 31, 1998 was $59,748. On December 31, 1997, the
net working capital deficit was $393,896. Equity raised through the 504 offering
increased net worth by approximately $847,000 after all expenses associated with
the offering.
To date, the Company's cash requirements have exceeded cash flow. The Company
has satisfied its capital needs primarily through debt and equity financing.
The Company's outstanding indebtedness as of December 31, 1998 was $40,132,
represented by promissory notes payable to two companies controlled by officers
and directors of the Company. Tynehead Capital Corp. supplied funds to the
Company to maintain the Company's operations dating back to February, 1996, and
prior to the time that the Company had raised funds from any third party. The
notes reflecting such loans, dating back to 1996, were issued from time to time
as made to October of 1998. The Company at that time had no tangible assets or
operations. The notes are payable 30 days after demand, bear interest at prime
plus 4%, and are convertible into shares of the Company at $.25 per share. The
conversion figure of $0.25 was fixed before the Joint Venture Agreement was
made, and was considered to be appropriate in light of the circumstances then
existent. The Joint Venture Agreement and the progress made by the Joint Venture
with respect to the MSA screening test followed the fixing of the conversion.
The notes are secured by a security interest in and to all assets and book
accounts of the Company. Subsequent to December 31, 1998, the Company's
indebtedness has not changed.
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The Company has material capital commitments under its Joint Venture with
Biotherapies. The Company is unable to satisfy such needs without additional
capital raising activities. The Company contemplates a future registered
offering of its securities. The Company intends to file for such an offering
only after the Joint Venture has achieved certain milestones. See "Subsequent
Events."
Year 2000. The Company, after management review, has determined that all of its
limited computer systems are Year 2000 compliant. The operating systems employed
by the Company include Windows 98 and DOS, which are certified as compliant. The
Company has determined that its ACCPAC accounting software is also compliant.
The Company does not believe that computer systems failures attributable to Y2K
will have any meaningful adverse effect on the Company's operations. See also
Year 2000 discussion, below.
Comparison of the Six Months Ended June 30, 1999 to the Six Months Ended June
30, 1998.
Total operating expenses increased by $360,636 to $487,834 for the six months
ended June 30, 1999, compared to $127,198 for the six
months ended June 30, 1998. The major expenses for the Company in 1999 are legal
fees, management and consulting fees, office and premises costs and travel.
Legal fees increased by approximately $25,000 for costs related to the Company's
Series A Convertible Preferred offering and its listing of its common shares and
the registration of same. The increase in management and consulting fees
increased by $193,306 due to the reflection of full costs associated with the
executive staff and the use of external consultants to investigate, evaluate,
negotiate and finance executive staff and the use of external consultants to
investigate, evaluate, negotiate and finance the agreements with Biotherapies
and the Joint Venture, and, to a lesser extent, to investigate other
opportunities. Office and premises costs, in aggregate, increased by $77,797 as
the Company established its corporate offices and undertook a comprehensive plan
to close its Convertible Preferred Share offering, closed on August 30, 1999.
Salaries and benefits reflect the hiring of one new clerical staff member.
The increase in travel and promotion of $34,142 is also related to the Company's
capital raising and related activities, and business evolution and opportunity
examination costs.
Results of Operations
The Company remains in a start-up phase with respect to its assets
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and operations. Management believes revenues will not be generated by the
Company directly or through the Joint Venture prior to the middle of 2000. These
financial statements are not indicative of future periods, if and when the Joint
Venture or the Company begin to produce revenues.
Results for the six months ended June 30, 1999 reflect a loss from operations of
$484,468 compared to a loss of $126,750 for the six months ended June 30, 1998.
The loss for 1999 was greater than 1998 by $357,718 primarily as a result of
increased start up activities and fund raising activities to fund the Company's
Joint Venture investment.
Liquidity and Capital Resources
As of June 30, 1999, the Company had cash $321,345 compared to $121,575 at June
30, 1998. Improvement in the cash position was primarily due to additional funds
received from the issuance of Series A Convertible Preferred Stock. (See also
"Subsequent Events.")
Operating activities during the six months ended June 30, 1999 used $361,975 of
cash compared to a use of $291,207 for 1998. This usage increase is primarily
due to a greater loss for the six months in 1999, net of an increase in accounts
payable and preferred stock subscription received.
Cash used for investing activities was $1,014,157 utilized for $14,157 of office
and computer equipment and $1,000,000 required under the Joint Venture
Agreement.
The Company generated a net amount of $1,615,324 from financing activities
compared to $832,380 in 1998. $1,729,324 was generated from the issuance of
619,170 shares of Series A Preferred Stock at a price of $3.00 per share, net of
commissions. In addition, $114,000 of Preferred Stock subscriptions on hand at
the beginning of 1999 were converted to issued shares during the period. As of
June 30, 1999, the Company's cash balances on hand were not sufficient to fund
its operations and obligations for more than three months. (See "Subsequent
Events.")
Subsequent Events
In July of 1999, the Company re-negotiated certain items of the Joint Venture
Operating Agreement with Biotherapies Inc.
The main amendments to the Agreement are as follows:
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1. Definition of milestone revised; "means the date that the Company first
receives in the aggregate (not to be calculated on any particular periodic
basis) $100,000 in gross revenue of any type derived from any sale or
license of the Mammastatin Serum Assay and has completed the diagnostic
clinical trials for some form of the Mammastatin Serum Assay in the United
States.
2. In the event that the Company fails to meet its obligations to
Biotherapies (as per the Operating Agreement - $2,000,000 after August 9,
1999), then the Company shall retain an interest in the Joint Venture
based on this formula:
BioLabs Capital Contributions
-----------------------------
10,000,000 =%
In addition, BioLabs has a grace period of 180 days to rectify any capital
obligation not met by the due date.
3. BioLabs to pay $1,000,000 to Biomedical Diagnostics LLC by August 9, 1999.
This obligation has been met - payment made August 9, 1999.
4. BioLabs to pay $500,000 to Biotherapies by August 9, 1999. This obligation
has been met - payment made August 9, 1999.
5. BioLabs to pay $1,000,000 to Biotherapies within 60 days after completion
by Joint Venture of diagnostic clinical trials for some form of the
Mammastatin Serum Assay in the United States.
6. BioLabs to pay additional $1,000,000 to Biotherapies Inc, within 30 days
after the date that Joint Venture first achieves revenues.
In the period from June 30, 1999 to August 30, 1999 additional 1,388,830
Convertible Preferred Shares were placed by the Company with the same group of
nineteen (19) investors who purchased the earlier traunche of the same
securities. In all, a total of 2,000,000 shares were sold under this offering,
to a total number of nineteen (19) investors.
Proceeds of the Company's Private Placement Offerings, net of commissions and
costs have been applied by the Company solely to capital contributions to the
Joint Venture with Biotherapies and payment of general operating expenses
current and future.
Impact of the Year 2000 Issue
- -----------------------------
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<PAGE>
The year 2000 Issue is the result of certain computer programs being written
using two digits rather than four to indicate the applicable year. As a result,
computer programs with date-sensitive software may incorrectly recognize a date
using "00" as the year 1900 rather than the year 2000. Such an error could
result in a system failure or miscalculations resulting in disruptions of
operations, including a temporary inability to process normal business
transactions or provide service to our customers.
The Company has undertaken a review of its own computer systems and applications
to determine if significant problems exist with the operations of those systems
as a result of the year 2000 Issue. As a result of that review, management does
not expect that any modifications required to address Year 2000 problems will
have a material impact on the Company's business, operations or financial
condition.
The Company cannot guarantee that the systems of its vendors and suppliers will
be Year 2000 compliant. However, based on surveys of such vendors and suppliers,
management does not anticipate replacement or major modifications of any
hardware or software components in its systems if third party supplied hardware
and software is not Year 2000 compliant. Nevertheless, the Company may be
required to install software updates to its systems and hardware. Management
believes that any such needed software updates are currently available or will
be available through normal software maintenance licenses.
The Company has not incurred material costs to date in its Year 2000 review
process and does not anticipate that it will incur material expenses outside the
normal course of business to modify systems or third party supplied systems to
be Year 2000 compliant. However, its systems and third party systems may contain
undetected errors or defects that may cause management to incur material costs
and could result in a material adverse effect on its operations and financial
condition. Based upon a current review, management has no reason to
anticipate-ate any interruption of its business or material unexpected costs as
a consequence of any Y2K computer.
Item 3. Description of Property.
The Company maintains its executive offices in approximately 2000 square feet of
space in Surrey, British Columbia, Canada, pursuant to a lease expiring on
November 30, 2001. The Company has an option to renew the lease for an
additional three years. Monthly lease payments are approximately Two Thousand
Three Hundred ($2,300.00 USD) Dollars per month.
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Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information known to the Company, as of August 2,
1999, regarding the beneficial ownership of the Company's voting securities by
(i) each of the Company's directors and executive officers, and (ii) all
directors and executive officers of the Company as a group.
Except as indicated below, management is not aware of any individual or entity
that owns 5% or more of the voting stock of the Company, unless otherwise
indicated, each of the stockholders listed in the table below has sole voting
and dispositive power with respect to shares beneficially owned by such
stockholder.
<TABLE>
<CAPTION>
Name of Common Percent Percent of Voting
Beneficial Owner(1) Shares of Class Ownership(2)
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
E. Greg McCartney 440,000 (3) 5.4% 4.6%
Lawrence J. Pasemko 440,000 (3) 5.4% 4.6%
Albert Klychak 300,000 (3) 3.7% 3.1%
Dr. Ian B. Woods 390,000 (3) 4.8% 4.1%
Carol Patterson Neves ----- ---- ----
Dr. Paul R. Ervin, Jr. ----- ---- ----
All Directors and
Officers as a Group 1,570,000 (3)(4)1 9.3% 15.5%
Lutz Family Trust 310,000 (5) 3.8% 6.6%
</TABLE>
- ----------------------------
(1) The address for each of Messrs. McCartney, Pasemko, Klychak, and Woods is
c/o Company, Inc., Suite #1A, 3033 King George Highway, Surrey, BC,
Canada, V4P 1B8.
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(2) The percentage shown reflects voting ownership after taking into account
the existing Class A Preferred Stock. None of the officers or directors
owns any of the Class A Preferred Stock.
(3) Includes vested options to purchase Common Shares held by such officers
and directors.
(4) Excludes unvested option shares held by Dr. Paul R. Ervin, Jr. Dr. Ervin
is no longer a Director of the Company.
(5) The Trust also owns 310,000 shares of the Company's Convertible Preferred
Stock, Class A.
Item 5. Directors, Executive Officers, Promoters and Control Persons.
The directors and executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
E. Greg McCartney 48 President, Chief Executive Officer and
Chairman of the Board of Directors
Lawrence J. Pasemko 62 Chief Financial Officer, Secretary and
Director
Albert Klychak 41 Vice President, Corporate Relations and
Director
Dr. Ian B. Woods 55 Vice President, Operations and Director
Carol Patterson Neves 66 Director
E. Greg McCartney. Mr. McCartney has been the Company's President and Chief
Executive Officer since 1995. In addition, he serves as Chairman of the Board
for White Diamond Spirits Inc., an American distilled spirits importing company.
From 1992 to 1995, Mr. McCartney was Vice President of Corporate Development at
Advanced Gaming Technology Corp., a public company distributing and
manufacturing electronic gaming equipment. Prior to 1992, Mr. McCartney was a
founding partner in a number of private enterprises involved in the electronics
industry, real estate and the automotive distribution business.
Lawrence J. Pasemko. Mr. Pasemko has been the Company's Chief Financial Officer
and Secretary Treasurer since 1995. From 1992 to 1995, Mr. Pasemko was the CFO
for Advanced Gaming Technology Corp., a public company which manufactured and
distributed electronic gaming equipment. Prior to his employment with Advanced
Gaming,
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Mr. Pasemko was president of Supercart Pacific Wholesale (Canada) Inc., a
private distribution business with operations throughout the Pacific Northwest
and was President and General Manager of two Chrysler automobile dealerships
located in British Columbia.
Dr. Ian B. Woods. Dr. Woods has been the Company's Vice President, Operations
since February 1998. Dr. Woods is the senior founding partner of the Burke
Mountain Medical Centre in Port Coquitlam, British Columbia, where he has
conducted a general medical practice since 1977. He received his Ph.D. in
Physics and his M.D. from the University of British Columbia. He completed his
internship at the Royal Columbian Hospital. He has served on numerous medical
advisory committees, is a director of ETC Industries Ltd. and President and
director of Chill Tech Industries Inc.
Albert Klychak. Mr. Klychak has been the Company's Vice President, Corporate
Relations since 1995 and is primarily responsible for investor relations. From
1993 to 1996, Mr. Klychak was the President and Director of Quinchak Enterprises
Limited, a private company providing financing and investor relations services
and management services for a private equity fund. From 1986 to 1993, he managed
a private equity portfolio as an independent consultant.
Carol Patterson Neves. Ms. Neves was employed with Merrill Lynch, Pierce, Fenner
& Smith for approximately 40 years prior to her retirement in 1996. From 1986 to
1996, Ms. Neves was the First Vice President/Senior Research Analyst:
Diversified Companies. Ms. Neves received her B.A. in Economics from Trinity
College, her graduate certificate from Harvard Business School and her MBA from
New York University. Ms. Neves was first elected to the Board on March 1, 1999,
by the Board of Directors.
Each director holds office until the Company's annual meeting of stockholders
and until his successor is duly elected and qualified. Officers are elected by
the Board of Directors and hold office at the discretion of the Board of
Directors. There are no family relationships between any of the directors or
executive officers of the Company. All of the directors, other than Dr. Ervin
and Ms. Neves were re-elected at a meeting of the stockholders held on July 31,
1998. Dr. Ervin and Ms. Neves were subsequently selected by the Board. Dr. Ervin
has advised the Board of his intention not to stand for re-election, due to
excessive time demands, but will instead accept a senior position on the
Scientific Advisory Board for Company.
Item 6. Executive Compensation.
-----------------------
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<PAGE>
The Company is in the start-up phase of its business and operations and
currently generates no revenues. None of the Company's principal officers are
employed directly by the Company. However, Messrs. McCartney, Pasemko and
Klychak, through their respective holding companies, are parties to an
employment agreement dated September 1, 1998, between Tynehead Capital Corp. and
the Company. The Employment Agreement employs the Executives, as independent
contractors, to provide described management services to the Company, including
setting objectives, structures, time frames, identifying resources required and
allocating and utilizing such resources. The Company pays a monthly management
fee, subject to annual review, at $22,833 to Tynehead. That amount is subject to
annual review for increases only. In addition, Tynehead may be entitled to an
annual incentive management fee on the basis of the recommendations of the Board
taking into account the financial performance of the Company and other relevant
factors. The Board of Directors of the Company is currently controlled by the
Executives. The Executives recognize this and expect that any recommendations
concerning increase in Tynehead compensation or incentive compensation will
require independent director recommendation, but no formal procedure for
independent director review has been agreed upon or otherwise established as of
this date.
During the year ended December 31, 1998, fees aggregating $173,200 was paid or
was payable to Tynehead Capital Corp. in connection with management and
administrative services provided by such executive officers and their respective
holding corporations. The amount was divided equally among the three officers
excepting automobile expenses, which were based on actual expenses incurred. Dr.
Woods was not paid for his services in 1998.
The agreement provides that Messrs. McCartney, Pasemko and Klychak will not
compete with the Company for a period of one year subsequent to termination. The
enforcement of such non-compete clauses may be subject to challenge as against
public policy.
Director Compensation Directors not otherwise employed by the Company did not
receive cash compensation for serving on the Board of Directors during the
fiscal year ended December 31, 1998. However, directors received stock options.
See below.
Option and Award Plan On July 31, 1998, the stockholders approved the 1998 Stock
Option Plan adopted by the Board of Directors of the Company. The plan provides
for the grant of incentive stock options for up to 650,000 shares of Common
Stock to those employees, officers, directors or consultants eligible under the
Plan to receive stock options.
-30-
<PAGE>
The Plan is administered by the Board of Directors or a committee thereof, which
determines, among other things, those individuals who receive options, the time
period during which the options may be partially or fully exercised, the terms
of any restrictions, the number of shares of Common Stock issuable upon the
exercise of each option, the exercise price and the expiration date, which date
will not exceed ten years from the date of grant of the Option.
The exercise price per share of Common Stock subject to an incentive option may
not be less than the fair market value per share of Common Stock on the date the
option is granted, as determined by a formula contained in a standard stock
option agreement. The maximum grant to any individual cannot exceed 5% of the
total issued and outstanding Common Stock of the Company as of the date of the
grant of the option.
No stock option may be transferred by a plan participant other than by will, or
the laws of descent and distribution, and during the lifetime of the plan
participant, the option can be only exercised by the plan participant. In the
event of termination by death, retirement or the date a consultant ceases to be
a consultant by termination of the contract in accordance with its terms, or
ceases to be a director, the plan participant shall be entitled to exercise the
option within ninety days of the termination date. Options expire immediately in
all other instances. The plan administrator may amend the rules with respect to
termination in special circumstances.
Options issued under the Plan must be exercised within ten years from the date
the option is granted. All options granted under the Plan provide for the
payment of the exercise price in cash or bank draft provided the plan
participant delivers notice of intent to exercise speaking the number of options
to be exercised.
In the event of a merger, amalgamation or other corporate arrangement, including
but not limited to takeover, the Board of Directors may, in a fair and equitable
manner, determine the manner in which all unexercised option rights granted
under this plan will be treated, including the acceleration of time for the
exercise of such rights.
Any unexercised options that expire or that terminate upon a participant ceasing
to be employed by the Company become available again for issuance under the
Plan.
As of August 2, 1999, the following options to purchase Common Stock have been
granted to officers, directors and employees of the Company:
-31-
<PAGE>
<TABLE>
<CAPTION>
Name Options Held Exercise Price
---- ------------ --------------
<S> <C> <C>
E. Greg McCartney 90,000 $1.00
Lawrence J. Pasemko 90,000 $1.00
Albert Klychak 90,000 $1.00
Dr. Ian B. Woods 90,000 $1.00
Dr. Paul R. Ervin Jr. 50,000 $1.00
Other Employees 5,000 $1.00
</TABLE>
Item 7. Certain Relationships and Related Transactions On May 4, 1997, the
Company issued 3,000,000 common shares to companies controlled by officers and
directors of the Company to settle debt of $120,000 ($.04 per Share). During
1998 the Company issued 3,000,000 additional common shares to companies
controlled by officers and directors of the Company to settle debt of $347,395
($.115 per Share). As of January 2, 1998, the Company, then known as Flexx
Realm, Inc. had an indebtedness (accounts payable and notes payable) to Tynehead
Capital Corp. (the management services company owned by the principal managers
of the Company) of $193,406.20. At the same time, the Company had an
indebtedness to a related entity - Sterling Gate Financial Corporation - for
accounts payable and notes payable amounting to $153,988.63. Both sets of
indebtedness were settled by conversion to equity, 1,670,200 Shares to Tynehead
and 1,329,800 to Sterling Gate, or an aggregate of 3,000,000 Shares for the
$347,395 of debt. The 575,000 Shares issued to Tynehead were redistributed to
the accounts of certain officers and directors of the Company as follows:
On January 2, 1998, 200,000 shares of Common Stock of the Company were issued to
Aspenwood Holdings Ltd., a company controlled by E. Greg McCartney, as
settlement of outstanding debts and accounts ($23,160) owing from Tynehead to
Aspenwood.
On January 2, 1998, 215,000 shares of Common Stock of the Company were issued to
Supercart Pacific Wholesale (Canada) Inc., a company controlled by Lawrence J.
Pasemko, as settlement of outstanding debts and accounts ($22,497) owing from
Tynehead to Supercart.
On January 2, 1998, 100,000 shares of Common Stock of the Company were issued to
Dr. Ian B. Woods, an officer and director of the Company, as settlement of
outstanding debts and accounts ($8,635) owing from Tynehead to Dr. Woods.
On January 2, 1998, 60,000 shares of Common Stock of the Company
-32-
<PAGE>
were issued to Albert Klychak, an officer and director of the Company, as
settlement of outstanding debts and accounts ($6,948) owing from Tynehead to Mr.
Klychak.
Such issuances were made before there was a trading market in the securities of
the Company. All of such stock issuances were related party transactions. No
independent opinion as to the fairness of the issuances was obtained. No related
party equity transactions occurred in 1999, and none are contemplated.
In addition all of the above persons rendered services in connection with the
formation of the Company for which they received no cash compensation or other
payment.
Item 8. Description of Securities
The Company is authorized to issue One Hundred Million (100,000,000) shares of
its Common Stock, $.0001 par value, of which 8,118,997 shares are outstanding as
of November 10, 1999. The Company is also authorized to issue One Hundred
Million (100,000,000) shares of its Preferred Stock, $.0001 par value, of which
2,000,000 shares are outstanding as of November 10, 1999.
Each outstanding share of Common Stock is entitled to one vote, either in person
or by proxy, on all matters that may be voted upon by the holders thereof at
meetings of the stockholders. The holders of the Company's Common Stock have
equal ratable rights to dividends from funds legally available, therefore, when,
and if declared by the Board of Directors of the Company, and are entitled to a
pro rata share, subject to preferences given to Preferred Stock holders, of all
the assets of the Company available for distribution to holders of the Common
Stock, upon liquidation, dissolution or winding up of the affairs of the
Company. The holders of Common Stock do not have preemptive, subscription or
conversion rights, redemption or any redemption or sinking fund provisions. All
shares of Common Stock outstanding are fully paid and non-assessable.
Each holder of the Series A Convertible Preferred Stock, par value $0.0001, (the
"Class A Stock") is entitled to receive, out of any funds legally available,
noncumulative dividends at a rate of six percent (6%) per annum prior and in
preference to any payment of any dividend on the Common Stock in each calendar
year, and to participate pro rata with the Common Stock in any additional
dividends. Dividends are paid when, as and if declared by the board. The
dividend rights and preferences of the Class A Stock are senior to those of the
Common Stock. The Company has never paid any dividends, and there is no
likelihood that it will do so
-33-
<PAGE>
in the foreseeable future.
All of the Class A Stock is restricted as to retransfer. There is no liquid
market for the securities. None is expected to develop. In certain events
relating to liquidation, dissolution, consolidation or winding up of the Company
holders of the Class A Stock are entitled to receive an amount equal to the
original purchase price per share for the Class A Stock plus an amount equal to
all declared but unpaid dividends thereon (the "Preference Amount"). After the
full liquidation preference on all outstanding shares of the Class A Stock has
been paid, any remaining funds and assets of the Company legally available for
distribution to shareholders are distributed pro rata among the holders of the
Class A Stock and the Common Stock on an "as-if-converted" basis. If the Company
has insufficient assets to permit payment of the Preference Amount in full to
all the Class A Stock shareholders, then the holders of the Class A Stock will
receive lesser payments in proportion to the Preference Amount each such holder
would otherwise be entitled to receive, without any distribution to the holders
of the Common Stock.
The Company has rights to redeem all of the outstanding Class A Stock at any
time. The redemption price is 110% of the initial purchase price of the Class A
Stock plus all declared but unpaid dividends. Redemption is highly unlikely
under current circumstances.
The holders of the Class A Stock have the right to convert its Class A Stock
into shares of Common Stock at any time commencing one year after purchase. The
Conversion Rate is one share of Class A Stock for one share of Common Stock. The
holders and the Class A Stock also have information rights, demand and
piggy-back registration rights, which ensure such holders that, under certain
circumstances, the Company will be forced to register the underlying Common
Stock for resale by the holders. The existence of such registration rights is a
risk factor with respect to the Common Stock. All rights incident to a share of
Class A Stock will terminate automatically upon any conversion of such share
into Common Stock. The Conversion Rate of the Class A Stock into Common Stock is
subject to adjustment based upon standard anti-dilution adjustment provisions
from time-to-time.
-34-
<PAGE>
Company, INC.
FORM 10 S-B
REGISTRATION STATEMENT
PART II
Item 1. Market Price of and Dividends on the Registrants Common Equity.
Price Range of Common Stock
The Common Stock of the Company commenced trading on the OTC Bulletin Board on
February 16, 1999, under the symbol "BILB". The following table sets forth, for
the fiscal periods indicated, the high and low trading prices of a share of
Common Stock as reported by the OTC Bulletin Board for periods on and subsequent
to February 16, 1999, and solely in the pink sheets from September 1, 1999 to
date. Such quotations reflect inter-dealer prices, without dealer mark-up,
mark-down or commission and may not necessarily represent actual transactions.
High Low
---- ---
Fiscal Year 1999 to Date
1st Quarter $7.00 $3.50
2nd Quarter $4.625 $2.00
3rd Quarter $7.00 $2.50
4th Quarter to date:
(October 28, 1999) $4.50 $3.25
As of August 4, 1999, there are approximately 1200 holders of record of shares
of such Common Stock. There is no market for the Registrant's Class A
Convertible Preferred Stock. As of August 4, 1999, there are approximately 19
holders of record of shares of the Class A Convertible Preferred Stock. None of
Class A Convertible Preferred Stockholders have converted. None are eligible to
convert prior to November, 1999.
The Company has not paid dividends on the Common Stock or the Class A Preferred
Stock since inception and does not intend to pay and dividends to its stock
holders in the foreseeable future. The declaration of dividends in the future
will be at the election of the Board of Directors and will depend upon the
earnings, capital
-35-
<PAGE>
requirements, financial position of the Company, general economic conditions,
and other factors the Board of Directors deems relevant.
Item 2. Legal Proceedings.
None. Not Applicable.
Item 3. Changes in and Disagreements with External Auditors.
None. Not Applicable.
Item 4. Recent Sales of Unregistered Securities.
In the past three years, the Company has made the following sales of
unregistered securities, all of which sales were exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to
Section 3(b) hereof or as otherwise indicated herein.
In August, 1998, the Company sold 960,000 shares of Common Stock at $1.00 per
share (an aggregate of $960,000) to 181 non-accredited investors. The Company
believes that each issuance and sale of such securities was exempt from
registration pursuant to Section 3 (b) of the Act and/or Rule 504 promulgated
thereunder. The Company filed a Form D relating to such transaction on August 1,
1998.
From November of 1998 to August 30 1999, the Company sold 2,000,000 shares of
Convertible Preferred Stock to 19 persons. 1,388,830 of the Convertible
Preferred Shares were placed by the Company with the same group of nineteen (19)
investors who purchased the earlier traunche of the same securities. Proceeds of
the Company's Private Placement Offerings, net of commissions and costs have
been applied by the Company solely to capital contributions to the Joint Venture
with Biotherapies, payments to Biotherapies (as per the JV Operating Agreement)
and payment of general operating expenses current and future. The Company
believes that such offerings are exempt from registration pursuant to Regulation
D and Sections 3(b) or 4(2) of the Act as well as relevant exemptions in
accordance with the Canadian Securities Laws and provincial authorities,
including Section 74(2)(4) of the Securities Act (British Columbia) and
107(1)(d) of the Securities Act (Alberta).
All proceeds of the Company's private placement offerings, minus sales
commissions not exceeding (10%) percent of the amount thereof, have been applied
by the Company solely to capital contributions to the Joint Venture, other
required capital
-36-
<PAGE>
commitments to Biotherapies and payment of general operating expenses. Except to
the extent disclosed herein Item 6, "Executive Compensation", none of the
proceeds were paid, directly or indirectly, to directors, officers, general
partners of the Company, 10% shareholders or any of their affiliates (other than
payments made to Biotherapies, which is an affiliate of Dr. Paul Ervin, a
director of the Company).
Item 5. Indemnification of Directors and Officers.
New York Law enables a corporation in its original certificate of incorporation,
or an amendment thereto validly approved by the Board of Directors, to eliminate
or limit personal liability of members of its Board of Directors for violations
of a director's fiduciary duty of care. However, the elimination or limitation
shall not apply where there has been a breach of the duty of loyalty, failure to
act in good faith, intentional misconduct or a knowing violation of a law, or
where an improper personal benefit is obtained. New York law permits a
corporation to indemnify directors and officers with respect to any matter in
which a director or officer acted in good faith and in a manner reasonably
believed to be not opposed to the best interests of the corporation, and, with
respect to any criminal action, had reasonable cause to believe the conduct was
lawful.
The Company's Certificate of Incorporation includes the following language:
The personal liability of directors to the corporation or its shareholders
for damages for any breach of duty in such capacity is hereby eliminated
except that such personal liability shall not be eliminated if a judgement
or other final adjudication adverse to such director established that his
acts or omissions were in bad faith or involved intentional misconduct or
a knowing violation of law or that he personally gained in fact a
financial profit or other advantage to which he was not legally entitled
or that his acts violated Section 719 of the Business Corporation Law.
The Company's By-Laws include the following language:
Each director and officer of the corporation shall be indemnified by the
corporation to the fullest extent permitted by law against all costs and
expenses actually and necessarily incurred by him or her in connection with the
defense of any action, suit or proceeding in which he or she may be involved or
-37-
<PAGE>
to which he or she may be made a party by reason of his or her being or having
been such director or officer, except in relation to matter as to which he or
she shall be finally adjudged in such action, suit or proceeding to be liable
for negligence or misconduct in the performance of duty.
[The rest of this page intentionally left blank.]
-38-
<PAGE>
Financial Statements
--------------------
The Financial Statements and Notes thereto can be found beginning on page FS-1
"Index to Financial Statements" following the signature page hereof.
[The rest of this page intentionally left blank.]
-39-
<PAGE>
Company, INC.
FORM 10 S-B
REGISTRATION STATEMENT
PART III
--------
Exhibits.
- ---------
3.1 Restated Certificate of Incorporation of Company, Inc. 2/9/99
3.2 Class A Convertible Preferred Stock definition. **
5.1O pinion regarding legality of Shares.*
10.1 Abstract of Limited Liability Company Operating Agreement of BioMedical
Diagnostics, LLC (Joint Venture Agreement)
10.2 Amended and Restated Joint Venture Agreement, dated as of November 4,
1998, and as amended through July 31, 1999.**
10.3 Management Services Agreement BioLabs, Inc. With Tynehead Capital Corp.**
21.1 Subsidiaries of Registrant: None.
27.1 Financial Data Schedule
Undertakings
- ------------
Upon the effectiveness of this Form 10-SB, the Registrant undertakes
to file all quarterly, annual and periodic reports required to be filed
by the Company.
* Filed with original filing on August 13, 1999.
** Filed with the re-filing on October 8, 1999.
-40-
<PAGE>
SIGNATURE PAGE
In accordance with Section 12 of the Securities Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
BioLabs, Inc.
BY /s/ E. Greg McCartney E. Greg McCartney Chief Ex.Officer/President
---------------------------------------------------------------------
E. Greg McCartney Name Title
DATE November 12, 1999
-----------------
BY /s/ E. Greg McCartney
---------------------
E. Greg McCartney, President, Chief Executive Officer and Chairman
DATE November 12, 1999
-----------------
BY /s/ Lawrence J. Pasemko
-----------------------
Lawrence J. Pasemko, Chief Financial Officer, Secretary and Director
DATE November 12, 1999
-----------------
BY /s/ Albert Klychak
------------------
Albert Klychak, Vice President and Director
DATE November 12, 1999
BY
-------------------------------
Dr. Ian B. Woods, Vice President and Director
DATE November , 1999
-----------------
By
-------------------------------
Carol Patterson Neves, Director
Date November , 1999
-41-
<PAGE>
BIOLABS, INC.
(formerly Flexx Realm Inc.)
(a New York Corporation)
(a development stage company)
FINANCIAL STATEMENTS
June 30, 1999
Unaudited - Prepared by Management
All figures are expressed in $USD
FS 1
<PAGE>
BioLabs, Inc.
BALANCE SHEET
(a development stage company)
(unaudited, prepared by management)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED:
June 30 1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash 321,345 121,575
Accounts receivable 18,970 121
Prepaid expenses 22,833
----------
363,148 121,696
Long term investments
Biomedical Diagnostics LLC 1,445,541
Biotherapies Incorporated 420,000 420,000
Office equipment 19,980
Incorporation costs 883 2,647
---------- ----------
2,249,552 544,343
---------- ----------
LIABILITIES
Current liabilities
Accounts payable & accrued liabilities 202,145 61,635
Common stock subscriptions 484,986
Preferred stock subscriptions 30,000
Promissory notes payable - related parties 40,132 170,973
---------- ----------
542,277 717,594
---------- ----------
SHAREHOLDER'S EQUITY (Deficiency)
Preferred stock par value $.0001
Authorized: 100,000,000 shares
Issued: 1999 - 619,170 1998 - nil 62
Common stock par value $.0001
Authorized: 100,000,000 shares
Issued: 1999 - 8,119,036 812 618
1998 - 6,176,536
Additional paid-in capital 3,845,999 475,594
Accumulated deficit (2,139,598) (649,463)
---------- ----------
1,707,275 (173,251)
---------- ----------
2,249,552 544,343
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements
All figures are expressed in $USD
- ---------------------------------
FS 2
<PAGE>
BioLabs, Inc.
STATEMENT OF OPERATIONS AND DEFICIT
(a development stage company)
(unaudited, prepared by management)
<TABLE>
<CAPTION>
----------------------
|Total from Inception|
FOR THE SIX MONTHS ENDED: |(September 19, 1994 |
June 30 1999 1998 | to June 30, 1999) |
- ------- ----- ----- |--------------------|
| |
<S> <C> <C> | <C> |
EXPENSES | |
Automobile $ 2,676 $ 4,903 | $ 39,674 |
Depreciation & amortization 3,921 882 | 10,973 |
Interest & bank charges 1,089 6,677 | 12,436 |
----------- ----------- | ----------- |
Legal & accounting 58,215 20,777 | 213,347 |
----------- ----------- | ----------- |
Listing & share transfer fees 4,693 - | 42,495 |
Management & consulting fees 273,287 79,981 | 1,390,903 |
Office & miscellaneous 64,653 937 | 83,899 |
Premises costs 14,076 - | 17,272 |
Salaries & benefits 9,175 - | 9,175 |
Telephone 9,884 1,018 | 18,737 |
Travel & promotion 46,165 12,023 | 252,447 |
----------- ----------- | ----------- |
487,834 127,198 | 2,091,358 |
----------- ----------- | ----------- |
| |
LOSS BEFORE OTHER INCOME (487,834) (127,198) | (2,091,358) |
Interest & miscellaneous income 3,366 448 | 6,219 |
Equity loss of Biomedical Diagnostics LLC (54,458) (54,458) | |
| |
NET LOSS (538,927) (126,750) | (2,139,597) |
| |
DEFICIT, BEGINNING OF PERIOD (1,600,671) (522,713) | - |
| |
DEFICIT, END OF PERIOD ($2,139,598) ($649,463) | ($2,139,597) |
| |
LOSS PER COMMON SHARE ($0.07) ($0.02) | |
----------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
All figures are expressed in $USD
- ---------------------------------
FS 3
<PAGE>
BioLabs, Inc.
STATEMENT OF CASH FLOW
(a development stage company)
(unaudited, prepared by management)
<TABLE>
<CAPTION>
Total from Inception
FOR THE SIX MONTHS ENDED: (September 19, 1994
June 30 1999 1998 to June 30, 1999)
- ------- ---- ---- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss ($ 538,927) ($ 126,750) ($2,139,598)
Adjustment to reconcile net loss to cash
used in operating activities:
Depreciation & amortization 3,921 882 10,973
Equity in loss of Biomedical Diagnostics LLC 54,459 54,459
Change in operating assets & liabilities 118,572 (165,339) 1,600,368
----------- ----------- -----------
(361,975) (291,207) (473,798)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures on equipment (14,157) -- (23,018)
Purchase of shares in Biotherapies Inc. -- (420,000) (420,000)
Investment in Biomedical Diagnostics LLC (1,000,000) -- (1,500,000)
----------- ----------- -----------
(1,014,157) (420,000) (1,943,018)
----------- ----------- -----------
Cash flows from financing activities:
Common stock issued for cash -- 347,394 708,837
Preferred stock issued for cash 1,615,324 -- 1,615,324
Common stock subscriptions received -- 484,986 --
Preferred stock subscriptions received -- -- 414,000
----------- ----------- -----------
1,615,324 832,380 2,738,161
----------- ----------- -----------
Net increase in cash 239,192 121,173 321,345
Cash:
Beginning of period 82,153 402 --
----------- ----------- -----------
End of period $ 321,345 $ 121,575 $ 321,345
----------- ----------- -----------
Non Cash Financing and Investing Activities:
Common stock issued to settle debt and
Accounts Payable $ 932,500 $ 347,395 $ 1,399,895
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
All figures are expressed in $USD
- ---------------------------------
FS 4
<PAGE>
BIOLABS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
JUNE 30, 1999
<TABLE>
<CAPTION>
Common Stock Preferred Stock
-------------------- Additional --------------------- Accum- Total
Number of Paid in Number of ulated Stockholders'
Shares Amount Capital Shares Amount Deficit Equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issue of common stock on
organization of the company 8,816,992 $8,817 $ -- -- $ -- $ --- $ 8,817
Net loss -- -- -- -- -- (147,192) (147,192)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 8,816,992 8,817 -- -- (147,192) (138,375)
Consolidation of shares in
November on a 50 for 1 basis (8,640,456) (8,799) 8,799 -- -- -- --
Net loss -- -- -- -- -- (184,403) (184,403)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 176,536 18 8,799 -- -- (331,595) (322,778)
Issue of common stock for
settlement of debt 3,000,000 300 119,700 -- -- -- 120,000
Net loss -- -- -- -- (191,118) (191,118)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 3,176,536 318 128,499 -- -- (522,713) (393,896)
Issue of common stock for
settlement of debt 3,000,000 300 347,095 -- -- -- 347,395
Issue of common stock for
cash 1,010,000 101 708,736 -- -- -- 708,837
Net loss -- -- -- -- -- (1,077,957) (1,077,957)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31,1998 7,186,536 719 1,184,330 -- -- (1,600,670) (415,621)
Issue of preferred stock for cash -- -- 1,729,262 619,170 62 -- 1,729,324
Issue of common stock for
settlement of debt 932,500 93 932,407 -- -- -- 932,500
Net loss -- -- -- -- -- (538,928) (538,928)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 8,119,036 812 $ 3,845,999 619,170 $ 62 $(2,139,598) $ 1,707,275
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
All figures are expressed in $USD
FS 5
<PAGE>
BioLabs, Inc.
Notes to Financial Statements
(Unaudited, prepared by management)
(All figures are expressed in $USD)
Note 1. Summary of Significant Accounting Policies
These financial statements are unaudited and reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating assets
for the interim periods.
The financial statements as of December 31, 1998, are derived from audited
financial statements. These financial statements should be read in conjunction
with the financial statements and accompanying notes contained in the Company's
financial statements for the fiscal year ended December 31, 1998. The results of
operations for the six months ended June 30, 1999, are not necessarily
indicative of the results that will be achieved for the entire fiscal year
ending December 31, 1999.
The financial statements have been prepared in accordance with generally
accepted accounting principles applicable to a going concern, which assume that
the Company will realize its assets and discharge its liabilities in the normal
course of business. Realization values may be substantially different from the
carrying values as shown in these financial statements should the Company be
unable to continue as a going concern. The Company's ability to meet its
obligations and maintain its operations is contingent upon successful completion
of additional financial arrangements and the continuing support of its
creditors.
Note 2. Supplemental Cash Flow Disclosures
On January 26, 1999, and February 15, 1999, the Company issued common stock in
non-cash transactions described in note 3.
Note 3. Equity Transactions
On January 26, 1999, in a non-cash transaction, the Company issued 60,000 shares
of common stock in exchange for $60,000 of investor relations services provided
by an unrelated party.
On February 15, 1999, in a non-cash transaction, the Company issued 872,500
shares of common stock through a negotiated agreement to convert $872,500 of
outstanding accounts payable into equity of the Company. The creditors are
unrelated parties to the Company.
During the six months ended June 30, 1999, the Company issued 619,170 shares of
series A Convertible Preferred stock to 17 persons for $3.00 per share. The
Company believes that such offerings are exempt from registration pursuant to
Regulation D and Sections 3(b) or 4(2) of the Act as well as relevant exemptions
in accordance with the Canadian
FS 6
<PAGE>
Securities Laws and provincial authorities, including Section 74(2)(4) of the
Securities Act (British Columbia) and 107(1)(d) of the Securities Act (Alberta).
All proceeds of the Company's private placement offerings, net of commissions,
have been applied by the Company solely to capital contributions to the JV with
Biotherapies, certain other capital commitments to Biotherapies and payment of
general operating expenses.
Note 4. Related Party Transactions
Pursuant to a management agreement dated September 1, 1998 between Tynehead
Capital Corp. and the Company, during the six months ended June 30, 1999, fees
aggregating $136,998 were paid or were payable, for the six months ended June
30, 1999, to Tynehead Capital Corp. in connection with management and
administration services provided by Messrs. McCartney, Pasemko and Klychak,
through their respective holding corporations. The amounts are divided equally
among the three executive officers excepting automobile expenses which were
based on actual expenses incurred.
Note 5. Capital Contribution Requirements
Under the terms of the original and subsequently amended Joint Venture Operating
Agreement, the Company agreed to contribute;
a. $1,500,000 to Biomedical Diagnostics LLC (the Joint Venture)
b. $3,500,000 to Biotherapies Inc.
As of October 28, 1999, the Company has contributed;
a. To Biomedical Diagnostics LLC - $1,500,000 This contribution completes the
obligation to Biomedical Diagnostics.
b. To Biotherapies Inc. - $1,500,000
A balance outstanding of $2,000,000 is payable under terms of the amended
Operating Agreement as outlined below under "Subsequent Events".
In addition to the foregoing, under terms of the Joint Venture Agreement,
BioLabs is obligated to issue 5% of its total outstanding shares of all classes
on a fully diluted basis, to Biotherapies within 14 days after Biomedical
Diagnostics LLC obtains the necessary regulatory approvals for the manufacturing
and marketing of some form of the MSA test in the United States.
FS 7
(All figures are expressed in $USD)
<PAGE>
Note 6. Stock Subscriptions
Common and Preferred stock subscriptions are recorded when cash is received, in
advance of the issuance of shares. Said cash is held by the Company until the
subscription documents are verified as to completeness and correctness, and
until the share certificates have been issued.
Subsequent Events
In July of 1999, the Company re-negotiated certain items of the JV Operating
Agreement between BioLabs, Inc. and Biotherapies Inc.
The main amendments to the Agreement are as follows:
1. Definition of milestone revised; "means the date that the Company first
receives in the aggregate (not to be calculated on any particular periodic
basis) $100,000 in gross revenue of any type derived from any sale or
license of the Mammastatin Serum Assay and has completed the diagnostic
clinical trials for some form of the Mammastatin Serum Assay in the United
States."
2. In the event that BioLabs fails to meet its obligations to Biotherapies
(as per the Operating Agreement - $2,000,000 after August 9, 1999), then
BioLabs shall retain an interest in Biomedical Diagnostics LLC based on
this formula:
BioLabs Capital Contributions
10,000,000 = % interest retained
In addition, BioLabs has a grace period of 180 days to rectify any capital
obligation not met by the due date.
3. BioLabs to pay $1,000,000 to Biomedical Diagnostics LLC by August 9, 1999.
This obligation has been met - payment made August 9, 1999.
4. BioLabs to pay $500,000 to Biotherapies Inc. by August 9, 1999. This
obligation has been met - payment made August 9, 1999.
5. BioLabs to pay $1,000,000 to Biotherapies Inc. within 60 days after
completion by Biomedical Diagnostics LLC of diagnostic clinical trials for
some form of the Mammastatin Serum Assay in the United States.
6. BioLabs to pay additional $1,000,000 to Biotherapies Inc. within 30 days
after the date that Biomedical Diagnostics LLC first achieves the
milestone.
(All figures are expressed in $USD)
FS 8
<PAGE>
In the period from June 30, 1999, to August 30, 1999, an additional 1,388,830
Convertible Preferred Shares were placed by the Company with the same group of
nineteen (19) investors who purchased the earlier traunche of the same
securities. In all, a total of 2,000,000 shares were sold under this offering,
to a total number of nineteen (19) investors.
Proceeds of the Company's Private Placement Offerings, net of commissions and
costs have been applied by the Company solely to capital contributions to the
Joint Venture with Biotherapies, payments to Biotherapies (as per the JV
Operating Agreement) and payment of general operating expenses current and
future.
Impact of the year 2000 Issue
The year 2000 Issue is the result of certain computer programs being written
using two digits rather than a four to indicate the applicable year. As a
result, computer programs with date-sensitive software may incorrectly recognize
a date using "00" as the year 1900 rather than the year 2000. Such an error
could result in a system failure or miscalculations resulting in disruptions of
operations, including a temporary inability to process normal business
transactions to provide service to our customers.
BioLabs has undertaken a review of its own computer systems and applications to
determine if significant problems exist with the operations of those systems as
a result of the Year 2000 Issue. As a result of that review, management does not
expect that any modifications required to address Year 2000 problems will have a
material impact on the Company's business, operations or financial condition.
BioLabs cannot guarantee that the systems of its vendors and suppliers will be
Year 2000 compliant. However, the number of vendors, customers, and suppliers is
negligible at this time, hence the Year 2000 Issue will not create an impact on
the Company's operations.
BioLabs has not incurred material costs to date in its Year 2000 review process
and does not anticipate that it will incur material expenses outside the normal
course of business to modify systems if third party supplied systems to be Year
2000 compliant.
(All figures are expressed in $USD)
FS 9
<PAGE>
Biomedical Diagnostics, LLC
Balance Sheet
As of June 30, 1999
<TABLE>
<CAPTION>
June 30, 1999
-------------
<S> <C>
ASSETS
Current Assets
Checking/Savings
AA Commerce Bank Checking 253,515.05
Loans to Biotherapies 50,000.00
----------
Total Checking/Savings 303,515.05
----------
Total Current Assets 303,515.05
Fixed Assets
Laboratory Equipment 72,417,78
Leasehold Improvements 40,355.00
Office Equipment
Computers 9,876.82
Furniture-Lease 1,009.70
Furniture/Equipment 944.46
Office Equipment-Other 2,102.50
Software 578.53
----------
Total Office Equipment 14,512.01
----------
Total Fixed Assets 127,284.79
----------
TOTAL ASSETS 430,799.84
==========
LIABILITIES & EQUITY
Liabilities
Long Term Liabilities
Loan Payable 39,717.00
Total Long Term Liabilities 39,717.00
Total Liabilities 39,717.00
Equity
Capital Stock
Capital-BioLabs 500,000.00
----------
Total Capital Stock 500,000.00
Net Income -108,917.16
----------
Total Equity 391,082.84
----------
TOTAL LIABILITIES & EQUITY 430,799.84
==========
</TABLE>
(All figures are expressed in $USD)
FS 10
<PAGE>
Biomedical Diagnostics, LLC
Profit and Loss
January through June 1999
<TABLE>
<CAPTION>
Jan - Jun 1999
--------------
<S> <C>
Income 0.00
Expense
Bank service charges 21.18
Conferences and seminars 3,640.00
Dues and subscriptions 95.00
Insurance
Health 267.58
Liability Insurance -297.00
Insurance-Other 3,423.00
----------
Total Insurance 3,393.58
Laboratory supplies
Antibody production 77.36
Assay relate 952.96
Laboratory supplies-Other 10,124.60
Total Laboratory supplies 11,154.92
Licenses and permits 70.00
Miscellaneous 5,809.10
Office Services 483.12
Office Supplies 1,433.58
Payroll expenses
Gross wages 53,335.40
----------
Total Payroll Expenses 53,335.40
Payroll taxes
FICA 4,080.15
MESC 256.50
Total Payroll taxes 4,336.65
Postage and delivery 39.60
Professional Fees
Contract labor 1,200.00
Management Consulting 7,300.00
Marketing/PR 4,800.00
Payroll processing 136.80
----------
Total Professional Fees 13,436.80
Rent
Rent-Ann Arbor 6,300.00
Security deposit 1,400.00
----------
Total Rent 7,700.00
Telephone 548.51
Travel and entertainment
Airfare 1,993.50
Lodging 212.15
Meals 518.21
Travel 356.62
----------
Total Travel and entertainment 3,080.48
Utilities
Gas and electric 339.24
----------
Total Utilities 339.24
----------
Total Expense 108,917.16
----------
Net Income -108,917.16
==========
</TABLE>
(All figures are expressed in $USD)
FS 11
<PAGE>
BIOLABS INC.
(formerly Flexx Realm Inc.)
(a New York Corporation)
(a development stage company)
FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1 Auditors' Report
2 Statement of Operations and Deficit
3 Balance Sheet
4 Statement of Stockholders' Equity
5 Statement of Cash Flows
6 Notes to the Financial Statements
- --------------------------------------------------------------------------------
FS 12
<PAGE>
AUDITORS' REPORT
To the Directors of
BIOLABS INC. (formerly Flexx Realm Inc.)
We have audited the accompanying balance sheet of Biolabs Inc. (A New York
Corporation) as at December 31, 1998 and the related statements of operations
and deficit and changes in cash flows for the year then ended. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 1998 and the
results of its operations and the changes in its cash flows for the year then
ended in accordance with generally accepted accounting principles.
The prior year financial statements were audited by other auditors who expressed
their opinion without reservation in their report dated March 19, 1998.
"LDMB"
Chartered Accountants
Langley, Canada
January 22, 1999
FS 13
<PAGE>
BIOLABS INC.
(formerly Flexx Realm Inc.)
(a New York Corporation)
(a development stage company)
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS AND DEFICIT
(U.S.$)
- ---------------------------------------------------------------------------------------------------------------------------
Total from
inception
(September 19,
1994) to
December 31,
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE $ - $ - $ - $ -
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES
Amortization 1,763 1,763 1,763 7,052
Automobile 16,650 11,650 8,698 36,998
Interest and bank charges 3,136 8,088 123 11,347
Legal and accounting 109,180 20,005 25,948 155,132
Listing and share transfer fees 37,802 - - 37,802
Management and consulting fees 737,832 112,176 123,315 1,117,616
Office and miscellaneous 15,462 772 1,875 19,246
Rent 3,196 - - 3,196
Telephone 6,118 1,648 1,087 8,853
Travel and promotion 149,671 35,017 21,594 206,282
- ---------------------------------------------------------------------------------------------------------------------------
1,080,810 191,119 184,403 1,603,524
- ---------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE OTHER INCOME (1,080,810) (191,119) (184,403) (1,603,524)
Interest and miscellaneous income 2,853 - - 2,853
- ---------------------------------------------------------------------------------------------------------------------------
NET LOSS (1,077,957) (191,119) (184,403) (1,600,671)
DEFICIT, BEGINNING (522,714) (331,595) (147,192) -
- ---------------------------------------------------------------------------------------------------------------------------
DEFICIT, ENDING $ (1,600,671) $ (522,714) $ (331,595) $ (1,600,671)
- ---------------------------------------------------------------------------------------------------------------------------
LOSS PER COMMON SHARE (Note 7) $ 0.17 $ 0.09 $ 1.04
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS 14
<PAGE>
BIOLABS INC.
(formerly Flexx Realm Inc.)
(a New York Corporation)
(a development stage company)
BALANCE SHEETS
(U.S.$)
- -------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash $ 82,153 $ 402 $ -
Accounts receivable - 288 -
Prepaid expenses 10,000 - -
- -----------------------------------------------------------------------------------------------------------------------------
92,153 690 -
Long-term investment in:
Biomedical Diagnostics LLC (Note 2) 500,000 - -
Biotherapies Incorporated - shares (6%) 420,000 - -
Office equipment (Note 3) 8,861 - -
Organizational expense 1,765 3,528 5,291
- -----------------------------------------------------------------------------------------------------------------------------
$ 1,022,779 $ 4,218 $ 5,291
=============================================================================================================================
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $ 984,269 $ 276,599 $ 328,069
Preferred stock subscriptions (Note 8) 414,000 - -
Promissory notes payable - related parties (Note 4) 40,132 121,516 -
Commitments (Note 9)
- -----------------------------------------------------------------------------------------------------------------------------
1,438,401 398,115 328,069
- -----------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Note 5)
Preferred stock, $.0001 par value.
Authorized 100,000,000 shares, none issued
Common stock, $.0001 par value.
Authorized 100,000,000 shares;
Issued: 1998-7,186,536; 1997-3,176,536;1996-176,536 719 318 18
Additional paid-in capital 1,184,330 128,499 8,799
Accumulated deficit (1,600,671) (522,714) (331,595)
- -----------------------------------------------------------------------------------------------------------------------------
(415,622) (393,897) (322,778)
- -----------------------------------------------------------------------------------------------------------------------------
$ 1,022,779 $ 4,218 $ 5,291
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS 15
<PAGE>
BIOLABS INC.
(formerly Flexx Realm Inc.)
(a New York Corporation)
(a development stage company)
STATEMENT OF STOCKHOLDERS' EQUITY
(U.S.$)
- -------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Common stock
----------------------- Additional Total
Number paid-in Accumulated stockholders'
of shares Amount capital deficit equity
<S> <C> <C> <C> <C> <C>
Issue of common stock on
organization of the company 8,816,992 $ 8,817 $ - $ - $ 8,817
Net loss - - - (147,192) (147,192)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 8,816,992 8,817 - (147,192) (138,375)
Consolidation of shares in
November on a 50 for 1 basis (8,640,456) (8,799) 8,799 - -
Net loss - - - (184,403) (184,403)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 176,536 18 8,799 (331,595) (322,778)
Issue of common stock for
settlement of debt 3,000,000 300 119,700 - 120,000
Net loss - - - (191,118) (191,118)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 3,176,536 318 128,499 (522,713) (393,896)
Issue of common stock for
settlement of debt 3,000,000 300 347,095 - 347,395
Issue of common stock for
cash 1,010,000 101 708,736 - 708,837
Net loss - - - (1,077,957) (1,077,957)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31,1998 7,186,536 $ 719 $ 1,184,330 $ (1,600,670) $ (415,621)
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS 16
<PAGE>
STATEMENT OF CASH FLOWS
(U.S.$)
<TABLE>
<CAPTION>
=============================================================================================================================
Total from
inception,
(September 19,
1994) to
December 31,
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net Loss $ (1,077,957) $ (191,119) $ (184,403) $ (1,600,671)
Adjustment to reconcile net loss to cash
used in operating activities:
Amortization 1,763 1,763 1,763 7,052
Changes in operating assets
and liabilities:
Accounts receivable 288 (288) - -
Prepaid expenses (10,000) - - (10,000)
Promissory notes payable 266,011 121,516 - 387,527
Accounts payable 707,671 68,529 182,640 1,104,269
- -----------------------------------------------------------------------------------------------------------------------------
(112,224) 401 - (111,823)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Capital expenditures on equipment (8,861) - - (8,861)
Purchase of shares of Biotherapies Inc. (420,000) - - (420,000)
Investment in Biomedical Diagnostics LLC (500,000) - - (500,000)
(928,861) - - (928,861)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Common stock issued for cash 708,837 - - 708,837
Preferred stock subscriptions received 414,000 - - 414,000
- -----------------------------------------------------------------------------------------------------------------------------
1,122,837 - - 1,122,837
- -----------------------------------------------------------------------------------------------------------------------------
Net increase in cash 81,752 401 - 82,153
Cash, beginning 401 - - -
Cash, ending $ 82,153 $ 401 $ - 82,153
Non-cash financing and investing activities
- -----------------------------------------------------------------------------------------------------------------------------
Common stock issued to settle debt $ 347,395 $ 120,000 $ - $ 467,395
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS 17
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
(U.S.$)
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
1. Summary of significant accounting policies
Nature of operations
Biolabs Inc., through its 50% interest in Biomedical Diagnostics LLC.,
is involved in the development of a mammastatin diagnostic assay to be
used in breast cancer detection.
These financial statements have been prepared in accordance with
generally accepted accounting principles applicable to a going concern
which assume that the Company will realize its assets and discharge its
liabilities in the normal course of business. Realization values may be
substantially different from the carrying values as shown in these
financial statements should the Company be unable to continue as a
going concern. The Company's ability to meet its obligations and
maintain its operations is contingent upon successful completion of
additional financial arrangements and the continuing support of its
creditors.
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash equivalents
Cash equivalents include holdings of highly liquid investments with
maturities of three months or less when purchased.
Long-term investments
The Company accounts for its investment in Biomedical Diagnostics LLC
by the equity method, whereby the investment is initially recorded at
cost and adjusted thereafter to include the Company's pro-rata share of
Biomedical Diagnostics LLC earnings and losses.
Long-term investments in companies in which the Company holds less than
a 20% interest are recorded at cost. When there is other than a
temporary decline in value, these investments are written down to
provide for the loss.
Equipment
Equipment is recorded at cost less depreciation. Depreciation is
primarily accounted for on the straight-line method based on estimated
useful lives.
FS 18
<PAGE>
BIOLABS INC.
(formerly Flexx Realm Inc.)
(a New York Corporation)
(a development stage company)
NOTES TO THE FINANCIAL STATEMENTS
(U.S.$)
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
1. Summary of significant accounting policies (continued)
Organizational costs
Costs associated with the organization of the Company are capitalized
and amortized on a straight-line basis over a period of five years
commencing January 1, 1995.
Stock options
The exercise price of stock options granted was greater than the market
price at the grant date. No expense related to the stock options has
been recorded.
Earnings per common share
Statement of Financial Accounting Standards No. 128, "Earnings per
Share", which became effective in 1997, requires presentation of two
calculations of earnings per common share. "Basic" earnings per common
share equals net income divided by weighted average number of common
shares outstanding during the period. "Diluted" earnings per common
share equal net income divided by the sum of weighted average common
shares outstanding during the period plus common stock equivalents.
Common stock equivalents are shares assumed to be issued if outstanding
stock options were exercised and are only considered if their effect on
earnings per common share is dilutive.
2. Investment in Biomedical Diagnostics, LLC
The Company has entered into a joint venture agreement with
Biotherapies Incorporated for development of a mammastatin diagnostic
assay. The joint venture is named Biomedical Diagnostics, LLC and the
Company and Biotherapies Incorporated each have a 50% interest .
Under the terms of the Biomedical Diagnostics, LLC operating agreement,
the Company is required to make capital contributions of $1,500,000 to
Biomedical Diagnostics, LLC. The first contribution of $500,000 is due
within 90 days of the effective date. The remaining $1,000,000
contribution is due on or before March 31, 1999.
The Company is also required, under the operating agreement, to make
the following additional payments to Biotherapies Incorporated:
-$500,000 within 60 days of execution (paid)
-$500,000 on or before March 31, 1999
-$2,500,000 within 14 days after the later of:
-the date the shares of the Company are first
quoted on the OTC Bulletin Board
FS 19
<PAGE>
2. Investment in Biomedical Diagnostics, LLC (continued)
-the date Biomedical Diagnostics, LLC obtains
regulatory approvals as required
Within 14 days of Biomedical Diagnostics, LLC achieving the Milestone,
the Company will issue to Biotherapies Incorporated voting shares of
the common stock of the Company constituting 5% of the total
outstanding shares of all types on a fully diluted basis, taking into
account allocations, convertible debt and issued shares.
Had the milestone been reached by December 31, 1998, the Company would
----------------- ----------------------------------------------------
have been required to issue 385,353 shares determined as follows:
-----------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Preferred shares outstanding -
Common stock 7,186,536
Stock options outstanding 360,000
Convertible debt ($40,132 / $.25 per share) 160,528
- ----------------------------------------------------------------------------------------------
7,707.064
x 5%
385,353 shares
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
As at December 31, 1998, Biomedical Diagnostics, LLC had not commencedoperations.
3. Equipment
-------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Office equipment $ 8,861 $ - $ -
Less: accumulated depreciation - - -
--------------------------------------------------------------------------------------
$ 8,861 $ - $ -
==============================================================================================
</TABLE>
FS 20
<PAGE>
4. Promissory notes payable - related parties
Promissory notes payable to companies controlled by Officers and
Directors of the Company, repayable 30 days after demand, interest at
prime plus 4%, convertible into shares of the Company at $.25 per share
after the shares are listed for trading, secured by a security interest
in and to all assets and book accounts, equipment, furniture, cash as
well as accounts receivable and inventory owned by the Company
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 40,132 $ 121,516 $ -
==============================================================================================
</TABLE>
5. Stockholders' equity
Pursuant to a Directors resolution dated November 14, 1996, the
authorized and issued common stock of the corporation was consolidated
on a 50 to 1 basis. Pursuant to the resolution, the authorized capital
of the Company was then increased to 19,000,000 shares with a par value
of $0.0001 per share of which 176,340 shares are issued.
In July 1998, the Company amended the Articles of Incorporation as
follows:
-The name of the Company was changed to Biolabs Inc.
-The authorized share capital of the Company was
increased to 200,000,000 shares, comprised of:
-100,000,000 common shares with a par value of
$0.0001 per common share.
-100,000,000 preferred shares with a par value of
$0.0001 per preferred share, leaving to the sole
discretion of the directors the determination of the
rights and preferences of such shares.
6. Stock option plan
During 1998, the Company established a stock option plan to allow key
employees, directors, advisors and representatives of the Company to
acquire Company common stock. Under the terms of the plan the Company
has made available 650,000 common shares to the plan.
Stock options outstanding under this plan are summarized as follows:
<TABLE>
<CAPTION>
Option price Shares
per share outstanding
----------------------------------------------------------------------------------------------
<S> <C>
$ 1.00 360,000
==============================================================================================
</TABLE>
FS 21
<PAGE>
6. Stock option plan (continued)
During the year the Company granted 360,000 stock options. These
options expire September 8, 2003. No options were exercised during the
year.
The exercise price of stock options granted was equal to the market
value at the grant date. No expenses related to the stock option has
been recorded.
The fair value of the options granted in 1998 have been estimated at
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: expected stock volatility of 58%; risk-free
interest rate of 5.5%; expected life of 5 years and no dividend yield
as the Company has no history of paying dividends.
The Black-Scholes option valuation model was developed for estimating
the fair value of traded options that have no vesting restrictions and
are fully transferable. Because option valuation models require the use
of subjective assumptions and changes in these assumptions can
materially impact the fair value of the options and the Company's
options do not have the characteristics of traded options, the option
valuation models do not necessarily provide a reliable measure of the
fair value of its options. The estimated fair value of stock options
granted during 1998 is $.68 per share.
7. Loss per common share
Loss per common share is computed by dividing the net loss by the
average number of Common shares and common stock equivalents
outstanding during the year. The weighted average number of Common
shares outstanding during the year ended December 31, 1998 were
approximately 6,496,536 and approximately 2,123,533 during the year
ended December 31, 1997 and approximately 177,311 during the year ended
December 31, 1996.
Common stock equivalents are the net additional number of shares which
would be issuable upon the exercise of the outstanding common stock
options (see Note 6), assuming that the Company reinvested the proceeds
to purchase additional shares at market value. Common stock equivalents
had no material effect on the computation of earnings per share for the
three years ended December 31, 1998.
FS 22
<PAGE>
8. Preferred stock subscriptions
Under the terms of a private placement offering memorandum the company
has received $414,000 in subscription payments for 138,000 Series A
preferred shares. The Series A preferred shares carry a 6%
non-cumulative dividend rate in preference to any dividend on common
stock, have a liquidation preference ahead of common stock and are
convertible into common stock on a one-for-one basis within one year of
the date of the subscription agreement.
Subsequent to the year end the Company received additional preferred
share subscriptions for 145,500 Series A preferred shares.
9. Commitments
Lease commitments
The Company leases office premises for use in its operations. Rent
expense was $3,196 in 1998. This table shows future minimum rental
commitments under the lease at December 31, 1998.
<TABLE>
<CAPTION>
1999 2000 2001
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lease commitment $ 37,065 $ 37,194 $ 35,400
================================================================================================================
</TABLE>
Funding commitments
Under the terms of the Biomedical Diagnostics, LLC operating agreement
the Company has agreed to fund Biotherapies Incorporated and Biomedical
Diagnostics, LLC as set out in Note 2 Investment in Biomedical
Diagnostics, LLC.
Management services
During the year the Company entered into a management services
agreement with Tynehead Capital Corp. Tynehead Capital Corp. is
controlled by certain directors of the Company. Under the terms of the
agreement the Company has future commitments as set out in the table
below.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Management services $ 274,000 $ 274,000 $ 274,000 $ 274,000 $ 205,000
================================================================================================================
</TABLE>
FS 23
<PAGE>
10. Income taxes
The company has accumulated losses for tax purposes which may be
carried forward and used to reduce taxable income otherwise calculated.
The benefit of these available carry forwards has not been recorded in
the accounts.
11. Related party transactions
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
(a) Management and consulting fees paid
to companies controlled by officers
and directors of the Company. $ 137,055 $ 103,691 $ 123,315
(b) Interest on promissory notes payable
to companies controlled by officers
and directors of the Company. $ 2,225 $ 7,574 $ -
(c) Included in the balance sheet are the
following amounts due to
directors and officers and/or companies
controlled by officers
and directors of the Company.
Accounts payable $ 30,756 $ 248,098 $ 322,209
Promissory notes payable $ 40,132 $ 121,516 $ -
</TABLE>
(d) In 1997 the Company issued 3,000,000 common shares to companies
controlled by officers and directors of the Company to settle
debt of $120,000. During 1998 the Company issued 3,000,000 common
shares to companies controlled by officers and directors of the
Company to settle debt of $347,395.
12. Financial instruments
The fair value of the company's cash, accounts receivable, accounts
payable and accrued liabilities, and promissory notes payable are
estimated to approximate their carrying values due to the immediate or
short term maturity of these financial instruments.
13. Subsequent events
Subsequent to the year end the Company reached agreement with certain
of its creditors to settle payables totalling $872,500 by issuing
872,500 common shares.
FS 24
