<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE:)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-19701
-------
ZYNAXIS, INC.
(Exact name of Registrant as specified in its charter)
------------------------------------------------------
Pennsylvania 23-2562913
------------ ----------
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
371 Phoenixville Pike, Malvern, Pennsylvania 19355
--------------------------------------------------
(Address of principal executive offices) (Zip Code)
(610) 889-2200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Shares of Common Stock outstanding at November 7, 1996 were 10,332,550.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 223,177 $ 411,706
Short-term securities -- 97,437
Collaborative, contract and grant
revenue receivable (Note 6) 134,111 111,263
Restricted cash 25,157 23,735
Prepaid expenses 41,062 25,765
Other current assets 21,498 43,226
----------- -----------
Total current assets 445,005 713,132
PROPERTY AND EQUIPMENT (NOTE 9):
Equipment 2,896,333 2,907,858
Leasehold improvements 3,044,256 3,028,323
----------- -----------
5,940,589 5,936,181
Less accumulated depreciation
and amortization (3,880,206) (3,090,640)
----------- -----------
Net property and equipment 2,060,383 2,845,541
OTHER ASSETS:
Restricted cash 77,320 109,711
Other long-term assets 36,045 31,869
Note receivable 314,516 287,575
----------- -----------
Total other assets 427,881 429,155
$ 2,933,269 $ 3,987,828
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 863,147 $ 747,777
Accrued expenses 335,544 487,794
Notes payable to shareholders (Note 3) 450,000 150,000
Current maturities of long-term debt (Note 4) 34,117 25,050
Current portion of other long-term obligations 40,698 36,209
Deferred income 29,159 --
------------ ------------
Total current liabilities 1,752,665 1,446,830
LONG-TERM DEBT (NOTE 4) 58,745 79,909
OTHER LONG-TERM OBLIGATIONS 98,342 103,494
COMMITMENTS AND CONTINGENCIES (NOTE 2)
STOCKHOLDERS' EQUITY (NOTE 5):
Series A preferred stock, 8% cumulative,
2,000,000 authorized shares. 1,412,500 and
1,500,000 issued and outstanding at September
30, 1996 and December 31, 1995, respectively
(liquidation preference of $3,150,266 at
September 30, 1996) 2,554,305 2,712,535
Common Stock, $.01 par value, 25,000,000
shares authorized and 10,298,002 and
9,460,676 issued and outstanding at
September, 30, 1996 and December 31, 1995,
respectively 102,980 94,607
Additional paid-in capital 45,881,678 45,071,223
Accumulated deficit (47,515,446) (45,520,770)
------------ ------------
1,023,517 2,357,595
$ 2,933,269 $ 3,987,828
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1996 1995
---------- -----------
<S> <C> <C>
REVENUES:
- ---------
Collaborative, contract and grant
revenues (Note 6) $ 650,512 $ 133,148
---------- -----------
650,512 133,148
COSTS AND EXPENSES:
- -------------------
Research and development 910,214 1,222,359
Marketing, general and administrative 420,226 569,911
Charge for acquired research and
development -- 3,647,321
---------- -----------
1,330,440 5,439,591
OPERATING LOSS (679,928) (5,306,443)
OTHER INCOME (EXPENSE):
- -----------------------
Interest income 12,950 39,543
Interest expense (17,908) (6,498)
Other 214,591 83,652
Gain on sale of diagnostic technologies
and assets (Note 8) -- 494,354
---------- -----------
209,633 611,051
NET LOSS $ (470,295) $(4,695,392)
========== ===========
Net loss per common share ($0.05) ($0.63)
========== ===========
Shares used in computing net loss per
common share 10,297,288 7,419,847
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
------------ -----------
<S> <C> <C>
REVENUES:
- ---------
Collaborative, contract and grant
revenues (Note 6) $ 1,689,205 $ 164,627
Sales -- 141,189
----------- -----------
1,689,205 305,816
COSTS AND EXPENSES:
- -------------------
Research and development 2,781,827 4,192,422
Marketing, general and administrative 1,333,356 1,547,162
Restructuring charge (Note 7) -- 347,436
Charge for acquired research and
development -- 3,647,321
Cost of sales -- 40,261
----------- -----------
4,115,183 9,774,602
OPERATING LOSS (2,425,978) (9,468,786)
OTHER INCOME (EXPENSE):
- -----------------------
Interest income 42,687 70,517
Interest expense (31,731) (32,413)
Other 420,346 91,134
Gain on sale of diagnostic technologies
and assets (Note 8) -- 1,595,616
----------- -----------
431,302 1,724,854
NET LOSS $(1,994,676) $(7,743,932)
=========== ===========
Net loss per common share $ (0.20) $ (1.29)
=========== ===========
Shares used in computing net loss per
common share 10,060,509 5,988,748
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
------------ -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(1,994,676) $(7,743,932)
Adjustments to reconcile net loss to net
cash used for operating activities:
Charge for acquired research and
development -- 3,647,321
Gain on sale of diagnostic technologies
and assets -- (1,595,616)
Depreciation and amortization 762,694 878,445
Deferred compensation -- 3,771
Issuance of Common Stock to 401k plan 8,428 13,760
Decrease (increase) in
- ----------------------
Restricted cash 30,969 20,433
Prepaid expenses (15,297) 6,863
Collaborative, contract and grant
revenue receivable (22,848) (125,775)
Other current assets 21,727 (49,660)
Other long term assets (4,176) 16,881
Increase (decrease) in
- ----------------------
Accounts payable 115,370 267,126
Accrued expenses (152,249) 114,870
Deferred income 29,159 --
Other long-term obligations (22,491) (22,489)
----------- -----------
Net cash used for operating
activities (1,243,390) (4,568,003)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,408) (43,743)
Proceeds from sale of diagnostic
technologies and assets -- 1,200,000
Payment of merger-related fees and
expenses -- (423,174)
Net sales short-term securities 97,437 2,126,176
----------- -----------
Net cash from investing activities 93,029 2,859,259
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 500,000 2,712,536
Proceeds from issuance of short-term
promissory notes to Shareholders 450,000 --
Proceeds from capital lease financing 25,640 10,284
Proceeds from exercise of Common Stock
options 2,103 5,000
Principal payments on capital lease
obligations (3,813) (16,457)
Principal payments on notes payable (12,098) (336,832)
----------- -----------
Net cash from financing activities 961,832 2,374,531
Net (decrease) increase in cash and cash
equivalents (188,529) 665,787
Cash and cash equivalents, beginning of
period 411,706 90,280
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 223,177 $ 756,067
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid for interest expense $11,060 $25,745
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
6
<PAGE>
ZYNAXIS, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
-----------
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles applicable to interim
periods. These financial statements do not include all disclosures required for
annual financial statements and should be read in conjunction with the more
complete disclosures contained in the audited financial statements of Zynaxis,
Inc. ("Zynaxis" or the "Company") incorporated by reference in the Company's
Annual Report on Form 10-K, as amended, for the year ended December 31, 1995.
The statements reflect, in the opinion of management, all adjustments of a
normal and recurring nature necessary to present fairly the Company's
consolidated financial position at September 30, 1996 and December 31, 1995, the
consolidated results of operations for the three and nine months ended September
30, 1996 and 1995, and the consolidated cash flows for the nine months ended
September 30, 1996 and 1995. The results of operations for the three and nine
months ended September 30, 1996, and the cash flows for the nine months ended
September 30, 1996, are not necessarily indicative of the results to be expected
for the entire year.
Certain prior year amounts have been reclassified to conform to current year
classifications.
NOTE 2 - BACKGROUND AND SIGNIFICANT UNCERTAINTIES
- -------------------------------------------------
Zynaxis, Inc. was incorporated in Pennsylvania on March 5, 1987 and commenced
operations in July 1988. The Company initially focused on the development of
cell-mediated therapies and cellular diagnostic products including research
reagents for cell tracking. Between 1988 and 1991, the Company received funding
primarily through venture capital financing involving the issuance of
convertible preferred stock and convertible notes, all of which have since been
converted into Common Stock. In January 1992, the Company completed an initial
public offering of its Common Stock, receiving net proceeds of approximately
$23,300,000 through the sale of 2,875,000 shares of Common Stock. Between 1992
and 1994, the Company focused on development of products for site-directed drug
delivery using its proprietary Zyn-Linker molecules and on the development of
cellular diagnostic products including its Zymmune CD4/CD8 Cell Monitoring Kit.
During 1995 the Company modified its strategic direction, divesting its
diagnostic products, acquiring vaccine delivery technologies, and focusing its
resources on selected drug and vaccine delivery opportunities, which were
anticipated, in the opinion of the Board of Directors and management, to yield
an improved long-term return for both the Company and its shareholders compared
to the Company's previous strategy of funding both therapeutic and diagnostic
operations.
Four key events occurred in 1995 as a result of the Company's modified strategic
direction: (i) the sale of the Company's diagnostic operations, accompanied by a
significant reduction in work-force, (ii) the acquisition by merger of
Secretech, Inc. ("Secretech") and associated technologies for oral and mucosal
vaccine delivery, (iii) the completion of a private placement which raised net
proceeds of $2,700,000 to fund operations, and (iv) the completion of a
significant corporate collaborative agreement for the development of certain
technologies acquired through the merger with Secretech. These events are
described in detail within the Management's Discussion and Analysis of Financial
Condition and Results
7
<PAGE>
of Operations contained in the Company's Report on Form 10-K, as amended, for
the year ended December 31, 1995.
During the latter part of 1995, the Company established as its strategic goal to
become a profitable organization with positive cash flow from operations by
developing varied applications of its drug and vaccine delivery platforms
through significant cash-generating collaborations with pharmaceutical and
biotechnology firms.
During the first nine months of 1996, the Company attempted to develop its
technologies and enter into significant corporate collaborations. Other than the
Company's Development and Licensing Agreement with ALK A/S ("ALK"), the Company
has had limited success in entering into such significant collaborations. The
Company has sustained significant operating losses and expects such losses to
continue in the future. The Company has not received significant revenues from
the sale of any of its products. For the period from its inception to September
30, 1996, the Company has an accumulated deficit of $47,515,000.
During the first nine months of 1996, the Company has attempted to raise cash to
finance its ongoing operations. The Company's efforts have primarily been
focused on attempting to sell the Cauldron Process Chemistry division
("Cauldron") and its related assets for cash. Cauldron was established by the
Company to utilize its process chemistry expertise in response to growing demand
for contract services. Cauldron provides collaborative consulting services on
all aspects of bulk pharmaceutical production and offers process research,
development and pilot scale-up facilities for the pharmaceutical, biochemical
industries and fine chemical industries. In July 1996, the Company signed a
binding letter of intent to sell Cauldron to Seloc AG ("Seloc"), a subsidiary of
Schwarz Pharma. In conjunction with the execution of the binding letter of
intent, the Company received an exclusive option payment of $100,000, and an
up-front payment of $50,000 on a Seloc process development contract.
On August 27, 1996, the Company received notification that Seloc was terminating
its agreement in principle to purchase Cauldron (the "Seloc Termination"). The
Company immediately revived discussions with previous potential purchasers and
initiated discussions with others.
The Seloc Termination precipitated three significant strategic decisions.
Reduction in Operations and Workforce
- -------------------------------------
The Company determined that, in order to conserve its limited cash resources, it
must limit its activities to those which were cash positive or were essential to
the Company's operations. Accordingly, during September, 1996, the Company
reduced its workforce by 40%. As a result, the Company's operations have been
reduced to its Cauldron process chemistry operations, the research and
development which is funded through Small Business Innovative Research Grants
("SBIRs") and other essential corporate functions.
Sale of Zyn-Linker Technologies
- -------------------------------
On September 23, 1996, the Company entered into an Exclusive License Agreement
and Purchase Option with Phanos Technologies, Inc. ("Phanos") related to
intellectual property related to its Zyn-Linker technologies. Under terms of
this agreement, Phanos was given a license and purchase option to acquire all of
the Company's Zyn-Linker technology. The Company had previously licensed certain
diagnostic applications of Zyn-Linkers to Phanos. Upon execution of this
agreement, the Company received a $50,000 initial deposit, of which $5,000 is
non-refundable. In October, 1996, the Company received an additional deposit,
which is fully refundable, of $150,000. If Phanos elects to exercise its
purchase option, it will be required to pay an additional $525,000.
8
<PAGE>
Decision to aggressively pursue significant corporate transaction
- -----------------------------------------------------------------
During the first half of 1996, the Company had determined that, while its
ultimate survival is dependent upon its ability to generate significant and
sustained revenues from corporate research and development collaborations
through up-front, milestone or other funding payments, in order to assure the
viability of the technology and to protect shareholder value, it needed to
generate significant cash inflows to the Company. Options identified included a
significant private placement of its equity securities, merger, acquisitions,
joint ventures, technology sales, and technology acquisitions, among others
(collectively, "Significant Strategic Transactions"). As a result of the Seloc
Termination, the Company began to aggressively pursue a Significant Strategic
Transaction.
The Company is currently negotiating such a Significant Strategic Transaction.
Given its financial condition and reduced viability, the Company believes that
this transaction represents the only option available to optimize the value to
its shareholders of its remaining assets, including but not limited to its oral
vaccine delivery technologies, its Cauldron operations and the Company's status
as a public company.
The Company is critically short of cash to fund its operations and has a severe
working capital deficit. Current cash resources, augmented by expected
collaborative and other revenues, are only sufficient to fund operations into,
but not beyond, the latter part of the fourth quarter of 1996. The ability of
the Company to operate as a going concern with its reduced research and
development efforts will primarily be determined by its ability to complete a
Significant Corporate Transaction. There is no assurance that the Company will
ultimately complete this Significant Corporate Transaction. Additionally, the
Company believes that certain matters associated with its anticipated
Significant Corporate Transaction may require the approval of shareholders. If
the Company is unable to complete the contemplated Significant Corporate
Transaction, or if the shareholders fail to approve certain conditions precedent
to closing of the Significant Corporate Transaction, the Company will not be
able to continue operations. Should the Company determine that it is no longer
in the best interest of its shareholders to continue operations, the ability of
the Company to fund an orderly disposition of assets, pay off its then
outstanding liabilities and return any remaining cash to its shareholders will
be limited by the amount of working capital then on hand, if any.
NOTE 3 - NOTES PAYABLE TO SHAREHOLDERS
- --------------------------------------
On December 28, 1995, the Company issued a $150,000 Demand Promissory Note (the
"December 1995 Note") to one of its principal shareholders. A general partner of
the shareholder is a member of the Board of Directors. This December 1995 Note
bore interest at the annual rate of 10% and was initially due on the earlier of
(i) a closing of a private offering of the Company's Common Stock in an amount
of at least $2,000,000 or (ii) March 31, 1996. In connection with this
transaction, the Company issued a warrant with a five year term to purchase
15,000 shares of the Company's Common Stock at an exercise price of $1.00 per
share. On February 29, 1996, the holder of the December 1995 Note converted the
outstanding principal balance and all accrued interest thereon to Common Stock
with transfer restrictions, as described in Note 5 to the consolidated interim
financial statements.
On May 3, 1996 the Company issued Demand Promissory Notes (the "May 1996 Notes")
aggregating $200,000 to two of its principal shareholders. A general partner of
one shareholder and the president of another shareholder are members of the
Board of Directors. These May 1996 Notes bear interest at the annual rate of 11
1/4% and are due on the earlier of (i) the receipt by the Company of proceeds
from the sale of Cauldron aggregating at least $1,000,000 or (ii) upon demand if
the closing on the sale of Cauldron does not occur by September 30, 1996. The
May 1996 Notes are convertible at the option of the holder into an aggregate of
200,000 shares of the Company's Common Stock at any time prior to repayment. In
connection with the issuance of the May 1996 Notes, the Company issued warrants
with a five year term to purchase 200,000 shares of the Company's Common Stock
at an exercise price of $1.00 per share.
9
<PAGE>
On June 7, 1996 the Company issued a $250,000 Demand Promissory Note to another
of its principal shareholders. This note was canceled and reissued on July 17,
1996 due to a revision of the repayment terms (the "July 1996 Note"). This July
1996 Note bears interest at the annual rate of 11 1/4% and is due on the earlier
of (i) the receipt by the Company of proceeds from the sale of Cauldron
aggregating at least $1,000,000 or (ii) upon demand if the closing on the sale
of Cauldron does not occur by October 15, 1996. This July 1996 Note is
convertible at the option of the holder into an aggregate of 150,000 shares of
the Company's Common Stock at any time prior to repayment. In connection with
the issuance, the Company also issued a warrant with a five year term to
purchase 25,000 shares of the Company's Common Stock at an exercise price of
$1.00 per share.
NOTE 4 - LONG-TERM DEBT
- -----------------------
Long-term debt consists of a ten-year note to the then lessor of the Company's
office and research facility to finance certain leasehold and other
improvements. The note bears interest at 13% and is fully collateralized by a
$91,141 certificate of deposit. The amount of the collateral decreases each
year. The certificate of deposit is included within restricted cash in the
accompanying balance sheets.
NOTE 5 - STOCKHOLDERS' EQUITY
- -----------------------------
Series A Convertible Preferred Stock
- ------------------------------------
During the nine months ended September 30, 1996, a holder of Series A
Convertible Preferred Stock converted a total of 87,500 shares of Series A
Convertible Preferred Stock into 175,000 shares of Common Stock.
Common Stock
- ------------
On February 29, 1996, the Company completed a private placement of Common Stock
with transfer restrictions, raising proceeds of $500,000. Additionally, a
$150,000 short-term promissory note payable held by a related party, plus
accrued interest of $2,582, was converted to Common Stock with transfer
restrictions on February 29, 1996.
Under terms of the above agreements, the Company issued an aggregate of 652,582
shares of Common Stock at a price of $1.00 per share. Additionally, the Company
issued warrants to purchase 195,775 shares of Common Stock at an exercise price
of $1.00 per share.
Stock Warrants
- --------------
In connection with the issuances of the May 1996 Notes and the July 1996 Note
described in Note 3 above, the Company issued warrants to purchase an aggregate
of 225,000 shares of the Company's Common Stock. These warrants have a five year
term and have an exercise price of $1.00 per share.
10
<PAGE>
NOTE 6 - COLLABORATIVE, CONTRACT AND GRANT REVENUES
- ---------------------------------------------------
Collaboration with ALK A/S
- --------------------------
In October 1995, the Company announced a development and licensing agreement
with ALK, a leading European pharmaceutical company in the field of allergy
immunotherapy. The collaboration involves certain of the technologies acquired
in the merger with Secretech relating to bioactive substance delivery
technology.
Under the terms of the ALK development and licensing collaboration, the Company
has received payments aggregating $1,000,000. The Company received the second
installment of $250,000 in January 1996, the third installment of $250,000 in
April 1996, and the fourth and final installment payment of $250,000 in August
1996.
The Company also has agreed to provide ALK with research and development support
of the licensed technology for which it will receive additional revenues based
upon costs incurred. During the nine months ended September 30, 1996, the
Company recorded $36,700 of such revenue. As a result of the reduction in force
described above, the Company's ability to continue to provide ALK with research
and development support is significantly diminished.
The Company will receive a base royalty of 7% on net sales of products using the
Company's technology, increasing based upon certain sales criteria established
within the agreement. The Company could also receive additional milestone
payments of up to $2,000,000 based upon either FDA or certain other regulatory
approvals of additional products using the Company's vaccine delivery
technologies. There can be no assurance that ALK will ever obtain the
appropriate regulatory approvals, or will ever generate any sales using the
technology licensed from the Company.
Should the Company receive royalties under this agreement, it will be required
to pay approximately 3% of the net sales of the licensed product to the original
patent holder of the technology.
Contract Manufacturing
- ----------------------
During the three and nine months ended September 30, 1996, the Company, through
its Cauldron Process Chemistry division, recognized contract manufacturing
revenues of $260,000 and $547,000, respectively, by providing process chemistry
and pilot manufacturing services to other biotechnology, pharmaceutical and
chemical organizations.
Grant Revenue
- -------------
For the three and nine months ended September 30, 1996, the Company recognized
$83,200 and $250,700, respectively, pursuant to a SBIR grant awarded by the
National Heart, Lung and Blood Institute. This grant is funding the preclinical
development of Zyn-Linker molecules linked with heparin and the investigation of
their ability to inhibit post-angioplasty restenosis and local thrombosis. This
grant has been extended for a second year; the Company could recognize up to an
additional $258,000 under the terms of this grant extension.
The Company has also received a Phase I SBIR grant for up to $100,000 to develop
Zyn-Linker molecules linked with Taxol and the investigation of their ability to
inhibit post-angioplasty restenosis and local thrombosis. The Company has
recorded $40,000 and $55,000 of revenue related to this grant in the three and
nine months ended September 30, 1996, respectively.
11
<PAGE>
NOTE 7 - RESTRUCTURING CHARGE
- -----------------------------
During the nine months ended September 30, 1995, the Company recorded a
restructuring charge as a result of its decision to sell its diagnostic
technologies and assets and exit the diagnostic field. This $347,000 charge
consisted of severance and severance-related expenses resulting from the
termination of diagnostic employees, as well as amounts potentially due to
certain distributors of the Company's Zymmune Cell Monitoring System pursuant to
the terms and conditions of certain distribution agreements.
NOTE 8 - GAIN ON SALE OF DIAGNOSTIC TECHNOLOGIES AND ASSETS
- -----------------------------------------------------------
During the three and nine months ended September 30, 1995, the Company recorded
gains on the sale of diagnostic technologies and assets of $494,000 and
$1,595,600, respectively. The gain for the three months represents the cash
received under the terms of the Company's agreements with Intracel Corporation,
reduced by certain lease termination costs and other technology transfer costs
(principally employee costs from the Asset Purchase agreement date of July 18,
1995 through October 31, 1995). The gain on the sale of diagnostic technologies
and assets for the nine months ended September 30, 1995 also includes the
proceeds from the sale of the Company's research reagent business to Phanos.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION, OVERVIEW AND SIGNIFICANT EVENTS OF THE THIRD QUARTER 1996
- -----------------------------------------------------------------------
This discussion should be read in conjunction with the information presented in
the Consolidated Financial Statements and the related notes to the consolidated
interim financial statements.
The Company commenced operations in July 1988 and initially focused on the
development of cell-mediated therapies and cellular diagnostic products
including research reagents for cell tracking. Between 1988 and 1991, the
Company received funding primarily through venture capital financing involving
the issuance of convertible preferred stock and convertible notes, all of which
have since been converted into Common Stock. In January 1992, the Company
completed an initial public offering of its Common Stock, receiving net proceeds
of approximately $23,300,000 through the sale of 2,875,000 shares of Common
Stock. Between 1992 and 1994, the Company focused on development of products for
site-directed drug delivery using its proprietary Zyn-Linker molecules and on
development of cellular diagnostic products including its Zymmune CD4/CD8 Cell
Monitoring Kit.
During 1995, the Company modified its strategic direction, divesting its
diagnostic products, acquiring vaccine delivery technologies, and focusing its
resources on selected drug and vaccine delivery opportunities, which were
anticipated, in the opinion of the Board of Directors and management, to yield
an improved long-term return for both the Company and its shareholders compared
to the Company's previous strategy of funding both therapeutic and diagnostic
operations.
Four key events occurred in 1995 as a result of the Company's modified strategic
direction: (i) the sale of the Company's diagnostic operations, accompanied by a
significant reduction in work-force, (ii) the acquisition by merger of
Secretech, Inc. ("Secretech") and associated technologies for oral and mucosal
vaccine delivery, (iii) the completion of a private placement which raised net
proceeds of $2,700,000 to fund operations, and (iv) the completion of a
significant corporate collaboration agreement for the development of certain
technologies acquired through the merger with Secretech. These events are
described in detail within Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Report on Form
10-K, as amended, for the year ended December 31, 1995.
During the latter part of 1995, the Company established as its strategic goal to
become a profitable organization with positive cash flow from operations by
developing varied applications of its drug and vaccine delivery platforms
through significant cash-generating collaborations with pharmaceutical and
biotechnology firms.
During the first nine months of 1996, the Company attempted to develop its
technologies and enter into significant corporate collaborations. Other than the
Company's Development and Licensing Agreement with ALK A/S ("ALK"), the Company
has had limited success in entering into such significant collaborations. The
Company has sustained significant operating losses and expects such losses to
continue in the future. The Company has not received significant revenues from
the sale of any of its products. For the period from its inception to September
30, 1996, the Company has an accumulated deficit of $47,515,000.
During the first nine months of 1996, the Company attempted to raise cash to
finance its ongoing operations. The Company's efforts have primarily been
focused on attempting to sell the Cauldron Process Chemistry division
("Cauldron") and its related assets for cash. Cauldron was established by the
Company to utilize its process chemistry expertise in response to growing demand
for contract services. Cauldron provides collaborative consulting services on
all aspects of bulk pharmaceutical production and offers process research,
development and pilot scale-up facilities for the pharmaceutical, biochemical
and
13
<PAGE>
fine chemical industries. In July 1996, the Company signed a binding letter of
intent to sell Cauldron to Seloc AG ("Seloc"), a subsidiary of Schwarz Pharma.
In conjunction with the execution of the binding letter of intent, the Company
received an exclusive option payment of $100,000, and an up-front payment of
$50,000 on a Seloc process development contract.
On August 27, 1996, the Company received notification that Seloc was terminating
its agreement in principle to purchase Cauldron (the "Seloc Termination"). The
Company immediately revived discussions with previous potential purchasers and
initiated discussions with others.
The Seloc Termination precipitated three significant strategic decisions.
Reduction in Operations and Workforce
- -------------------------------------
The Company determined that, in order to conserve its limited cash resources, it
must limit its activities to those which were cash positive or were essential to
the Company's operations. Accordingly, during September, 1996, the Company
reduced its workforce by 40%. As a result, the Company's operations have been
reduced to its Cauldron process chemistry operations, the research and
development which is funded through Small Business Innovative Research Grants
("SBIRs") and other essential corporate functions.
Sale of Zyn-Linker Technologies
- -------------------------------
On September 23, 1996, the Company entered into an Exclusive License Agreement
and Purchase Option with Phanos Technologies, Inc. ("Phanos") related to
intellectual property related to its Zyn-Linker technologies. Under terms of
this agreement, Phanos was given a license and purchase option to acquire all of
the Company's Zyn-Linker technology. The Company had previously licensed certain
diagnostic applications of Zyn-Linkers to Phanos. Upon execution of this
agreement, the Company received a $50,000 initial deposit, of which $5,000 is
non-refundable. In October, 1996, the Company received an additional deposit,
which is fully refundable, of $150,000. If Phanos elects to exercise its
purchase option, it will be required to pay an additional $525,000.
Decision to aggressively pursue significant corporate transaction
- -----------------------------------------------------------------
During the first half of 1996, the Company had determined that, while its
ultimate survival is dependent upon its ability to generate significant and
sustained revenues from corporate research and development collaborations
through up-front, milestone or other funding payments, in order to assure the
viability of the technology and to protect shareholder value it needed to
generate significant cash inflows to the Company. Options identified included a
significant private placement of its equity securities, merger, acquisitions,
joint ventures, technology sales, and technology acquisitions, among others
(collectively, "Significant Strategic Transactions"). As a result of the Seloc
Termination, the Company began to aggressively pursue a Significant Strategic
Transaction.
The Company is currently negotiating such a Significant Strategic Transaction.
Given its financial condition and reduced viability, the Company believes that
this transaction represents the only option available to optimize the value to
its shareholders of its remaining assets, including but not limited to its oral
vaccine delivery technologies, its Cauldron operations and the Company's status
as a public company.
These strategic decisions, individually and collectively, are subject to
significant risks which are exacerbated by the Company's extremely critical
financial condition as described below in "Uncertainties and Risks."
14
<PAGE>
LIQUIDITY, CAPITAL RESOURCES AND PLANS TO FUND FUTURE OPERATIONS
- ----------------------------------------------------------------
At September 30, 1996, the Company had cash and cash equivalents of $223,200 and
a working capital deficit of $1,307,700.
The Company's net cash used for operations was $1,243,400 and $4,568,000 for the
nine months ended September 30, 1996 and 1995, respectively. The 73% decrease in
the use of cash for operations between the periods presented was primarily due
to the divestiture of the Company's diagnostic operations and the resulting
reduction in operating expenses, offset by the growth in collaborative and grant
revenues, combined with sublease revenues described below.
The Company has funded operations since December 31, 1995 primarily through the
issuance of short-term promissory notes to certain holders of Series A Preferred
Stock (the "Preferred Shareholders"), and the completion of an additional
private offering:
Issuance of Short-term Promissory Notes
---------------------------------------
The Company issued an aggregate of $450,000 of Demand Promissory Notes (the
"Notes") to three of its Preferred Shareholders in exchange for cash to fund
operations. These Notes bear interest at an annual rate of 11 1/4% and are to
be repaid on the earlier of (a) the date the Company receives aggregate
proceeds of at least $1,000,000 from the sale of Cauldron Process Chemistry as
described below, or (b) upon demand on selected dates in the third or fourth
quarters of 1996. As additional consideration the Company issued an aggregate
of 225,000 warrants to purchase Common Stock of the Company with an exercise
price of $1.00 per share.
Completion of Private Placement
-------------------------------
On February 29, 1996, the Company received cash proceeds of $500,000 in a
private placement of Common Stock to an institutional investor. Under the
terms of the purchase agreement, the Company issued 500,000 shares of
unregistered Common Stock at a price of $1.00 per share, and a warrant to
purchase 150,000 shares of Common Stock with transfer restrictions at an
exercise price of $1.00 per share. Additionally, on February 29, 1996, the
Company converted a $150,000 bridge loan from a Preferred Shareholder and
accrued interest thereon into 152,582 shares of Common Stock with transfer
restrictions and issued a warrant to purchase 45,775 shares of Common Stock at
an exercise price of $1.00 per share.
The ability of the Company to survive as a going concern beyond the fourth
quarter of 1996 is contingent on the consummation of the Significant Strategic
Transaction and receipts of certain cash inflows associated therewith. There can
be no assurance, however, that the Company will be able to successfully conclude
negotiations related to the Significant Strategic Transaction on a timely basis,
if at all. If the Company is unable to conclude these negotiations, additional
funding will be required in order to continue operations. There is no assurance
that such additional funding will be available. If no other funding is obtained
by the Company, it will be required to cease operations.
UNCERTAINTIES AND RISKS
- -----------------------
The Company continues to be subject to significant and increasing uncertainty
and risk. The Company's independent public accountants have included an
explanatory paragraph in their report covering the Company's financial
statements for the fiscal year ended December 31, 1995, expressing substantial
doubt about the Company's ability to continue as a going concern. These risks
and uncertainties arise from a number of factors, some of which are described
below, including those inherent in the biotechnology industry as well as those
resulting from the Company's poor financial condition, as previously discussed.
15
<PAGE>
The Company is critically short of cash to fund its operations and has a severe
working capital deficit. Current cash resources, augmented by expected
collaborative and other revenues, are only sufficient to fund operations into
but not beyond the latter part of the fourth quarter of 1996. The ability of the
Company to operate as a going concern with its reduced research and development
efforts will primarily be determined by its ability to complete a Significant
Strategic Transaction. There is no assurance that the Company will ultimately
complete this Significant Strategic Transaction. Additionally, the Company
believes that certain matters associated with its anticipated Significant
Strategic Transaction may require the approval of shareholders. If the Company
is unable to complete the contemplated Significant Strategic Transaction, or if
the shareholders fail to approve certain conditions precedent to closing of the
Significant Strategic Transaction, the Company will not be able to continue
operations. Should the Company determine that it is no longer in the best
interest of its shareholders to continue operations, the ability of the Company
to fund an orderly disposition of assets, pay off its then outstanding
liabilities and return any remaining cash to its shareholders will be limited by
the amount of working capital then on hand, if any.
Prior to December 20, 1995, the Company's Common Stock traded on the Nasdaq
National Market. The NASD By-Laws required the Company to maintain certain
quantitative standards for continued listing on the Nasdaq National Market.
These standards included, among other things, a minimum bid price of $1.00 per
share for the Common Stock, or, in the alternative, market value of public float
of $3,000,000 and $4,000,000 of net tangible assets. Additionally, an issuer
such as the Company which had sustained losses from continuing operations and/or
net losses in three of its last four most recent fiscal years was required to
have net tangible assets of at least $4,000,000. Due to the Company's inability
to consistently meet these standards, the Company's Common Stock was removed
from the Nasdaq National Market and is now traded on the Nasdaq SmallCap Market.
This could limit the Company's ability to raise additional capital and reduce
the liquidity of the Company's shareholders. Additionally, unlike the Nasdaq
National Market, the Nasdaq SmallCap Market does not entitle listing companies
to an automatic exemption from the majority of state securities registration and
reporting requirements.
On August 27, 1996, the Company was notified by the National Association of
Securities Dealers, Inc. that the Company was in danger of failing to meet the
continued listing requirements of the SmallCap Market. Specifically, the Company
has failed to maintain a closing bid price greater than or equal to $1.00 per
share, or as an alternative, maintain capital and surplus of $2,000,000 and a
market value of public float of $1,000,000. The Company continues to be
noncompliant regarding these criteria and does not anticipate being in
compliance prior to completion of the contemplated Significant Strategic
Transaction. If the Company fails to meet the continued listing requirements by
November 27, 1996, or fails to deliver an acceptable plan to assure compliance,
the Company could be delisted from the SmallCap Market.
On August 27, 1996, the Company was notified by Southern Research Institute
("SRI"), the holder of certain micro encapsulation technology licensed by the
Company, that the Company was in default of its obligations under its license
agreement. The Company has until November 27, 1996 to cure this default. This
technology is central to the Company's oral vaccine research and development
efforts. If the default is not cured, the licensed technology could revert to
SRI. If this license does revert to SRI, the Company will be unable to develop
its oral micro encapsulation of vaccine technologies.
As discussed above, the Company has concluded an agreement with Phanos related
to the sale of intellectual property related to its Zyn-Linker technologies.
Through November 7, 1996, the Company had received deposits of $200,000, of
which $195,000 is refundable should Phanos ultimately decide not to exercise its
option to purchase these technologies. Phanos has until January 21, 1997 to make
this election. There is no assurance that Phanos will ultimately exercise this
option. Should Phanos not exercise its option, the Company will be required to
refund $195,000 to Phanos and will need to initiate efforts to sell this
technology. There is ultimately no assurance that the Company will ever realize
any proceeds from the sale of this technology. With the decision to sell all
rights and interest in its Zyn-
16
<PAGE>
Linker technology, the Company has concentrated its product development risk in
the research and development of the oral delivery of vaccines.
If the Company is ultimately able to complete the contemplated Significant
Strategic Transaction, the Company will continue to be exposed to the
significant risks of product development. Product opportunities that the Company
is presently pursuing will require substantial additional research, development,
clinical testing and regulatory approvals prior to commercialization. These
activities are time-consuming and expensive. The ability of the Company to
advance these technologies will be highly dependent upon the Company's available
cash resources and the ability of the Company to obtain significant and
sustained funding from collaborative partners, investors or other sources. To
date, the Company has had limited success in obtaining substantial funding from
collaborative partners. There is no assurance that the Company will be
successful in the future. Pharmaceutical companies seeking collaborative
arrangements in order to avail themselves of products in the development stage
have become increasingly selective and have required substantial proof of
principle, safety and efficacy before agreeing to provide substantial
collaborative funding. Significant cash expenditures are required to obtain such
evidence of principle, safety and efficacy.
Even if a product candidate appears promising at an early stage of development,
there is no assurance that it can be successfully commercialized due to a number
of factors. Such possibilities include that the product will prove to be
ineffective or unsafe during clinical trials, will fail to receive necessary
domestic or foreign regulatory approvals on a timely basis, will not be accepted
by patients or physicians, will be difficult to manufacture on a commercial
scale, will be uneconomical to market or will be precluded from
commercialization by proprietary rights of others.
The Company's success depends in part on its ability to obtain patents, maintain
trade secret protection and operate without infringing on the proprietary rights
of others. The Company has filed applications for U.S. and foreign patents and
holds several issued U.S. patents and related know-how. The Company also has
exclusive licenses to certain oral vaccine delivery technologies from third
parties under various U.S. patent applications. There can be no assurance that
any of the Company's patent applications will be approved, that the Company will
develop additional proprietary technologies that are patented, that any patents
issued by the Company or its licensors will provide the Company with any
competitive advantages or will not be challenged by third parties, or that the
patents of others will not have an adverse effect on the ability of the Company
to operate in a particular field. Patent law relating to the scope of claims in
the biotechnology field is still evolving and the degree of future protection
for the Company's proprietary rights is uncertain. Furthermore, there can be no
assurance that others will not independently develop similar technologies, or
design around patents issued to the Company. The failure by the Company to
obtain appropriate patent protection may make certain of its products
commercially unattractive.
The Company's strategy for the research, development, manufacture and marketing
of vaccine products using its delivery technologies has been to enter into
various arrangements with corporate partners, licensors, licensees and others.
The Company has no commercial-scale manufacturing or clinical trial
capabilities. Therefore, the successful commercialization of the Company's
vaccine technology is dependent upon the Company's ability to enter into such
arrangements and the ability of these third parties to perform their agreed-upon
responsibilities. Although the Company believes that parties to any such
arrangements would have an economic motivation to succeed in performing their
contractual responsibilities, the actual performance under the arrangements is
outside of the control of the Company.
Research, preclinical development, clinical trials and manufacturing and
marketing of pharmaceutical products are subject to extensive, costly and
rigorous regulation by government authorities in the United States and other
countries. The process of obtaining required regulatory approval from the FDA
and other regulatory authorities often takes many years and can vary
substantially based upon the type, complexity, novelty and application of the
product. As with any investigational new drug or vaccine, additional government
regulations may be promulgated which could impose additional costly and time
consuming
17
<PAGE>
testing procedures necessary to obtain regulatory approval. There can be no
assurance that any products developed by the Company alone or, more than likely,
in collaboration with others will be determined to be safe and efficacious in
clinical trials or meet other applicable regulatory standards to receive the
necessary approvals for manufacture and marketing. Even if such approvals are
obtained, post-market evaluation of the products could result in limitations of
the approvals. Delays in obtaining U.S. or foreign approvals could adversely
affect the marketing of the Company's or co-developed products of its
collaborators and diminish any competitive advantage. Even if FDA and/or foreign
regulatory approvals are obtained, there can be no assurance that such products
will be accepted and prescribed by physicians, or will be accepted by third
party insurers or government health administration authorities as a reimbursable
expense. In addition, delays in regulatory approvals that may be encountered by
corporate collaborators or other licensees of the Company could adversely affect
the Company's ability to receive royalties under such arrangements.
The Company operates in rapidly evolving fields. New developments are expected
to continue at a rapid pace in the biotechnology industry, large pharmaceutical
companies and academia. These institutions represent significant competition to
the Company; this competition is intense and is expected to increase. Most of
the competitors have substantially greater capital resources, research and
development staffs and facilities, and have substantially greater expertise in
conducting clinical trials, obtaining regulatory approvals, and manufacturing
and marketing products than the Company. There can be no assurance that
developments by others will not render the Company's technologies and products
employing that technology obsolete or noncompetitive.
Results of Operations
- ---------------------
Revenues totaled $650,500 and $1,689,200 for the three and nine months ended
September 30, 1996, respectively, as compared to $133,100 and $305,800 for the
corresponding periods of 1995. Revenues by major source in each of these periods
were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1996 1995 1996 1995
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
Collaborative revenue from ALK $268,000 $ 57,300 $ 786,700 $ 57,400
Contract revenues 259,600 27,900 546,800 27,900
Government grant revenues 122,900 43,100 305,500 43,100
Other collaborative revenues -- 4,800 50,200 36,200
Research reagent sales -- -- -- 76,500
Zymmune-related sales -- -- -- 64,700
-------- -------- ---------- --------
$650,500 $133,100 $1,689,200 $305,800
======== ======== ========== ========
</TABLE>
Collaborative revenue from ALK is a result of a development and licensing
agreement entered into between ALK and the Company in September 1995. The
Company recognized $250,000 and $500,000 during the three and nine months ended
September 30, 1996, respectively. The Company has also recorded $18,000 and
$36,700 of revenue related to research conducted on behalf of ALK during the
three and nine months ended September 30, 1996, respectively.
Contract revenues commenced late in 1995 and have been generated by the
Company's Cauldron Process Chemistry division.
Government grant revenues represent amounts earned pursuant to two SBIR grants
to develop the Company's Zyn-Linker/Heparin and Zyn-Linker/Taxol delivery
systems for the treatment of restenosis. At September 30, 1996, $258,400 and
$45,200 remains to be billed under the terms of a Phase II SBIR grant to develop
Zyn-Linker/Heparin and a Phase I SBIR grant to develop Zyn-Linker/Taxol,
respectively.
18
<PAGE>
Included in 1995 revenues are research reagent and Zymmune-related sales
generated by the Company's diagnostic operations, which were divested during
1995.
Research and development expenses totaled $910,200 and $2,781,800 in the three
and nine months ended September 30, 1996, respectively. For the corresponding
periods in 1995, research and development expenses totaled $1,222,400 and
$4,192,400, respectively. Included in research and development expenses for the
three and nine months ended September 30, 1995 are $222,500 and $754,000,
respectively, of research and development expenses for Secretech, which the
Company acquired on July 27, 1995. During 1995, the Company funded virtually all
of Secretech's operations prior to the consummation of the merger. The Company
also provided subsequent funding of operations in Birmingham prior to cessation
of Secretech operations in that location during the fourth quarter of 1995. Also
included in research and development expenses in the three and nine months ended
September 30, 1995 are diagnostic-related expenses of $43,900 and $516,900,
respectively. The Company completed its divestiture of these operations in the
fourth quarter of 1995. The savings resulting from the cessation of Secretech
operations in Birmingham, and the divestiture of the Company's diagnostic
operations have been partially offset by increased Cauldron-related expenditures
associated with increasing its third-party contract operations.
Marketing, general and administrative costs were $420,000 and $1,333,000 in the
three and nine months ended September 30, 1996, respectively, compared to
$569,900 and $1,547,100 in the three and nine months ended September 30, 1995,
respectively. Reduced diagnostic marketing, travel and certain other
administrative expenses have been partially offset by increased patent-related
and consulting costs associated with the Company's expanded technology platforms
resulting from the Secretech acquisition in July 1995.
During the nine months ended September 30, 1995, in connection with the decision
to divest its diagnostic operations, the Company recorded a restructuring charge
of $347,400 representing severance payments, inventory buy-back payments, and
certain other costs associated with and directly attributable to the decision to
terminate its diagnostic operations.
During the three months ended September 30, 1995, the Company recorded a charge
for acquired research and development in the amount of $3,647,000 in connection
with the issuance of shares pursuant to the terms of the Secretech merger
agreement. This charge represents the purchase of in-process research and
development equal to the value of the shares issued, the excess of liabilities
assumed over assets acquired, as well as all fees and expenses to effect the
transaction.
Other income of $214,600 and $420,300 in the three and nine months ended
September 30, 1996, respectively, primarily represents income from the Company's
subleasing of certain excess space at its Malvern facility. Included in other
income for the three and nine months ended September 30, 1996 was income of
$100,000 related to the Company's retention of an option payment received from
Seloc in connection with the subsequently terminated sale of Cauldron.
During the three and nine months ended September 30, 1995, the Company recorded
gains on the sale of diagnostic technologies and assets of $494,000 and
$1,595,600, respectively. The gain for the three months represents the cash
received under the terms of the Company's agreements with Intracel Corporation,
reduced by certain lease termination costs and other technology transfer costs
(principally employee costs from the Asset Purchase agreement date of July 18,
1995 through October 31, 1995). The gain on the sale of diagnostic technologies
and assets for the nine months ended September 30, 1995 also includes the
proceeds from the sale of the Company's research reagent business to Phanos.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
--------
The following is a list of exhibits filed as part of this quarterly report on
Form 10-Q:
- -------------------------------------------------------------------------------
10.1 Registration Rights Agreement dated June 7, 1996 between the Registrant
and S.R. One. Ltd.
- -------------------------------------------------------------------------------
10.2 Amended and Restated Warrant dated June 7, 1996 issued by the Registrant
to S.R. One. Ltd.
- -------------------------------------------------------------------------------
10.3 Amended and Restated Warrant dated May 3, 1996 issued by the Registrant
to Plexus Ventures, Inc.
- -------------------------------------------------------------------------------
10.4 Exclusive License Agreement with Purchase Option dated September 23, 1996
between the Registrant and Phanos Technologies, Inc.
- -------------------------------------------------------------------------------
10.5 Amendment No. 1 dated October 17, 1996 to the Exclusive License Agreement
with Purchase Option between the Registrant and Phanos Technologies, Inc.
- -------------------------------------------------------------------------------
(b) REPORTS ON FORM 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended September 30, 1996.
20
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZYNAXIS, INC.
-------------
(Registrant)
Date: November 13, 1996 By: \s\ Martyn D. Greenacre
----------------- ----------------------------------
MARTYN D. GREENACRE
President and Chief Executive
Officer (Principal Executive
Officer and Principal Financial
and Accounting Officer)
21
<PAGE>
EXHIBIT INDEX
-------------
The page numbers listed refer to the page number where such exhibits are located
in this form 10-Q Report using the Sequential numbering system specified in
Rules 0-3 and 403.
- -------------------------------------------------------------------------------
EXHIBIT DESCRIPTION PAGE
- -------------------------------------------------------------------------------
10.1 Registration Rights Agreement dated June 7, 1996 between the
Registrant and S.R. One. Ltd.
- -------------------------------------------------------------------------------
10.2 Amended and Restated Warrant dated June 7, 1996 issued by the
Registrant to S.R. One. Ltd.
- -------------------------------------------------------------------------------
10.3 Amended and Restated Warrant dated May 3, 1996 issued by the
Registrant to Plexus Ventures, Inc.
- -------------------------------------------------------------------------------
10.4 Exclusive License Agreement with Purchase Option dated
September 23, 1996 between the Registrant and Phanos
Technologies, Inc.
- -------------------------------------------------------------------------------
10.5 Amendment No. 1 dated October 17, 1996 to the Exclusive
License Agreement with Purchase Option between the Registrant
and Phanos Technologies, Inc.
- -------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
- --------------------------------------------------------------------------------
This is a REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of June 7,
1996 by and among ZYNAXIS, INC., a Pennsylvania corporation with headquarters
located at 371 Phoenixville Pike, Malvern, Pennsylvania, 19355 (the "Company"),
and S.R. ONE, LTD., a Pennsylvania business trust with headquarters at 565 E.
Swedesford Road, Suite 315, Wayne, PA 19087 ("S.R. One").
BACKGROUND
----------
In connection with the issuance by the Company of a PROMISSORY NOTE AND SECURITY
AGREEMENT to S.R. One. (the "Note") and a WARRANT (the "Warrant"), on the date
hereof to S.R. One, the Company and S.R. One have agreed to enter into this
agreement relating to Registration of the shares of the Company's Common Stock
(the "Warrant Shares") issuable upon exercise of the Warrant.
NOW THEREFORE, in consideration of the premises and mutual covenants contained
herein, and other good and valuable consideration which is specified within the
Note and the Warrant, the receipt and sufficiency of which are hereby
acknowledged, the Company and S.R. One agree as follows:
SECTION 1:
----------
REGISTRATION ON FORM S-3
------------------------
1.1 Prior to November 28, 1996, unless not permitted under the then applicable
rules and regulations of the Securities and Exchange Commission (the "SEC"), the
Company will commence preparation of and will file a registration statement on
Form S-3 (the "Registration Statement") with the SEC under the Securities Act of
1933, as amended (the "Securities Act"), to register the Warrant Shares. The
Company will use its best efforts to have the Registration Statement declared
effective and keep the Registration Statement effective until the earlier of (1)
the fifth anniversary of the date of this Agreement, subject to such periods of
time when the Company must suspend the use of the prospectus forming a part of
the Registration Statement until such time as an amendment is filed and declared
effective or an appropriate report is filed by the Company with the SEC, or (2)
the date on which the Warrant Shares may be sold without restriction under the
Securities Act.
<PAGE>
SECTION 2:
----------
ABOUT REGISTRATION
------------------
2.1 The Company shall pay all Registration Expenses (as defined below) in
connection with any registration, qualification or compliance hereunder, and
S.R. One or a permitted transferee under Section 4.1 hereof (the "Holder") shall
pay all Selling Expenses (as defined below) and other expenses that are not
Registration Expenses relating to the Warrant Shares to be registered on behalf
of such Holder in accordance with this Section 2 (the "Registrable Securities").
"Registration Expenses" means all expenses, except for Selling Expenses,
incurred by the Company in complying with the registration provisions of this
Agreement, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Company, blue sky fees and expenses and the expense of any special
audits incident to or required by any such registration. "Selling Expenses"
means all selling commissions, underwriting fees and stock transfer taxes
applicable to the Registrable Securities and all fees and disbursements of
counsel for the Holder.
2.2 In the case of any registration effected by the Company pursuant to these
registration provisions, the Company will use its best efforts to: (i) prepare
and file with the SEC such amendments and supplements to the Registration
Statement and the prospectus used in connection with the Registration Statement
as may be deemed necessary to comply with the provisions of the Securities Act
with respect to the disposition of the Registrable Securities; (ii) furnish such
number of prospectuses and other documents incident thereto, including any
amendment of or supplement to the prospectus, as the Holder from time to time
may reasonably request; (iii) cause all such Registrable Securities registered
as described herein to be listed on each securities exchange and quoted on each
quotation service on which similar securities issued by the Company are then
listed or quoted; (iv) provide a transfer agent and registrar for all
Registrable Securities registered pursuant to the Registration Statement and a
CUSIP number for all such Registrable Securities; (v) comply with all applicable
rules and regulations of the SEC; and (vi) file the documents required of the
Company and otherwise use its best efforts to maintain requisite blue sky
clearance in all jurisdictions for which the Holder requests in writing such
registration or qualification, provided however that the Company shall not be
required to qualify to do business or consent to service of process in any state
in which it is not now so qualified or has not so consented.
2.3 Each Holder of Registrable Securities shall furnish to the Company such
information regarding such Holder and the distribution proposed by such Holder
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
described herein. Such Holder shall represent that such information is true and
complete.
2.4 If any Holder shall propose to sell any Registrable Securities pursuant to a
Registration Statement, it shall notify the Company of its intent to do so at
least three full business days prior to such sale, and the provision of such
notice to the Company shall be deemed to establish an agreement by such Holder
to comply with the registration
2
<PAGE>
provisions contained herein. Such notice shall be deemed to constitute a
representation that any information previously supplied by such Holder is
accurate as of the date of such notice. At any time within such three business
day period, the Company may refuse to permit the Holder to resell any
Registrable Securities pursuant to the Registration Statement; provided that in
order to exercise this right, the Company must deliver a certificate in writing
to the Holder to the effect that a delay in such sale is necessary because, in
the good judgment of the Company, a sale pursuant to a Registration Statement in
its then-current form could require the public disclosure of information that
would not otherwise be required to be disclosed (which disclosure would be
burdensome or could have a material adverse effect on the Company) or that would
in other respects constitute a violation of the federal securities law. In such
an event, the Company shall use its best efforts to amend the Registration
Statement if necessary and take all other actions necessary to allow such sale
under the federal securities laws, and shall notify the Holder promptly after it
has determined that such circumstances no longer exist. Notwithstanding the
foregoing, the Company shall not under any circumstances be entitled to exercise
its right to withdraw a Registration Statement more than two times in any twelve
(12) month period, and the period during which such Registration Statement may
be withdrawn shall not exceed thirty (30) days. Each Holder hereby covenants and
agrees that it will not sell any Registrable Securities pursuant to a
Registration Statement during the periods a Registration Statement is withdrawn
as set forth in this Section 2.4.
2.5 When a Holder is entitled to sell, gives notice of its intent to sell
pursuant to a Registration Statement and complies with the provisions of this
Section, the Company shall furnish to such Holder a reasonable number of copies
of a supplement to or an amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such shares, such prospectus
shall not include an untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading or incomplete in the light of the circumstances then
existing.
SECTION 3:
----------
INDEMNIFICATION AND CONTRIBUTION.
--------------------------------
3.1 The Company agrees to indemnify and hold harmless each Holder and its
directors and officers from and against any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) to which such Holder
may become subject (under the Securities Act or otherwise) insofar as such
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) arise out of, or are based upon, any claim by a third party asserting
any untrue statement of a material fact in or omission of a material fact from a
Registration Statement, on the effective date thereof, or arise out of any
failure by the Company to fulfill any undertaking included in such Registration
Statement, and the Company will, as incurred, reimburse such Holder for any
legal or other expenses reasonably incurred in investigating, defending or
preparing to defend any such action, proceeding or claim; provided, however,
-------- -------
that the Company shall not be liable in any such case to the extent that such
loss, claim, damages or liability arises out of, or is
3
<PAGE>
based upon (i) an untrue statement made in such Registration Statement in
reliance upon and in conformity with information furnished to the Company by or
on behalf of such Holder for use in preparation of such Registration Statement
or (ii) any untrue statement in any prospectus that is corrected in any
subsequent prospectus that was delivered to the Holder prior to the pertinent
sale or sales by the Holder.
3.2 Each Holder agrees to indemnify and hold harmless the Company and its
directors and officers from and against any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) to which the Company
may become subject (under the Securities Act or otherwise) insofar as such
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) arise out of, or are based upon any claim by a third party asserting
(i) an untrue statement of a material fact in or omission of a material fact
from a Registration Statement in reliance upon and in conformity with
information furnished to the Company by or on behalf of such Holder for use in
preparation of such Registration Statement, provided that no Holder shall be
liable in any such case for any untrue statement included in any prospectus
which statement has been corrected in writing by such Holder and delivered to
the Company before the sale from which such loss occurred and each Holder will,
as incurred, reimburse the Company for any legal or other expenses reasonably
incurred in investigating, defending or preparing to defend any such action,
proceeding or claim.
3.3 Promptly after receipt by any indemnified person of a notice of a claim or
the beginning of any action in respect of which indemnity is to be sought
against an indemnifying person pursuant to this Section 3, such indemnified
person shall notify the indemnifying person in writing of such claim or of the
commencement of such action, and, subject to the provisions hereinafter stated,
in case any such action shall be brought against an indemnified person and the
indemnifying person shall have been notified thereof, the indemnifying person
shall be entitled to participate therein, and, to the extent that it shall wish,
to assume the defense thereof, with counsel reasonably satisfactory to the
indemnified person. After notice from the indemnifying person to such
indemnified person of the indemnifying person's election to assume the defense
thereof, the indemnifying person shall not be liable to such indemnified person
for any legal expenses subsequently incurred by such indemnified person in
connection with the defense thereof; provided that if there exists or shall
exist a conflict of interest that would make it inappropriate in the reasonable
judgment of the indemnified person for the same counsel to represent both the
indemnified person and such indemnifying person or any affiliate or associate
thereof, the indemnified person shall be entitled to retain its own counsel at
the expense of such indemnifying person.
3.4 If the indemnification provided for in this Section 3 is unavailable to or
insufficient to hold harmless an indemnified party under Section 3.1 or Section
3.2 above in respect of any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) referred to therein, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions in
respect thereof) based upon such party's relative fault, as well as any other
4
<PAGE>
relevant equitable considerations. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or a Holder on
the other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
the Holder agree that it would not be just and equitable if contribution
pursuant to this Section 3.4 were determined by pro rata allocation or by any
other method of allocation which does not take account of the equitable
considerations referred to above in this Section 3.4. The amount paid or payable
by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this Section
3.4 shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 3.4, no Holder
shall be required to contribute any amount in excess of the amount by which the
net amount received by the Holder from the sale of the Registrable Securities to
which such loss relates exceeds the amount of any damages which such Holder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11 (f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
3.5 The obligations of the Company and the Holder under this Section 3 shall be
in addition to any liability which the Company and the Holder may otherwise have
and shall extend, upon the same terms and conditions, to each person, if any,
who controls the Company or any Holder within the meaning of the Securities Act.
SECTION 4:
----------
TRANSFER OF REGISTRATION RIGHTS.
-------------------------------
4.1 The right to sell Registrable Securities pursuant to a Registration
Statement described herein may not be assigned or transferred by S.R. One,
except to an Affiliate. For the purpose of this Section 4, "Affiliate" shall
mean any entity which controls, is controlled by or is under common control with
S.R. One. In the event that it is necessary, in order to permit a Holder to sell
Registrable Securities pursuant to a Registration Statement, to amend such
Registration Statement to name such Holder, such Holder shall, upon written
notice to the Company, be entitled to have the Company make such amendments as
soon as reasonably practicable. Notwithstanding the above provisions relating to
Registration Expenses, in the event that such an amendment is requested, the
Holder shall, at the request of the Company, be obligated to reimburse the
Company for reasonable Registration Expenses incurred by it in connection with
such amendment.
4.2 S.R. One hereby agrees that, if a transfer or assignment is necessary
pursuant to Section 4.1, that, assignment of the right to sell Registrable
Securities pursuant to a Registration Statement will be contingent upon the
Affiliate accepting assignment of this Agreement.
5
<PAGE>
IN WITNESS WHEREOF, the Company and S.R. One have caused this Agreement to be
duly executed as of the date first written above.
ZYNAXIS, INC.
By: /s/ Francis M. Conway
---------------------
Francis M. Conway
Controller, Treasurer and Secretary
S.R. ONE, LTD.
By: /s/ Brenda D. Gavin
-------------------
Date: October 3, 1996
---------------
6
<PAGE>
- --------------------------------------------------------------------------------
THE WARRANT REPRESENTED HEREBY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE WARRANT MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM.
THE WARRANT REPRESENTED HEREBY AND THE RIGHTS OF HOLDERS THEREOF ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER AND OTHER RESTRICTIONS, AS DESCRIBED IN SECTION
4 OF THIS WARRANT.
- --------------------------------------------------------------------------------
Void after 5:00 p.m. (Eastern Time), on the last
day of the Warrant Term, as provided herein.
Amended and Restate
Warrant to Purchase
25,000 Shares of
Common Stock
Date: June 7, 1996
AMENDED AND RESTATED WARRANT
TO PURCHASE COMMON STOCK OF
ZYNAXIS, INC.
THIS CERTIFIES THAT, FOR VALUE RECEIVED, S.R. One, Ltd. (herein called
"Warrant Holder") or registered assigns, is the holder of a Warrant and is
entitled to purchase, subject to the provisions of this Warrant, from Zynaxis,
Inc., a Pennsylvania corporation (the "Company"), at any time and from time to
time during the Warrant Term, 25,000 fully paid, validly issued and
nonassessable shares of Common Stock, par value $.01 per share, of the Company
("Common Stock"), at the Warrant Price. The Warrant Price and number and kind of
securities issuable hereunder are subject to adjustments as provided herein.
1. Definition of Principal Terms. For the purpose of this Warrant:
-----------------------------
(a) "Promissory Note" means the Promissory Note dated June 7, 1996,
issued by the Company to the Warrant Holder.
(b) "Warrant" means the Warrant to purchase Common Stock issued by the
Company in connection with and in consideration for the funding received
<PAGE>
pursuant to the Promissory Note and any and all Warrants which are issued in
exchange or substitution for any outstanding Warrant pursuant to the terms of
that Warrant.
(c) "Warrant Price" means the price per share at which shares of Common
Stock are purchasable hereunder, as such price may be adjusted from time to time
hereunder, and shall initially be equal to $1.00.
(d) "Warrant Shares" means shares of Common Stock purchased upon
exercise of the Warrants.
(e) "Warrant Term" means, except as provided in Section 6 hereof, the
period commencing on June 7, 1996 and ending at 5:00 p.m. (Eastern Time) on June
6, 2001.
2. Exercise of Warrants. This Warrant may be exercised during the Warrant
--------------------
Term in whole or in part by the surrender of the Warrant, with the purchase
agreement attached hereto as Rider A properly completed and executed, at the
principal office of the Company at 371 Phoenixville Pike, Malvern, Pennsylvania
19355 or such other location which shall at that time be the principal office of
the Company (the "Principal Office"), and upon payment to it by wire transfer,
certified check or bank draft to the order of the Company for the purchase price
for the Warrant Shares to be purchased upon such exercise. The person entitled
to the Warrant Shares so purchased shall be treated for all purposes as the
holder of such Warrant Shares as of the close of business on the date of
exercise and certificates for the Warrant Shares so purchased shall be delivered
to the person so entitled within a reasonable time, not exceeding thirty (30)
days, after such exercise. Unless this Warrant has expired, a new Warrant of
like tenor and for such number of shares of Common Stock as the holder of this
Warrant shall direct, representing in the aggregate the right to purchase a
number of shares of Common Stock with respect to which this Warrant shall not
have been exercised, shall also be issued to the holder of this Warrant within
such time.
3. Exchange. This Warrant is exchangeable from the date hereof until the
--------
expiration of the Warrant Term, upon the surrender thereof by the holder thereof
at the Principal Office of the Company, for new Warrants of like tenor
registered in such holder's name and representing in the aggregate the right to
purchase the number of shares of Common Stock purchasable under the Warrant
being exchanged, each of such new Warrants to represent the right to subscribe
for and purchase such number of shares of Common Stock as shall be designated by
said holder at the time of such surrender.
4. Restrictions on Transfer and Registration Rights. The transferability
------------------------------------------------
of this Warrant and the Warrant Shares are subject to the restrictions on
transfer set forth below:
(a) Notice of Transfer and Opinion of Counsel. The Warrant Holder, and
-----------------------------------------
any other holder of the Warrant by acceptance thereof, agrees that, prior to
2
<PAGE>
any transfer of any Warrant, such holder will give written notice to the Company
of such holder's intention to effect such transfer and to comply in all other
respects with the provisions of this Section 4. Each such notice shall contain
(i) a statement setting forth the intention of such holder's prospective
transferee with respect to its retention or disposition of such Warrant, and
(ii) unless waived by the Company, an opinion of counsel for such holder (who
may be the inside or staff counsel employed by such holder), as to the necessity
or non-necessity for registration under the Securities Act of 1933, as amended
(the "Securities Act"), and applicable state securities laws in connection with
such transfer and stating the factual and statutory bases relied upon by
counsel. The following provisions shall then apply:
(A) If in the opinion of counsel for the Company the proposed
transfer of such Warrant may be effected without registration or
qualification under the Securities Act and any applicable state securities
laws, then the registered holder of such Warrant shall be entitled to
transfer such Warrant in accordance with the intended method of
disposition specified in the statement delivered by such holder to the
Company.
(B) If in the opinion of counsel for the Company the proposed
transfer of such Warrant may not be effected without registration under
the Securities Act or registration or qualification under any applicable
state securities laws, the registered holder of such Warrant shall not be
entitled to transfer such Warrant until the requisite registration or
qualification is effective.
(b) Transfer. Subject to the restrictions on transfer set forth above,
--------
this Warrant is transferable, in whole, at the Principal Office of the Company
by the registered holder thereof, in person or by duly authorized attorney, upon
presentation of the Warrant, properly endorsed, for transfer. Each holder of
this Warrant, by holding it, agrees that the Warrant, when endorsed in blank,
may be deemed negotiable, and that the holder thereof, when the Warrant shall
have been so endorsed, may be treated by the Company and all other persons
dealing with the Warrant as the absolute owner thereof for any purpose and as
the person entitled to exercise the rights represented by the Warrant, or to the
transfer on the books of the Company, any notice to the contrary
notwithstanding.
(c) Registration Restrictions. This Warrant and the Warrant Shares have
-------------------------
not been registered under the Securities Act, by reason of their issuance in a
transaction exempt from the registration requirements of the Securities Act
pursuant to the exemption provided in Section 4(2) thereof, and have not been
registered under state securities laws by reason of their issuance in a
transaction exempt from such registration requirements. This Warrant and the
Warrant Shares may not be sold, transferred or otherwise disposed of unless
registered under the Securities Act and applicable state securities laws or
exempted from registration. Shares of Common Stock issuable upon exercise of
this Warrant will bear the following restrictive legend:
3
<PAGE>
The shares represented by this certificate have been acquired for
investment and have not been registered under the Securities Act of
1933, as amended. The shares may not be sold or transferred in the
absence of such registration or an exemption therefrom.
The shares represented by this certificate and the rights of holders
thereof are subject to certain restrictions on transfer and other
restrictions, and the holder of the shares represented by this
certificate (including any holders) are bound by the terms of the
original Warrant (copies of which may be obtained from the Company).
All restrictions contained herein shall be binding on any transferee of this
Warrant and the Company may require any such transferee to execute an instrument
agreeing in writing to be so bound by these restrictions as a condition to
transfer.
The Company shall be entitled to give stop transfer instructions to the transfer
agent with respect to Warrant Shares in order to enforce the forgoing
instructions.
5. Certain Covenants of the Company. The Company covenants and agrees that
--------------------------------
all shares which may be issued upon the exercise of this Warrant will, upon
issuance, be duly and validly issued, fully paid and nonassessable and free from
all taxes, liens and charges with respect to the issue thereof; and without
limiting the generality of the foregoing, the Company covenants and agrees that
it will from time to time take all such action as may be requisite to assure
that the par value per share of the Common Stock is at all times equal to or
less than the then effective purchase price per share of the Common Stock
issuable pursuant to this Warrant. The Company further covenants and agrees that
during the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized, and reserved for the
purpose of issue upon exercise of the purchase rights evidenced by this Warrant,
a sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by the Warrant.
6. Automatic Termination of Warrant Term. The Warrant Term shall terminate
-------------------------------------
automatically sixty (60) days after the Common Stock of the Company has traded
at an average closing price per share as reported on the Nasdaq Stock Market or
the Nasdaq SmallCap Market of The Nasdaq Stock Market, Inc. or at an average
closing bid price per share as quoted on the OTC Bulletin Board, as the case may
be, of three dollars ($3) or greater for any thirty (30) consecutive trading
days during the Warrant Term.
7. Adjustments of Warrant Price. In the event that the Company shall
----------------------------
effect a subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or otherwise
than by
4
<PAGE>
payment of a dividend in Common Stock or in any right to acquire Common Stock),
or in the event the outstanding shares of Common Stock shall be combined or
consolidated, by reverse stock split, reclassification or otherwise, into a
lesser number of shares of Common Stock, then the Warrant Price shall,
concurrently with the effectiveness of such event, be proportionately decreased
or increased, as appropriate, to avoid dilution of the exercise rights
hereunder.
8. Adjustments for Reclassification and Reorganization. In case of any
---------------------------------------------------
reclassification or change of outstanding securities issuable upon exercise of
the Warrant (other than a change in par value, or from par value to no par
value, or from no par value to par value or as a result of a subdivision or
combination) or in case of any consolidation or merger of the Company with or
into another corporation (other than a merger with another corporation in which
the Company is the surviving corporation and which does not result in any
reclassification or change, other than a change in par value, or from par value
to no par value, or from no par value to par value, or as a result of a
subdivision or combination of outstanding securities issuable upon the exercise
of the Warrant), or in case of any sale or transfer to another corporation of
the property of the Company as an entirety or substantially as an entirety, the
Company, or such successor or purchasing corporation, as the case may be, shall
without payment of any additional consideration therefor, execute new warrants
providing that the holder of the Warrant shall have the right to exercise such
new warrant (upon terms not less favorable to the holders than those then
applicable to the Warrant) and to receive upon such exercise, in lieu of each
share of Common Stock theretofore issuable upon exercise of the Warrant, the
kind and amount of shares of stock, other securities, money or property
receivable upon such reclassification, change, consolidation, merger, sale or
transfer by the holder of one share of Common Stock issuable upon exercise of
the Warrant had the Warrant been exercised immediately prior to such
reclassification, change, consolidation, merger, sale or transfer. Such new
warrants shall provide for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in Section 7 hereof and this
Section 8. The provisions of this Section 8 shall similarly apply to successive
reclassifications, changes, consolidations, mergers, sales and transfers.
9. Notices. Whenever the Warrant Price shall be adjusted pursuant to
-------
Section 7 hereof, or there shall be a reclassification, reorganization or other
event specified in Section 8 hereof, the Company shall promptly prepare a
certificate signed by its President or a Vice President and by its Treasurer,
setting forth in reasonable detail, as the case may be, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated, the Warrant Price after giving effect to such adjustment, and
information regarding the execution of new warrants, and shall promptly cause
copies of such certificate to be mailed (by first class and postage prepaid) to
the registered holders of the Warrant.
In the event the Company shall take any action which pursuant to
Section 7 may result in an adjustment of the Warrant Price, or pursuant to
Section 8 may result in the execution of new warrants, the Company will give to
the registered holders
5
<PAGE>
of the Warrant at their last addresses known to the Company written notice of
such action ten (10) days in advance of its effective date in order to afford to
such holders of the Warrant an opportunity to exercise the Warrant and to
purchase shares of Common Stock of the Company prior to such action becoming
effective.
10. Fractional Shares. No fractional shares of Common Stock will be issued
-----------------
in connection with any purchase hereunder.
11. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company of
--------------------------------------
reasonable evidence satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of the Warrant and (in the case of loss, theft or
destruction) of reasonable indemnity and (in case of mutilation) upon surrender
and cancellation thereof, the Company will execute and deliver, in lieu thereof,
new warrant of like tenor.
12. Headings. The description headings of the several sections of this
--------
Warrant are inserted for convenience only and do not constitute a part of this
Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer under its corporate seal, attested by its duly
authorized officer, on the date of this Warrant.
ZYNAXIS, INC.
By: /s/ Martyn D. Greenacre
-----------------------
Chief Executive Officer
Attest: /s/ Francis M. Conway
---------------------
6
<PAGE>
RIDER A
-------
PURCHASE AGREEMENT
------------------
Date: ___________________
TO:
The undersigned, pursuant to the provisions set forth in the attached
Warrant, hereby agrees to purchase shares of Common Stock covered by such
Warrant, and makes payment herewith in full thereof at the price per share
provided by this Warrant.
Signature:________________________
Address: ________________________
________________________
* * *
For Value Received,
hereby sells, assigns and transfers all of the rights of the undersigned under
the within Warrant, with respect to the number of shares of Common Stock covered
by such Warrant to:
NAME OF ASSIGNEE ADDRESS NO. OF SHARES
- ---------------- ------- -------------
and appoints _______________________________ Attorney to make such transfer of
the books of Zynaxis, Inc. maintained for such purpose, with full power of
substitution in the premises.
Dated: Signature:________________________
Witness: ________________________
7
<PAGE>
- --------------------------------------------------------------------------------
THE WARRANT REPRESENTED HEREBY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE WARRANT MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM.
THE WARRANT REPRESENTED HEREBY AND THE RIGHTS OF HOLDERS THEREOF ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER AND OTHER RESTRICTIONS, AS DESCRIBED IN SECTION
4 OF THIS WARRANT.
- --------------------------------------------------------------------------------
Void after 5:00 p.m. (Eastern Time), on the last
day of the Warrant Term, as provided herein.
Amended and restated
Warrant to Purchase
100,000 Shares of
Common Stock
Date: May 3, 1996.
AMENDED AND RESTATED WARRANT
TO PURCHASE COMMON STOCK OF
ZYNAXIS, INC.
THIS CERTIFIES THAT, FOR VALUE RECEIVED, Plexus Ventures, Inc. (herein
called "Warrant Holder") or registered assigns, is the holder of a Warrant and
is entitled to purchase, subject to the provisions of this Warrant, from
Zynaxis, Inc., a Pennsylvania corporation (the "Company"), at any time and from
time to time during the Warrant Term, 100,000 fully paid, validly issued and
nonassessable shares of Common Stock, par value $.01 per share, of the Company
("Common Stock"), at the Warrant Price. The Warrant Price and number and kind of
securities issuable hereunder are subject to adjustments as provided herein.
1. Definition of Principal Terms. For the purpose of this Warrant:
-----------------------------
(a) "Promissory Note" means the Promissory Note dated May 3, 1996,
issued by the Company to the Warrant Holder.
(b) "Warrant" means the Warrant to purchase Common Stock issued by the
Company in connection with and in consideration for the funding received
<PAGE>
pursuant to the Promissory Note and any and all Warrants which are issued in
exchange or substitution for any outstanding Warrant pursuant to the terms of
that Warrant.
(c) "Warrant Price" means the price per share at which shares of Common
Stock are purchasable hereunder, as such price may be adjusted from time to time
hereunder, and shall initially be equal to $1.00.
(d) "Warrant Shares" means shares of Common Stock purchased upon
exercise of the Warrants.
(e) "Warrant Term" means, except as provided in Section 6 hereof, the
period commencing on May 3, 1996 and ending at 5:00 p.m. (Eastern Time) on May
2, 2001.
2. Exercise of Warrants. This Warrant may be exercised during the Warrant
--------------------
Term in whole or in part by the surrender of the Warrant, with the purchase
agreement attached hereto as Rider A properly completed and executed, at the
principal office of the Company at 371 Phoenixville Pike, Malvern, Pennsylvania
19355 or such other location which shall at that time be the principal office of
the Company (the "Principal Office"), and upon payment to it by wire transfer,
certified check or bank draft to the order of the Company for the purchase price
for the Warrant Shares to be purchased upon such exercise. The person entitled
to the Warrant Shares so purchased shall be treated for all purposes as the
holder of such Warrant Shares as of the close of business on the date of
exercise and certificates for the Warrant Shares so purchased shall be delivered
to the person so entitled within a reasonable time, not exceeding thirty (30)
days, after such exercise. Unless this Warrant has expired, a new Warrant of
like tenor and for such number of shares of Common Stock as the holder of this
Warrant shall direct, representing in the aggregate the right to purchase a
number of shares of Common Stock with respect to which this Warrant shall not
have been exercised, shall also be issued to the holder of this Warrant within
such time.
3. Exchange. This Warrant is exchangeable from the date hereof until the
--------
expiration of the Warrant Term, upon the surrender thereof by the holder thereof
at the Principal Office of the Company, for new Warrants of like tenor
registered in such holder's name and representing in the aggregate the right to
purchase the number of shares of Common Stock purchasable under the Warrant
being exchanged, each of such new Warrants to represent the right to subscribe
for and purchase such number of shares of Common Stock as shall be designated by
said holder at the time of such surrender.
4. Restrictions on Transfer and Registration Rights. The transferability
------------------------------------------------
of this Warrant and the Warrant Shares are subject to the restrictions on
transfer set forth below:
(a) Notice of Transfer and Opinion of Counsel. The Warrant Holder, and
-----------------------------------------
any other holder of the Warrant by acceptance thereof, agrees that, prior to
2
<PAGE>
any transfer of any Warrant, such holder will give written notice to the Company
of such holder's intention to effect such transfer and to comply in all other
respects with the provisions of this Section 4. Each such notice shall contain
(i) a statement setting forth the intention of such holder's prospective
transferee with respect to its retention or disposition of such Warrant, and
(ii) unless waived by the Company, an opinion of counsel for such holder (who
may be the inside or staff counsel employed by such holder), as to the necessity
or non-necessity for registration under the Securities Act of 1933, as amended
(the "Securities Act"), and applicable state securities laws in connection with
such transfer and stating the factual and statutory bases relied upon by
counsel. The following provisions shall then apply:
(A) If in the opinion of counsel for the Company the proposed
transfer of such Warrant may be effected without registration or
qualification under the Securities Act and any applicable state securities
laws, then the registered holder of such Warrant shall be entitled to
transfer such Warrant in accordance with the intended method of
disposition specified in the statement delivered by such holder to the
Company.
(B) If in the opinion of counsel for the Company the proposed
transfer of such Warrant may not be effected without registration under
the Securities Act or registration or qualification under any applicable
state securities laws, the registered holder of such Warrant shall not be
entitled to transfer such Warrant until the requisite registration or
qualification is effective.
(b) Transfer. Subject to the restrictions on transfer set forth above,
--------
this Warrant is transferable, in whole, at the Principal Office of the Company
by the registered holder thereof, in person or by duly authorized attorney, upon
presentation of the Warrant, properly endorsed, for transfer. Each holder of
this Warrant, by holding it, agrees that the Warrant, when endorsed in blank,
may be deemed negotiable, and that the holder thereof, when the Warrant shall
have been so endorsed, may be treated by the Company and all other persons
dealing with the Warrant as the absolute owner thereof for any purpose and as
the person entitled to exercise the rights represented by the Warrant, or to the
transfer on the books of the Company, any notice to the contrary
notwithstanding.
(c) Registration Restrictions. This Warrant and the Warrant Shares have
-------------------------
not been registered under the Securities Act, by reason of their issuance in a
transaction exempt from the registration requirements of the Securities Act
pursuant to the exemption provided in Section 4(2) thereof, and have not been
registered under state securities laws by reason of their issuance in a
transaction exempt from such registration requirements. This Warrant and the
Warrant Shares may not be sold, transferred or otherwise disposed of unless
registered under the Securities Act and applicable state securities laws or
exempted from registration. Shares of Common Stock issuable upon exercise of
this Warrant will bear the following restrictive legend:
3
<PAGE>
The shares represented by this certificate have been acquired for
investment and have not been registered under the Securities Act of
1933, as amended. The shares may not be sold or transferred in the
absence of such registration or an exemption therefrom.
The shares represented by this certificate and the rights of holders
thereof are subject to certain restrictions on transfer and other
restrictions, and the holder of the shares represented by this
certificate (including any holders) are bound by the terms of the
original Warrant (copies of which may be obtained from the Company).
All restrictions contained herein shall be binding on any transferee of this
Warrant and the Company may require any such transferee to execute an instrument
agreeing in writing to be so bound by these restrictions as a condition to
transfer.
The Company shall be entitled to give stop transfer instructions to the transfer
agent with respect to Warrant Shares in order to enforce the foregoing
instructions.
5. Certain Covenants of the Company. The Company covenants and agrees that
--------------------------------
all shares which may be issued upon the exercise of this Warrant will, upon
issuance, be duly and validly issued, fully paid and nonassessable and free from
all taxes, liens and charges with respect to the issue thereof; and without
limiting the generality of the foregoing, the Company covenants and agrees that
it will from time to time take all such action as may be requisite to assure
that the par value per share of the Common Stock is at all times equal to or
less than the then effective purchase price per share of the Common Stock
issuable pursuant to this Warrant. The Company further covenants and agrees that
during the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized, and reserved for the
purpose of issue upon exercise of the purchase rights evidenced by this Warrant,
a sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by the Warrant.
6. Automatic Termination of Warrant Term. The Warrant Term shall terminate
-------------------------------------
automatically sixty (60) days after the Common Stock of the Company has traded
at an average closing price per share as reported on the Nasdaq Stock Market or
the Nasdaq SmallCap Market of The Nasdaq Stock Market, Inc. or at an average
closing bid price per share as quoted on the OTC Bulletin Board, as the case may
be, of three dollars ($3) or greater for any thirty (30) consecutive trading
days during the Warrant Term.
7. Adjustments of Warrant Price. In the event that the Company shall
----------------------------
effect a subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or otherwise
than by
4
<PAGE>
payment of a dividend in Common Stock or in any right to acquire Common Stock),
or in the event the outstanding shares of Common Stock shall be combined or
consolidated, by reverse stock split, reclassification or otherwise, into a
lesser number of shares of Common Stock, then the Warrant Price shall,
concurrently with the effectiveness of such event, be proportionately decreased
or increased, as appropriate, to avoid dilution of the exercise rights
hereunder.
8. Adjustments for Reclassification and Reorganization. In case of any
---------------------------------------------------
reclassification or change of outstanding securities issuable upon exercise of
the Warrant (other than a change in par value, or from par value to no par
value, or from no par value to par value or as a result of a subdivision or
combination) or in case of any consolidation or merger of the Company with or
into another corporation (other than a merger with another corporation in which
the Company is the surviving corporation and which does not result in any
reclassification or change, other than a change in par value, or from par value
to no par value, or from no par value to par value, or as a result of a
subdivision or combination of outstanding securities issuable upon the exercise
of the Warrant), or in case of any sale or transfer to another corporation of
the property of the Company as an entirety or substantially as an entirety, the
Company, or such successor or purchasing corporation, as the case may be, shall
without payment of any additional consideration therefor, execute new warrants
providing that the holder of the Warrant shall have the right to exercise such
new warrant (upon terms not less favorable to the holders than those then
applicable to the Warrant) and to receive upon such exercise, in lieu of each
share of Common Stock theretofore issuable upon exercise of the Warrant, the
kind and amount of shares of stock, other securities, money or property
receivable upon such reclassification, change, consolidation, merger, sale or
transfer by the holder of one share of Common Stock issuable upon exercise of
the Warrant had the Warrant been exercised immediately prior to such
reclassification, change, consolidation, merger, sale or transfer. Such new
warrants shall provide for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in Section 7 hereof and this
Section 8. The provisions of this Section 8 shall similarly apply to successive
reclassifications, changes, consolidations, mergers, sales and transfers.
9. Notices. Whenever the Warrant Price shall be adjusted pursuant to
-------
Section 7 hereof, or there shall be a reclassification, reorganization or other
event specified in Section 8 hereof, the Company shall promptly prepare a
certificate signed by its President or a Vice President and by its Treasurer,
setting forth in reasonable detail, as the case may be, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated, the Warrant Price after giving effect to such adjustment, and
information regarding the execution of new warrants, and shall promptly cause
copies of such certificate to be mailed (by first class and postage prepaid) to
the registered holders of the Warrant.
In the event the Company shall take any action which pursuant to
Section 7 may result in an adjustment of the Warrant Price, or pursuant to
Section 8 may result in the execution of new warrants, the Company will give to
the registered holders
5
<PAGE>
of the Warrant at their last addresses known to the Company written notice of
such action ten (10) days in advance of its effective date in order to afford to
such holders of the Warrant an opportunity to exercise the Warrant and to
purchase shares of Common Stock of the Company prior to such action becoming
effective.
10. Fractional Shares. No fractional shares of Common Stock will be issued
-----------------
in connection with any purchase hereunder.
11. Loss, Theft, Destruction or Mutilation. Upon receipt by the Company of
--------------------------------------
reasonable evidence satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of the Warrant and (in the case of loss, theft or
destruction) of reasonable indemnity and (in case of mutilation) upon surrender
and cancellation thereof, the Company will execute and deliver, in lieu thereof,
new warrant of like tenor.
12. Headings. The description headings of the several sections of this
--------
Warrant are inserted for convenience only and do not constitute a part of this
Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer under its corporate seal, attested by its duly
authorized officer, on the date of this Warrant.
ZYNAXIS, INC.
By: /s/ Martyn D. Greenacre
-----------------------
Chief Executive Officer
Attest: /s/ Francis M. Conway
---------------------
6
<PAGE>
RIDER A
-------
PURCHASE AGREEMENT
------------------
Date:____________________
TO:
The undersigned, pursuant to the provisions set forth in the attached
Warrant, hereby agrees to purchase shares of Common Stock covered by such
Warrant, and makes payment herewith in full thereof at the price per share
provided by this Warrant.
Signature:________________________
Address: ________________________
________________________
* * *
For Value Received,
hereby sells, assigns and transfers all of the rights of the undersigned under
the within Warrant, with respect to the number of shares of Common Stock covered
by such Warrant to:
NAME OF ASSIGNEE ADDRESS NO. OF SHARES
- ---------------- ------- -------------
and appoints _______________________________ Attorney to make such transfer of
the books of Zynaxis, Inc. maintained for such purpose, with full power of
substitution in the premises.
Dated: Signature:_______________________
Witness: _______________________
7
<PAGE>
EXCLUSIVE LICENSE AGREEMENT WITH PURCHASE OPTION
------------------------------------------------
THIS EXCLUSIVE LICENSE AGREEMENT WITH PURCHASE OPTION ("Agreement") effective
the 23rd day of September, 1996, is made between Phanos Technologies, Inc. a
California corporation ("Phanos"), with offices at 8559 Higuera Street, Culver
City, California 90232, and Zynaxis, Inc., a Pennsylvania corporation
("Zynaxis"), with offices at 371 Phoenixville Pike, Malvern, Pennsylvania 19355.
WHEREAS:
A. Zynaxis is the owner of certain intellectual property rights under various
patents, patent applications, trademarks and associated goodwill, grants,
research and feasibility agreements ("Zynaxis Intellectual Property",
identified in Appendix I attached hereto) and of certain proprietary
know-how, technical data, procedures and research results ("Zynaxis
Know-How") relating to agents which improve the therapeutic performance of a
therapeutically-active compound by inclusion of a variety of structures
which include lipophilic hydrocarbon chains that can insert into cell
membranes or other hydrophobic regions ("Molecular Delivery Systems"), said
Zynaxis Intellectual Property and Zynaxis Know-How relating to Molecular
Delivery Systems being referred to herein collectively as "Zynaxis
Information";
B. Zynaxis wishes to maintain the Zynaxis Information as secret and
confidential and to preserve the value of these assets;
C. Phanos wishes to obtain immediately an exclusive license under the Zynaxis
Information, and to obtain immediately an option to acquire full ownership
of the Zynaxis Information in order to give Phanos a period of time during
which it can further evaluate the Zynaxis Information and make a decision
whether to exercise such option;
D. Phanos wishes to maintain access to certain Zynaxis personnel with
specialized know-how in the design, synthesis and characterization of
Molecular Delivery Systems and to the results of certain projects ongoing
under Zynaxis-held Small Business Innovative Research Grants during the term
of the exclusive license and option granted herein;
NOW, THEREFORE, in consideration of the promises and mutual covenants and
agreements contained herein, the parties agree as follows:
1. Zynaxis shall disclose to Phanos the Zynaxis Information. Phanos shall use
the Zynaxis Information solely and exclusively for the purpose of operating
under the exclusive license granted herein and for evaluating whether Phanos
wishes to exercise the option to purchase the Zynaxis Information granted
herein.
<PAGE>
2. Exclusive License Grant. Zynaxis grants to Phanos an exclusive worldwide
license under the Zynaxis Information subject to any third party rights
previously conveyed under existing grants and/or research and feasibility
agreements identified in Appendix II attached hereto (the "Exclusive
License"). The term of the Exclusive License shall run until the expiration
of the last-to-expire Zynaxis Intellectual Property, unless sooner
terminated in accordance with the provisions of this Agreement.
3. Option Grant. Zynaxis grants to Phanos an exclusive option to purchase (the
"Option") the full right, title and interest in, to and under all or so much
of the Zynaxis Information as Phanos, in its sole discretion, may wish to
acquire. The Option shall be exercisable by Phanos during the one hundred
twenty (120) day period beginning upon the execution date of this Agreement
("Option Period") by providing written notification to Zynaxis. Within five
(5) days following receipt of such written notification, or at such later
time as the parties may agree, the parties shall execute a mutually
agreeable Asset Purchase Agreement and Phanos shall pay to Zynaxis the
Purchase Price identified in paragraph 4 below. If Zynaxis delays the
execution of a previously agreed-upon Asset Purchase Agreement, and the
delay is exclusively the fault of Zynaxis, the Purchase Price identified in
paragraph 4 below shall be reduced by three percent (3%), and shall be
reduced an additional three percent (3%) for every subsequent thirty day
period during which Zynaxis fails to execute an Asset Purchase Agreement.
4. One-Time Payments. Phanos shall pay to Zynaxis upon execution of this
agreement a non-refundable Exclusive Option Fee of five thousand dollars
($5,000). Additionally, Phanos shall pay to Zynaxis an Exclusive License Fee
of one hundred ninety five thousand dollars ($195,000), of which forty five
thousand dollars ($45,000) shall be paid to Zynaxis upon execution of this
agreement and one hundred fifty thousand dollars ($150,000) shall be paid to
Zynaxis within the thirty (30) day period beginning upon the execution date
of this Agreement. Should Phanos desire to exercise the Option granted in
paragraph 3 above, Phanos shall pay to Zynaxis the Purchase Price of seven
hundred and twenty five thousand dollars ($725,000), against which the
Exclusive Option Fee and Exclusive License Fee amounts already paid by
Phanos shall be fully credited.
5. Running Royalties on Sales. Phanos shall pay to Zynaxis under the Exclusive
License running royalties equal to fifteen percent (15%) of all sums that
Phanos receives from worldwide sales of products that embody the Zynaxis
Information.
6. Non-Exercise of Option; Cancellation of Exclusive License. If Phanos does
not exercise the Option granted in paragraph 3 above during the Option
Period, Zynaxis may cancel the Exclusive License by re-paying to Phanos the
Exclusive License Fee of one hundred ninety five thousand dollars ($195,000)
within thirty days following the expiration of the Option Period.
<PAGE>
7. Zynaxis, during the Option Period, shall not license, sell, encumber, or
otherwise dispose of any rights in the Zynaxis Information to any third
party without the written consent of Phanos, and shall use all reasonable
efforts to preserve the value of the Zynaxis Information.
8. Zynaxis, during the Option Period, will use all reasonable efforts to
maintain staff, funding and research progress on projects ongoing under
Zynaxis-held Small Business Innovation Research (SBIR) Grants R44 HL1626-03
and R43 H155883-01, subject to the limits of funding provided by NIH
therefor.
9. Upon the exercise of the Option by Phanos, Zynaxis will use all reasonable
efforts to obtain any consent needed to effect the transfer of third-party
agreements from Zynaxis to Phanos, and shall cooperate fully with Phanos in
executing and delivering such other documents as may be needed or reasonably
desired by Phanos to perfect or evidence its title, including the execution
of documents suitable for recordation in the U.S. Patent and Trademark
Office and the patent offices of foreign countries.
10. Zynaxis shall not disclose the identity or nationality of Phanos or any
individuals associated therewith without the prior written consent of
Phanos, except as is required by government regulation.
11. Phanos shall keep confidential and not disclose the Zynaxis Information to
any person or business ally not having entered into a Confidentiality
Agreement with Zynaxis without the prior written consent of Zynaxis and
shall not use the Zynaxis Information for any purpose other than in
furtherance of its operations under the exclusive license and Option granted
herein.
12. The obligation of confidentiality shall survive termination and/or
expiration of this Agreement and shall expire five years following the date
of execution of this Agreement. The obligation of confidentiality shall not
extend to information which,
(a) prior to receipt from Zynaxis was known to Phanos;
(b) subsequent to receipt from Zynaxis is received by Phanos from another
entity who has no obligation of confidentiality to Zynaxis with respect
to such information; or
(c) is or becomes available to the public through no fault of Phanos.
13. The standard of care exercised by Phanos to protect the Zynaxis Information
shall be no less than the degree of care used by Phanos acting reasonably
and prudently to protect its own confidential and proprietary information.
<PAGE>
14. In the event that Phanos does not exercise its Option and Zynaxis terminates
the exclusive license pursuant to paragraph 3 above by returning the
Exclusive License Fee to Phanos, Phanos shall return to Zynaxis any and all
materials in relation to the Zynaxis Information delivered to it by Zynaxis
pursuant to this Agreement and Phanos shall not retain copies of such
material for any purpose. Nothing in this Agreement shall hinder or be
construed so as to hinder Phanos' rights and activities under the Asset
Purchase Agreement and Reagent Business Operation Agreement executed by
Zynaxis and Phanos on June 21, 1995.
15. Grant of Security Interest. The parties recognize that Phanos has already
committed and will continue to commit considerable effort and financial
resources to the development of products and markets for products embodying
the Zynaxis Information, and that Zynaxis' non-performance of or inability
to perform the obligations set forth in this Agreement could cause Phanos to
suffer expectancy damages (for example, the amount that Phanos could realize
from the sale or license to a third party of the Zynaxis Information, less
the Purchase Price) in excess of the Purchase Price. Accordingly, Phanos, as
additional security for the complete and timely performance and satisfaction
of all Zynaxis' obligations hereunder hereby grants unto Phanos, its
successors and assigns, a continuing lien and security interest in the
patents, patent applications and trademark registrations (and associated
goodwill) identified in Attachment I, together with all renewals, reissues
and extensions thereof, and all claims for damages by reason of past
infringement with the right to sue for and collect the same, and all license
rights, to Phanos. As used herein, the term "obligations" shall mean all
duties of payment and performance, whether direct or indirect, both now
existing and arising from time to time, owed by Zynaxis to Phanos under this
Agreement. Zynaxis shall cooperate fully with Phanos in executing and
delivering such other documents as may be needed or reasonably desired by
Phanos to perfect or evidence its security interest, including the execution
of a document evidencing the Exclusive License and security interests
granted herein and which is suitable for recordation in the U.S. Patent and
Trademark Office.
16. This Agreement shall be governed by and construed in accordance with the
laws of the State of California. This Agreement and any and all rights and
obligations of a party hereunder may be assigned, delegated, sold,
transferred, sublicensed or otherwise disposed of by either party (except
where such would be inconsistent with the obligations of that party
hereunder) upon written notification to the other party.
17. In the event that any provision of this Agreement shall be held to be
invalid, illegal, or otherwise voidable or unenforceable, such provision
shall be deemed to be severed from the Agreement and the balance of the
Agreement shall continue in full force and effect.
<PAGE>
18. Entire Agreement and Integration. This Agreement integrates all of the terms
and conditions herein and constitutes the entire agreement of the parties
and supersedes all prior agreements and understandings, both oral and
written, between the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date first
above written.
Zynaxis, Inc. Phanos Technologies, Inc.
By: /s/ Martyn D. Greenacre By: /s/ Shotaro Kawano
-------------------------- ------------------
Chief Executive Officer President
<PAGE>
PHANOS TECHNOLOGIES, INC.
C/O CYBERSTUDIOS
8559 HIGUERA ST.
CULVER CITY, CA 90232
October 17, 1996
Martyn Greenacre
Zynaxis, Inc.
371 Phoenixville Pike
Malvern, PA 19355
RE: EXCLUSIVE LICENSE AGREEMENT WITH PURCHASE OPTION
Dear Martyn:
Reference is made to the signed Exclusive License Agreement with Purchase Option
dated September 23, 1996 (the "Agreement") between Phanos Technologies, Inc. and
Zynaxis, Inc.
Paragraph 4 of the Agreement is hereby amended to provide that the $150,000
portion of the Exclusive License Fee described therein be payable $75,000 on
October 18, 1996 and $75,000 on October 23, 1996.
Paragraph 5 is amended to provide that the Running Royalties on Sales will
terminate upon the expiration of the last patent included in the Zynaxis
Information.
Paragraph 11 is amended to provide that Phanos may disclose the Zynaxis
Information to a third party if that third party has entered into a
Confidentiality Agreement with Phanos in a form reasonably acceptable to
Zynaxis.
The last sentence in Paragraph 14 is amended to include reference to the
Marketing Rights Agreement dated July 24, 1996.
Other than those specific changes noted above, the Agreement shall remain
unchanged and in full force and effect.
Yours sincerely, AGREED AND ACCEPTED:
Phanos Technologies, Inc. Zynaxis, Inc.
by: /s/ Patrick Murray by: /s/ Martyn D. Greenacre
------------------ -----------------------
its: Secretary its: Chief Executive Officer
------------------ -----------------------
cc: Shotaro Kawano
Bart Newland, Esq.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 223,177
<SECURITIES> 0
<RECEIVABLES> 134,111
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 445,005
<PP&E> 5,940,589
<DEPRECIATION> 2,060,383
<TOTAL-ASSETS> 2,933,269
<CURRENT-LIABILITIES> 1,752,665
<BONDS> 0
0
2,554,305
<COMMON> 102,980
<OTHER-SE> 1,633,768
<TOTAL-LIABILITY-AND-EQUITY> 2,933,269
<SALES> 0
<TOTAL-REVENUES> 1,689,205
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,781,827
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,731
<INCOME-PRETAX> (1,994,676)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,994,676)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,994,676)
<EPS-PRIMARY> (.20)
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