SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ________ to __________
Commission file number 0-22872
SYMBOLLON CORPORATION
(Name of small business issuer in its charter)
Delaware 36-3463683
(State of incorporation) (I.R.S. employer identification no.)
37 Loring Drive (508) 620-7676
Framingham, Massachusetts 01702 (Issuer's telephone number)
(Address of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Units, each consisting of one share of Class A Common Stock,
$.001 par value per share, one Redeemable
Class A Warrant and one Redeemable Class B Warrant
(Title of class)
Class A Common Stock, $.001 par value per share
(Title of class)
Redeemable Class A Warrants, each Redeemable Class A
Warrant entitling the holder to purchase one share of
Class A Common Stock and one Redeemable Class B Warrant
(Title of class)
Redeemable Class B Warrants, each Redeemable Class
B Warrant entitling the holder to
purchase one share of Class A Common Stock
(Title of class)
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No __
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year (year ended
December 31, 1997) were $1,697,349.
As of March 25, 1998, the aggregate market value of the voting stock of
the issuer held by non-affiliates of the issuer was approximately $2,225,339
based upon the closing price of such stock on that date.
As of March 25, 1998, 3,182,953 shares of Class A Common Stock and
15,738 shares of Class B Common Stock of the issuer were outstanding. See
"Market for Common Equity and Related Stockholder Matters."
Transitional Small Business Disclosure Format (check one): Yes _ No X
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Proxy Statement for the 1998 Annual Meeting -- Part III
<PAGE>
PART I
Item 1. Description of Business
General Background
Symbollon Corporation (the "Company" or "Symbollon") is engaged in
research, development and commercialization of proprietary iodine-based
pharmaceutical agents, disinfectants, antiseptics and sanitizers (collectively
referred to as "applications"). The Company is a Delaware corporation
incorporated in August 1993 and is the successor by merger to a Massachusetts
corporation of the same name incorporated in May 1991 which was the successor by
merger to an Illinois corporation which was incorporated in July 1986.
The Company's Technology
The Company has developed proprietary iodine technologies that the
Company believes addresses many of the issues associated with the use of iodine.
The technologies control the ratio of molecular iodine (I2), which is lethal to
microorganisms, to other inactive species of iodine in solution. The Company
believes that this will enable it to produce iodine-based applications having
advantages over currently available iodine-based products. By increasing the
ratio of molecular iodine to other iodine species, the Company's current and
proposed products will have greater killing power per unit of total iodine. The
Company believes that this feature will enable its current and proposed products
to utilize less iodine and therefore minimize or eliminate some of the negative
characteristics associated with the use of iodine.
Overall, the Company believes that the major strengths of its patented
technologies are the minimization of staining and color associated with iodine,
broad spectrum of antimicrobial activity, rapidity of cidal activity, safe
residues, no known resistance, and no environmental disposal concerns. The
primary weaknesses of the Company's technologies are the inconvenience and cost
of a multi-part delivery system and the potential for staining and corrosivity.
Initial Product
The Company focused a majority of its initial development efforts
regarding its technologies on a bovine teat sanitizer, marketed as
"IodoZyme(R)". The Company co-developed IodoZyme with West Agro, Inc. of Kansas
City, MO ("West Agro"), a subsidiary of the Tetra Laval Group and a leading
manufacturer and distributor of iodophor-based products for dairy use. In
January 1995, the Company and West Agro signed a marketing and supply agreement
covering IodoZyme, and the Company began shipping IodoZyme to West Agro in early
1995. Pursuant to this agreement, West Agro was granted the exclusive worldwide
right to market, distribute, promote and sell IodoZyme. Under the agreement, the
Company manufactures and supplies West Agro with IodoZyme in finished product
form.
Total product sales from IodoZyme for 1996 and 1997 were $117,906 and
$376,660, respectively. Substantially all sales were in the United States. West
Agro, through its foreign affiliates, has begun the registration process in
several foreign markets, for which clearances must be received prior to sales in
those foreign markets.
The Company's invoice terms are net 30 days. The Company had no firm
orders for future delivery of products at year end.
<PAGE>
Research and Product Development
During 1997 the Company concentrated its product development work on
proposed product applications for a treatment for fibrocystic breast disease,
the treatment of various dermatological and ophthalmic diseases, and a treatment
for stomach ulcers. Additional development efforts regarding the Company's
technology for use in dental water line disinfection, medical instrument
sterilization and hemodialysis membrane disinfection were conducted during 1997
at various universities and other third party laboratories through grants from
the Small Business Innovation Research ("SBIR") program. See "Small Business
Innovation Research."
The Company spent approximately $1,002,208 and $562,360 on research and
development during the years ended December 31, 1996 and 1997, respectively.
Since inception, the Company has spent approximately $4,036,698 on research and
development. Under certain collaborative relationships, the Company has received
payments which are reflected in the Company's financial statements as contract
and license fee revenues.
Given the Company's limited financial resources, the uncertainty of the
development effort and the necessity for regulatory approval, there can be no
assurance of ultimate success with respect to any product development program or
that resulting products, if any, will be commercially successful. Additionally,
the Company's limited resources will require substantial support for new
business areas from corporate partners who would ultimately introduce the
products into the marketplace. The Company's current strategic corporate
partners are described below.
Material developments in the Company's ongoing programs during fiscal
1997 are detailed below:
Fibrocystic Breast Disease
During 1997, the Company initiated a development program to investigate
the potential use of the Company's technology as a treatment for fibrocystic
breast disease ("FBD"). FBD is a term used to describe a range of benign breast
conditions which affect a large number of women to some degree. FBD is
characterized by breast nodularity, lumpiness or cysts which can cause pain or
tenderness. It is generally suspected to be caused by a hormonal imbalance
within a woman.
The Company's 1997 efforts were focused on identifying an appropriate
formulation, conducting pre-clinical toxicology studies in rats and transferring
the formulation from the laboratory to a current good manufacturing practices
("cGMP") contract manufacturer for production of materials suitable for human
clinical trials. In 1998, the Company anticipates filing an Investigational New
Drug ("IND") application to initiate clinical trials in humans.
Dermatology Applications
In May 1996, the Company signed a collaboration and license agreement
with Oclassen Pharmaceuticals, Inc. ("Oclassen") for dermatological products
based on Symbollon's proprietary iodine technologies. Pursuant to the agreement,
the companies plan to co-develop products for the treatment of certain skin
diseases, with initial development focused on products for acne, bacterial and
fungal skin diseases. Under the terms of the agreement, Oclassen obtained
exclusive marketing rights in the United States and Canada for dermatological
products based on Symbollon's iodine technologies. Subject to continuation of
<PAGE>
the agreement, Oclassen will make a series of milestone payments to Symbollon,
plus royalty payments on product sales. Oclassen is primarily responsible for
product development and commercialization. Symbollon consults, for a fee, on the
product development.
In August 1997, the Company amended its Collaboration and License
Agreement with Oclassen primarily to account for delays incurred in the
development program. The original agreement had anticipated that an IND
application covering use of the Company's chemistry in dermatology would have
been filed by August 1997; however, the development process had not advanced
sufficiently to warrant such filing. Along with certain other changes, in the
amendment Symbollon agreed to remove the time based payment requirement for the
next two milestones which were to be paid in May 1998 and 1999. Such milestone
payments will now be payable only upon the occurrence of certain events. As part
of the amended relationship, Symbollon has agreed to become more active in the
program. In 1998, the Company will undertake to provide Oclassen with a
preliminary formula and analytical methods necessary to validate formulation
stability, without further remuneration for its time.
Ophthalmology Applications
In August 1997, the Company signed a collaboration and sale/license
agreement with Bausch & Lomb Pharmaceuticals, Inc. ("B&L") for ophthalmic
products based on Symbollon's proprietary iodine technologies. Pursuant to the
agreement, the companies plan to develop products for the treatment of infective
diseases of the eye. Under the terms of the agreement, B&L obtained exclusive
marketing rights in the United States and Canada for ophthalmic products based
on Symbollon's iodine technologies. The agreement also provides B&L with options
to broaden its exclusive marketing rights to include the rest of the world, and
to include otic (ear) products. Subject to continuation of the agreement, B&L
will make a series of milestone payments to Symbollon, plus royalty payments on
product sales. In conjunction with the development collaboration, B&L also made
an equity investment in Symbollon. B&L is primarily responsible for product
development and commercialization. Symbollon consults, for a fee, on the product
development. Symbollon anticipates that work under the agreement will continue
throughout 1998.
Ulcer Treatment
In June 1995, the Company entered into an Evaluation and Option
Agreement with Astra Merck Inc. ("Astra Merck") to explore the possible use of
the Company's technology against Helicobacter pylori for the treatment of
stomach ulcers. As of March 1997, the parties amended the agreement to extend
the period Symbollon had to conduct animal studies to March 1998. From March
1998, Astra Merck has six months to evaluate the Company's technology and, in
Astra Merck's discretion, to negotiate a development and commercialization
agreement covering the technology for use as a treatment against Helicobacter
pylori in the gastrointestinal tract. Unless a development and commercialization
agreement is entered into with Astra Merck, Symbollon does not anticipate that
further work in this area will continue in 1998.
Other Potential Applications
The Company believes that its microbicide technologies have potential
applications in the development of a variety of human healthcare and other
products such as topical anti-infectives, oral care and hygiene products, wound
care applications, and as a preventive for urinary tract infection. Given the
Company's limited resources, although certain preliminary research, development
and regulatory activities may be undertaken by the Company in some of these
potential product areas, the Company's ability to fund the development and
commercialization of such applications will depend in large part on entering
into product development and commercialization agreements with corporate
partners.
<PAGE>
Small Business Innovation Research
In 1989, the Company entered into an agreement with Biomedical
Development Corporation located in San Antonio, Texas ("BDC") to cooperate in
applying for and performing under Small Business Innovation Research ("SBIR")
grants based on the Company's technology. The Small Business Innovation
Development Act of 1982 requires agencies of the Federal government engaged in
research to set aside a specified percentage of their research budgets for
grants ranging from approximately $50,000 to $75,000 for Phase I and up to
$500,000 to $600,000 for Phase II.
The Company is required to pay to BDC a royalty of 5% of net sales up
to a maximum of the amount of the SBIR grant related to the product. The results
of research undertaken by BDC become the property of the Company. In some
instances, BDC may cause research to be conducted by employees of academic
institutions. Such institutions may have rights in the results of such research.
Under the agreement, BDC is required to use its best efforts to obtain licenses
to such information and to transfer all such technical information to the
Company. The United States government retains a royalty-free license in the
results of research funded by SBIR grants, whether patented or not.
In May 1997, the Company terminated its agreement with BDC. While no
further SBIR grants covering the Company's technology will be applied for by
BDC, all ongoing grants will continue until their completion. To the Company's
knowledge, grants covering use of the Company's technology for medical equipment
sterilization, dental water line disinfection and hemodialysis membrane
disinfection are ongoing.
Manufacturing and Supplies
The development and manufacture of the Company's products are subject
to good laboratory practices ("GLP") and cGMP requirements prescribed by the
United States Food and Drug Administration (the "FDA") and to other standards
prescribed by the appropriate regulatory agency in the country of use. The
Company currently produces IodoZyme through a combination of internal
manufacturing activities and a network of subcontractors. See "Management's
Discussion and Analysis or Plan of Operation." The Company currently has limited
in-house manufacturing capacity, and if the Company continues to perform
manufacturing activities related to IodoZyme in-house, additional manufacturing
space and equipment may be necessary if product volumes increase. See
"Description of Property."
The Company does not presently have FDA certified facilities capable of
producing quantities of human pharmaceutical products required for clinical
trials or commercial production. The Company will need to rely on collaborators,
licensees or contract manufacturers to produce such materials. There can be no
assurance that the Company will be able to obtain an adequate supply of its
product from a third party manufacturer, or that if such a supply can be
obtained, that it will comply with GLP and cGMP, as applicable
The Company believes that there are adequate sources of the raw
materials required to produce its applications for commercial production and
testing purposes. Pursuant to its agreement with West Agro, all sodium iodide
used by the Company in the manufacture of the bovine teat sanitizer is to be
purchased from West Agro at a price not to exceed the price which West Agro
charges its largest customers. The Company has been and expects to continue to
be able to obtain all materials needed for these purposes without any
significant interruption or sudden price increase, although there can be no
assurance thereof.
<PAGE>
Marketing and Distribution
In accordance with the marketing and supply agreement signed with West
Agro, West Agro is marketing and distributing IodoZyme, and has agreed to market
and distribute other potential cleaners, sanitizers and disinfectants covered by
the agreement to dairy farms and dairy processing plants on an exclusive basis.
The principal market for IodoZyme is dairy farms.
The Company intends to market and distribute its potential products
through others having pre-established marketing and distribution networks
pursuant to contractual arrangements such as joint venture, licensing,
distribution or similar collaborative agreements. The principal markets for the
potential pharmaceutical and healthcare products include hospitals, medical
offices, dental offices, dialysis centers, outpatient clinics and nursing homes.
Government Regulation
The Company's research and development activities and the production
and marketing of the Company's current and proposed products are subject to
regulation by numerous governmental authorities in the United States and
comparable state agencies. Foreign governments also regulate the development,
production and marketing of products in their countries. The development,
manufacturing and marketing of human pharmaceuticals are subject to regulation
in the United States for safety and efficacy by the FDA in accordance with the
Federal Food, Drug and Cosmetic Act. There can be no assurances that regulatory
approvals or clearances will be obtained for any applications of the Company's
technology once developed, that if granted they will not be withdrawn or that
other regulatory action might result in an adverse impact on the ability to
market the Company's proposed products.
In the United States, human pharmaceuticals are subject to rigorous FDA
regulation including preclinical and clinical testing, The process of completing
clinical trials and obtaining FDA approvals for a new drug is likely to take a
number of years, requires the expenditure of substantial resources and is often
subject to unanticipated delays. There can be no assurance that any proposed
product will receive such approval on a timely basis, if at all.
The steps required before new products for use in humans may be
marketed in the United States include (i) preclinical trials, (ii) submission to
the FDA of an application for IND, which must be approved before human clinical
trials commence, (iii) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the product, (iv) submission of a New Drug
Application ("NDA") for a new drug to the FDA and (v) FDA approval of the NDA
prior to any commercial sale or shipment of the product.
Preclinical tests include laboratory evaluation of product formulation,
as well as animal studies (if an appropriate animal model is available) to
assess the potential safety and efficacy of the product. Formulations must be
manufactured according to cGMP and preclinical safety tests must be conducted by
laboratories that comply with FDA regulations regarding GLP. The results of the
preclinical tests are submitted to the FDA as part of an IND application and are
reviewed by the FDA prior to the commencement of human clinical trials. There
can be no assurance that submission of an IND application will result in FDA
authorization to commence clinical trials. Clinical trials involve the
administration of the investigational new drug to healthy volunteers and to
patients under the supervision of a qualified principal investigator.
<PAGE>
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, the investigational new drug
usually is administered to healthy human subjects and is tested for safety,
dosage, tolerance, absorption, distribution, metabolism, excretion and
pharmacokinetics. Phase II involves studies in a limited patient population to
(i) determine the efficacy of the investigational new drug for specific
indications, (ii) determine dosage tolerance and optimal dosage and (iii)
identify possible adverse effects and safety risks. When an investigational new
drug is found to be effective and to have an acceptable safety profile in Phase
II evaluation, Phase III trials are undertaken to further evaluate clinical
efficacy and to further test for safety within an expanded patient population at
geographically dispersed clinical study sites. There can be no assurance that
Phase I, Phase II or Phase III testing will be completed successfully within any
specified time period, if at all, with respect to any of the Company's proposed
products subject to such testing. Furthermore, the Company or the FDA may
suspend clinical trials at any time if the participants are being exposed to an
unacceptable health risk. The FDA may deny an NDA if applicable regulatory
criteria are not satisfied, require additional testing or information, or
require post marketing testing and surveillance to monitor the safety of the
Company's proposed products.
All data obtained from development programs are submitted as an NDA to
the FDA and the corresponding agencies in other countries for review and
approval. FDA approval of the NDA is required before marketing may begin in the
United States. Although the FDA's policy is to review priority applications
within 180 days of their filing, in practice longer times may be required. The
FDA frequently requests that additional information be submitted, requiring
significant additional review time. Essentially, all proposed products of the
Company will be subject to demanding and time-consuming NDA or similar approval
procedures in the countries where the Company intends to market its proposed
products. These regulations define not only the form and content of the
development of safety and efficacy data regarding the proposed product, but also
impose specific requirements regarding manufacture of the proposed product,
quality assurance, packaging, storage, documentation and record keeping,
labeling and advertising and marketing procedures. Effective commercialization
also requires inclusion of the Company's proposed products in national, state,
provincial or institutional formularies or cost reimbursement systems.
In addition to regulations enforced by the FDA, the Company also is
subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state or local regulations. The Company's research and development involves the
controlled use of hazardous materials and chemicals. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result, and any such liability could exceed the resources
of the Company.
In both domestic and foreign markets, the ability of the Company to
commercialize its proposed product candidates will depend, in part, on the
availability of reimbursement from third-party payers, such as government health
administration authorities, private health insurers and other organizations.
Third-party payers are increasingly challenging the price and cost-effectiveness
of medical products. There can be no assurance that Symbollon-developed products
will be considered cost effective. Significant uncertainty exists as to the
reimbursement status of newly-approved medical products. Government and other
third-party payers are increasingly attempting to contain medical costs by
limiting both coverage and the level of reimbursement for new therapeutic
products approved for marketing by the FDA and by refusing, in some cases, to
provide coverage for uses of approved products for disease indications for which
the FDA has not granted marketing approval. There can be no assurance that
adequate third-party insurance coverage will be available for the Company to
establish and maintain price levels sufficient for realization of an appropriate
<PAGE>
return on its investment in developing new therapies. If adequate coverage and
reimbursement levels are not provided by government and third-party payers for
uses of the Company's proposed therapeutic products, the market acceptance of
these products would be adversely affected.
There have been a number of federal and state proposals during the last
few years to subject the pricing of pharmaceuticals to government control and to
make other changes to the medical care system of the United States. It is
uncertain what legislative proposals will be adopted or what actions federal,
state or private payers for medical goods and services may take in response to
any medical reform proposals or legislation. The Company cannot predict the
effect medical reforms may have on its business, and no assurance can be given
that any such reforms will not have a material adverse effect on the Company.
IodoZyme, the bovine teat dip manufactured by the Company, is subject
to regulation by the FDA as an animal drug. Although a lengthy new animal drug
application ("NADA") approval process is generally required prior to marketing
an animal drug, under regulatory discretion afforded by the FDA, the agency does
not currently require manufacturers of bovine teat sanitizers to undergo this
process. The only current FDA requirements applicable to teat treatment
manufacturers are compliance with the FDA's labeling, establishment
registration, drug listing, and manufacturing requirements. The Company believes
that it and its subcontractors are in compliance with the current FDA
requirements applicable to teat treatment manufacturers. However, in February
1993, the FDA issued draft guidelines setting forth the types of data necessary
to demonstrate that a teat treatment is safe for the cow, effective and fulfills
human food safety, manufacturing and environmental requirements. Testing of
IodoZyme was not conducted in accordance with such guidelines. Future required
compliance with these guidelines or other FDA requirements, the probability of
which cannot currently be ascertained by the Company, would have a significant
adverse effect on the marketing of IodoZyme and, consequently, on the Company's
results of operations.
Patents and Proprietary Rights
The Company considers patent protection of its iodine technology to be
critical to its business prospects. The Company currently holds ten patents and
eight additional patent applications filed in the United States relating to its
technology. In addition, the Company holds patents and has filed a number of
patent applications relating to its technology in foreign countries.
The first of the Company's patents was issued in 1984 and relates to
bactericidal compositions and methods for applications to oral cavities. The
second patent was issued in 1990 and relates to the use of the Company's
technology as an aqueous sporicidal microbicide. In 1991, two additional patents
were issued, one of which covers formulations of the Company's technology to
rapidly sterilize and maintain a sterile environment for an extended period of
time, while the other relates to methods to avoid discoloration of plant or
animal tissue during the sterilization process. The fifth patent, which was
issued in 1993, relates to a method to clean and disinfect pathogens on the
epidermis. The sixth patent, which was issued in 1994, relates to a composition
to clean and disinfect pathogens on the epidermis. The seventh patent, which was
issued in 1995, relates to a method for forming a sterilant using an immobilized
enzyme. The Company had three patents issue in 1997, one relating to a method of
forming an iodine germicidal composition using an iodine sequestering agent; one
relating to a method for the therapeutic treatment of a mammalian eye; and the
last relating to an enzymatically generated iodine microbiocide for use in
sensitive biological materials. The Company intends to continue to pursue patent
protection for the various applications of its technology.
<PAGE>
The Company sold to B&L the United States patent that issued in 1997
relating to a method for the therapeutic treatment of a mammalian eye. See
"Research and Product Development - Ophthalmology Applications." The Company
continues to own the foreign rights and any continuations-in-part relating to
the invention.
The Company also relies upon unpatented proprietary technology, and in
the future may determine in some cases that its interest would be better served
by reliance on trade secrets or confidentiality agreements rather than patents.
To the extent that consultants or other third parties apply technological
information independently developed by them or by others to Company projects,
disputes may arise as to the proprietary rights to such information which may
not be resolved in favor of the Company. The Company is required to pay
royalties to a co-inventor on certain patents relating to the Company's
technology based on revenues received by the Company from sales of products
falling within the scope of such patents.
Competition
The Company's proposed products and products incorporating the
Company's proposed products would compete with many other applications currently
on the market. In addition, the Company is aware of other companies engaged in
research and development of other novel approaches to applications in some or
all of the markets identified by the Company as potential fields of application
for its products. Many of the Company's present and potential competitors have
substantially greater financial and other resources and larger research and
development staffs than the Company. Many of these companies also have extensive
experience in testing and applying for regulatory approvals. In addition,
colleges, universities, government agencies, and public and private research
organizations conduct research and are becoming more active in seeking patent
protection and licensing arrangements to collect royalties for the use of
technology that they have developed, some of which may be directly competitive
with that of the Company.
The Company is aware of one company, Mimetix Inc., which is currently
conducting human clinical trials in the United States and Canada utilizing an
iodine-based compound for the treatment of fibrocystic breast disease. If
Mimetix receives marketing approval for its drug compound prior to Symbollon, it
could adversely affect the Company's ability to receive marketing approval, or
if approved, the Company's ability to sell its product.
The bovine teat sanitizer market is currently dominated by iodophor
products, which generally compete on the basis of price and the ratio of
microbial killing power to total iodine. The Company believes that IodoZyme
competes on the basis of its superior convenience, efficiency, safety and high
ratio of killing power to total iodine. Additionally, IodoZyme, manufactured by
the Company and sold by West Agro, competes directly with products currently
being manufactured and sold by West Agro.
Employees
As of December 31, 1997, the Company had six employees, all of whom are
full-time. The Company has relationships with and from time to time engages the
services of university professors and other qualified consultants to assist it
in technological research and development. No employee of the Company is
currently represented by a labor union. Management considers its employee
relations to be good. The Company believes that the future success of the
Company is dependent to a significant degree on its being able to continue to
attract and retain skilled personnel.
<PAGE>
Executive Officers
The Company's executive officers are:
Name Age Position with the Company
---- --- -------------------------
Jack H. Kessler, Ph.D. 47 Executive Vice-President, Chief
Scientific Officer, Secretary and
Chairman of the Board of Directors
Paul C. Desjourdy 36 Executive Vice-President,
Chief Financial Officer,
Treasurer and Director
Certain biographical information regarding each executive officer of
the Company is set forth below:
Jack H. Kessler, Ph.D., is the founder of the Company and has served as
Executive Vice-President, Chief Scientific Officer, Secretary, and a director
since the Company's move to Massachusetts in May 1991, and as Chairman of the
Board of Directors since May 1996. Prior to that time, and since the Company was
initially formed in Illinois in 1986, Dr Kessler was the Company's sole
stockholder and served as its sole officer and director. From January 1990 until
May 1991, he served as principal systems engineer for Kollsman Manufacturing
Company, a diagnostic instrument design and manufacturing company.
Paul C. Desjourdy has served as Executive Vice President and Chief
Financial Officer since July 1996, as Vice-President - Finance and
Administration and Chief Financial Officer of the Company from September 1993 to
June 1996, as Treasurer from May 1994 to present, and as a director since August
1996. From September 1989 to September 1993, Mr. Desjourdy, a certified public
accountant, was an attorney at the law firm of Choate Hall & Stewart.
Officers are elected annually and serve at the discretion of the Board
of Directors.
Item 2. Description of Property
The Company leases approximately 5,400 square feet of office, research
and development and manufacturing space in Framingham, Massachusetts for a
current base annual rental of approximately $28,350 increasing $0.25 per square
foot each year effective September 1 through August 31, 2002. The lease expires
on August 31, 2002 and may be renewed for a five year period at the Company's
option on the same terms and conditions except that the rent shall continue to
increase $0.25 per square foot each year of the renewal period. The Company
believes that this space is suitable and adequate for its current needs;
however, because the existing space has limited in-house manufacturing capacity,
additional manufacturing space may be necessary if product volumes increase.
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1997.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) Price Range of Securities
The Company's Class A Common Stock, Class A Warrants and Class B
Warrants trade separately on the Nasdaq SmallCap Market tier of The Nasdaq Stock
Market under the symbols: SYMBA, SYMBW and SYMBZ, respectively. The following
sets forth the high and low sales prices for each of the quarterly periods
during fiscal 1996 and 1997, as reported by Nasdaq.
Fiscal 1996 Fiscal 1997
------------------------- --------------------------
High Low High Low
Class A Common Stock
First quarter 6 15/16 4 1/8 2 7/8 1 5/16
Second quarter 6 3/8 1 5/8 2 3/16 1 9/16
Third quarter 2 1/2 3/4 2 3/8 1 7/16
Fourth quarter 2 5/8 5/8 2 1/8 15/16
Class A Warrants
First quarter 4 3/4 2 5/8 1/8
Second quarter 4 3/4 31/32 1/2 3/16
Third quarter 1 1/16 1/4 1/2 3/16
Fourth quarter 1/2 3/32 5/16 1/16
Class B Warrants
First quarter 4 1 7/8 3/16 1/16
Second quarter 2 3/8 1/4 3/16 1/32
Third quarter 15/32 1/8 5/32 1/32
Fourth quarter 7/32 1/16 5/32 1/32
There is no established public trading market for the Company's Class B
Common Stock.
(b) Approximate Number of Equity Security Holders
Based upon information supplied from the Company's transfer agent, the
Company believes that the number of record holders of the Company's equity
securities as of March 25, 1998 are approximately as follows:
<PAGE>
Title of Class Number of Record Holders
Class A Common Stock 40
Class B Common Stock 3
Class A Warrants 10
Class B Warrants 8
Based upon information supplied from the Company's transfer agent, the
Company believes that the number of beneficial holders of the Company's Class A
Common Stock as of March 25, 1998 is in excess of 600.
(c) Dividends
The Company has never paid a cash dividend on any class of its common
stock and anticipates that for the foreseeable future any earnings will be
retained for use in its business and, accordingly, does not anticipate the
payment of cash dividends.
Item 6. Management's Discussion and Analysis or Plan of Operation
The Company is a development stage company. Since inception of the
Company's predecessor in 1986, the Company's efforts have been principally
devoted to research and development, securing patent and trademark protection
and raising capital, most of which efforts commenced after May 1991. Except for
revenue earned in 1996 and 1997 on sales of IodoZyme, the Company's sole revenue
to date has been from licensing/option arrangements and contract research and
development efforts with corporate partners.
Safe Harbor Statements
Any statements contained herein by the Company with regard to its
expectations as to financial results and other aspects of its business may
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company makes such
statements based on assumptions which it believes to be reasonable, the
Company's business is subject to significant risks and there can be no assurance
that actual results will not differ materially from the Company's expectations.
Accordingly, the Company hereby identifies the following important factors,
among others, which could cause its results to differ from any results which
might be projected, forecasted or estimated by the Company in any such
forward-looking statements: (i) the timely development and acceptance of new
products, (ii) the achievement of product development milestones by the
Company's corporate partners, (iii) the timely receipt of regulatory clearances
required to market the Company's proposed products, (iv) the continued sale of
IodoZyme, the Company's only product, (v) the Company's ability to enter into
new arrangements with corporate partners.
Results of Operations
Fiscal 1997 versus Fiscal 1996
Symbollon's net income in fiscal 1997 was $511,464, compared to a net
loss of $905,415 in fiscal 1996. This net income resulted primarily from
increased license fee revenues from research and development programs with
corporate partners, increased net sales of IodoZyme, and decreased research and
development expenses.
<PAGE>
Product revenues from sales of IodoZyme increased by $258,754 or 219.5%
from $117,906 in fiscal 1996 to $376,660 in fiscal 1997. The increased sales
relate primarily to greater market penetration in the United States. Based on
sales forecasts provided to Symbollon by West Agro, Symbollon anticipates
further increases in sales volume for IodoZyme in 1998, primarily related to a
potential introduction of the product in a number of foreign markets.
Cost of goods sold for IodoZyme increased by $108,425 or 154.7% from
$70,106 in fiscal 1996 to $178,531 in fiscal 1997. The increase in the gross
profit margin on product sales in fiscal 1997, from the comparable 1996 period,
was primarily due to manufacturing efficiencies resulting from increased sales
volume. The Company anticipates that the gross profit margin in 1998 will remain
consistent with 1997.
Contract revenues decreased by $74,302 or 51.2% from $144,991 in fiscal
1996 to $70,689 in fiscal 1997. License fee revenues increased by $750,000 or
150.0% from $500,000 in fiscal 1996 to $1,250,000 in fiscal 1997. All of the
contract revenue and $1,000,000 of the license fee revenue generated in fiscal
1997 relate to one corporate relationship entered into in May 1996 in the field
of dermatology. This relationship provided all of the contract and license fee
revenues in fiscal 1996. The remaining license fee revenue in fiscal 1997 was
generated from a new corporate relationship entered into in August 1997 in the
field of ophthalmology. In 1998, subject to continuation of existing research
and development contracts, the Company anticipates receiving $400,000 in license
fees. The level of contract revenues for 1998 is difficult to predict since it
depends on the amount of consulting effort expended by the Company at the
request of corporate partners.
Research and development expenses decreased by $439,848 or 43.9% from
$1,002,208 in fiscal 1996 to $562,360 in fiscal 1997. The decrease resulted from
the discontinuation of the development effort relating to the Company's high
level disinfectant formulation and a decrease in salary and other labor related
costs associated with a reduction in the Company's research and development
staff. The Company is anticipating that research and development expenses will
significantly increase in 1998 as the Company continues the development of a
formulation to treatment fibrocystic breast disease, which development effort
may include conducting clinical trials.
General and administrative expenses decreased by $162,448 or 23.7% from
$686,026 in fiscal 1996 to $523,578 in fiscal 1997. This decrease resulted
primarily from decreases in director and officer insurance premiums and legal
fees.
The Company's interest income increased by $2,710 or 2.9% from $92,098
in fiscal 1996 to $94,808 in fiscal 1997. The Company's interest expense
increased by $14,154 from $2,070 in fiscal 1996 to $16,224 in fiscal 1997. This
increase resulted from borrowings in 1997 under the Company's bank line of
credit which was established in March 1997.
During 1998, the Company anticipates incurring significant development
expenses associated with its proposed formulation for the treatment of
fibrocystic breast disease, including the cost of preparing and filing an IND
application with the FDA, manufacturing supplies for clinical trials and
conducting human clinical trials.
Liquidity and Capital Resources
The Company has funded its activities primarily through proceeds from
private and public placements of equity and debt securities. Independent
research and development activities regarding the Company's technology has been
funded through SBIR grants received and administered by BDC. See "Small Business
<PAGE>
Innovation Research." The Company's $500,000 bank line of credit expired in
March 1998, and the Company has no current plans to replace such line of credit.
During 1997, the Company generated its first operating profit; however,
it anticipates that 1998 revenues will be less than its 1998 operating expenses.
The Company has incurred a cumulative loss through December 31, 1997 of
$4,821,615. As of December 31, 1997, the Company had working capital of
$2,631,019. The Company believes that it has the necessary liquidity and capital
resources to sustain planned operations for fiscal 1998. In the event that the
Company's internal estimates relating to its planned expenditures prove
inaccurate, the Company may be required to reallocate funds among its planned
activities and curtail certain planned expenditures. In any event, the Company
anticipates that it will require additional financing after 1998, and therefore,
the Company will seek new financing in fiscal 1998. The Company's ability to
obtain new financing may, in part, be affected by the Company's ability to
continue to meet the criteria for continued listing of its securities on Nasdaq.
Nasdaq's current continued listing criteria require, in part, that the Company
maintain net tangible assets (total assets less total liabilities and goodwill)
of at least $2,000,000, a minimum bid price of $1.00 per share of common stock
and two market makers for its securities. There can be no assurance that in the
future the Company will be able to continue to meet the criteria for continued
listing of its securities on Nasdaq.
During 1998, the Company is committed to pay approximately $305,000 as
compensation for its current executive officers and approximately $26,100 for
lease payments on its facilities. The Company has no planned material capital
expenditures for fiscal 1998. At December 31, 1997, the Company had a net
operating loss carryforward for Federal income tax purposes of approximately
$4,552,000 expiring through 2011.
In connection with the Company's initial public offering, certain
stockholders of the Company agreed to transfer an aggregate of 700,000 shares of
Common Stock to the Company if the Company does not attain certain minimum
earnings thresholds. In the event the Company attains any of such earnings
thresholds, the position of the Securities and Exchange Commission is that the
release of these restrictions will be treated, for financial reporting purposes
only, as expense to the Company which is nondeductible for income tax purposes.
Accordingly, the Company will, in the event of the release of the restrictions,
recognize during the period in which the earnings thresholds are met or probable
of being met, what could be a substantial one-time charge which would have the
effect of substantially increasing the Company's loss or reducing or eliminating
earnings, if any, at such time. The amount of expense recognized by the Company
will not affect the Company's total stockholders' equity.
<PAGE>
Item 7. Financial Statements
Independent Auditors' Report
The Board of Directors and Stockholders
Symbollon Corporation
Framingham, Massachusetts
We have audited the accompanying balance sheets of Symbollon Corporation (a
development stage company) as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
years in the two-year period ended December 31, 1997 and for the period from
July 15, 1986 (inception) to December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of Symbollon Corporation at December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1997 and for the period
from July 15, 1986 (inception) to December 31, 1997 in conformity with generally
accepted accounting principles.
Richard A. Eisner & Company, LLP
Cambridge, Massachusetts
January 22, 1998
<PAGE>
<TABLE>
SYMBOLLON CORPORATION
(a development stage company)
Balance Sheets
<CAPTION>
December 31,
----------------------
1997 1996
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,527,865 $ 1,707,099
Accounts receivable 24,972 50,406
Inventory 73,629 17,818
Prepaid expenses 75,156 82,439
------------- -------------
Total current assets 2,701,622 1,857,762
Equipment and leasehold improvements,
net of accumulated depreciation and
amortization (Note C) 146,868 124,463
Other assets:
Patent and trademark costs, net of
accumulated amortization (Note D) 153,157 127,097
Deposit 2,364 5,000
------------- -------------
$ 3,004,011 $ 2,114,322
============= =============
LIABILITIES
Current liabilities:
Accounts payable $ 5,879 $ 41,173
Other accrued professional fees 21,867 83,910
Other current liabilities 22,857 14,441
Accrued finder's fee (Note J) 20,000
Deferred revenue 17,596
------------- -------------
Total current liabilities 70,603 157,120
Accrued rent 14,000
------------- -------------
70,603 171,120
------------- -------------
Redeemable common stock, Class A, par
value $.001 per share, 266,667 shares
issued at December 31, 1997 (aggregate
involuntary liquidation value $500,000) (Note F) 500,000
Commitments (Note J)
STOCKHOLDERS' EQUITY (Notes F and G)
Preferred stock, par value $.001 per share,
5,000,000 shares authorized,
444,444 shares issued at December 31, 1996 444
Common stock, Class A, par value $.001 per
share, 18,750,000 shares authorized,
2,916,286 and 1,288,253 shares issued
in 1997 and 1996, respectively 2,916 1,288
Common stock, Class B, par value $.001 per share,
1,250,000 shares authorized, 15,738 and
1,196,275 shares issued in 1997 and 1996,
respectively. Each share is convertible
into one share of Class A common stock 16 1,196
Additional paid-in capital 7,252,091 7,273,353
Deficit accumulated during the development stage (4,821,615) (5,333,079)
------------ -------------
Total stockholders' equity 2,433,408 1,943,202
------------- -------------
$ 3,004,011 $ 2,114,322
============= =============
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
SYMBOLLON CORPORATION
(a development stage company)
Statements of Operations
<CAPTION>
July 15,
1986
(Inception)
Year Ended December 31, to
---------------------------- December 31,
1997 1996 1997
------------ ------------ ---------------
<S> <C> <C> <C>
Income:
Net sales $ 376,660 $ 117,906 $ 617,547
Contract revenue 70,689 144,991 540,680
License fee revenue 1,250,000 500,000 1,790,000
------------ ------------ ---------------
Total income 1,697,349 762,897 2,948,227
------------ ------------ ---------------
Operating expenses:
Cost of goods sold 178,531 70,106 352,237
Research and development costs 562,360 1,002,208 4,036,698
General and administrative expenses 523,578 686,026 3,506,287
------------ ------------ ---------------
Total operating expenses 1,264,469 1,758,340 7,895,222
------------ ------------ ---------------
Income (loss) from operations 432,880 (995,443) (4,946,995)
Interest income 94,808 92,098 481,640
Interest expense and debt issuance costs (16,224) (2,070) (356,260)
------------ ------------ ---------------
Net income (loss) $ 511,464 $ (905,415) $(4,821,615)
============ ============ ===============
Net income (loss) per share of common stock $ .24 $ (.52)
===== ======
Net income per common share - assuming dilution $ .22
=====
Weighted average number of common shares outstanding 2,168,783 1,781,796
============= ============
Weighted average number of common shares and potential
common shares outstanding 2,360,333
=============
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
SYMBOLLON CORPORATION
(a development stage company)
Statements of Stockholders' Equity
<CAPTION>
Common Stock, $.001 Par Value Deficit
--------------------------------- Accumulated
Preferred Stock, Class A Class B Additional During the
$.001 Par Value---------------- ---------------- Paid-in Development
Shares Amount Shares Amount Shares Amount Capital Stage Total
------- ------ --------- ------ --------- ------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1992, consisting of net
losses from July 15, 1986 (inception)
through December 31, 1991 $ (143,451) $(143,451)
Merger and recapitalization, May 1991:
Issuance of new shares of Symbollon Corporation 831,316 $ 831 $ 9,169 10,000
Contribution of shares to the Company, September (41,565) (42) 42 0
Issuance of shares, September 425,251 426 299,574 300,000
Net loss for the year (207,457) (207,457)
--------- ------ ---------- ------------ ----------
Balance, December 31, 1992 1,215,002 1,215 308,785 (350,908) (40,908)
Issuance of shares, June 34,998 35 104,965 105,000
Capital contribution as of July 100,000 100,000
Warrants issued with bridge financing 25,000 25,000
Public offering, December:
Issuance of shares 1,000,000 $1,000 5,999,000 6,000,000
Costs of offering (1,244,133) (1,244,133)
Sale of unit purchase option 100 100
Net loss for the year (1,186,132)(1,186,132)
--------- ------ --------- ------ ---------- ------------ ----------
Balance, December 31, 1993 1,000,000 1,000 1,250,000 1,250 5,293,717 (1,537,040) 3,758,927
Issuance of over-allotment units of public offering 150,000 150 899,850 900,000
Additional public offering costs (99,369) (99,369)
Net loss for the year (1,516,913)(1,516,913)
--------- ------ --------- ------ ---------- ------------ ----------
Balance, December 31, 1994 1,150,000 1,150 1,250,000 1,250 6,094,198 (3,053,953) 3,042,645
Warrant conversion, July - August 77,920 78 629,126 629,204
Conversion of Class B to Class A 35,287 35 (35,287) (35) 0
Stock purchase plan sales 2,216 2 9,415 9,417
Net loss for the year (1,373,711)(1,373,711)
--------- ------ --------- ------ ---------- ------------ ----------
Balance, December 31, 1995 1,265,423 1,265 1,214,713 1,215 6,732,739 (4,427,664) 2,307,555
Issuance of preferred stock, August 444,444 $ 444 499,555 499,999
Conversion of Class B to Class A 18,438 19 (18,438) (19) 0
Stock purchase plan sales 4,392 4 7,943 7,947
Reduction of warrant conversion costs 33,116 33,116
Net loss for the year (905,415) (905,415)
------- ----- ---------- ------ --------- ------ ---------- ------------ ----------
Balance, December 31, 1996 444,444 444 1,288,253 1,288 1,196,275 1,196 7,273,353 (5,333,079) 1,943,202
Conversion of preferred stock, May (444,444) (444) 444,444 444 0
Conversion of Class B to Class A 1,180,537 1,180(1,180,537)(1,180) 0
Stock purchase plan sales 3,052 4 3,738 3,742
Issuance costs of redeemable common stock, August (25,000) (25,000)
Net income for the year 511,464 511,464
------- ----- ---------- ------ --------- ------ ---------- ------------ ----------
Balance, December 31, 1997 0 $ 0 2,916,286 $2,916 15,738 $ 16 $7,252,091 $(4,821,615) $2,433,408
======= ===== ========== ====== ========= ====== ========== ============ ==========
See Note F for additional information
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
SYMBOLLON CORPORATION
(a development stage company)
Statements of Cash Flows
<CAPTION>
July 15,
1986
(Inception)
Year Ended December 31, to
------------------------------- December 31,
1997 1996 1997
------------ -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 511,464 $ (905,415) $ (4,821,615)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization expense 59,677 57,680 379,202
Amortization of debt issuance costs 130,000
Accrued rent (14,000) (10,500) 0
Loss on disposition of equipment 7,274 7,274
Changes in:
Accounts receivable 25,434 (19,536) (24,972)
Inventory (55,811) 13,461 (73,629)
Prepaid expenses 7,283 (1,885) (75,156)
Deferred revenue (17,596) 17,596 0
Accounts payable and other current liabilities (68,921) 90,758 127,778
------------ ------------- -------------
Net cash provided by (used in) operating activity 454,804 (757,841) (4,351,118)
------------ ------------- -------------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements (85,333) (5,828) (340,653)
Patent and trademark costs (41,383) (53,323) (357,148)
Proceeds from sale of equipment 11,300 11,300
Deposit 2,636 (2,364)
------------ ------------- -------------
Net cash used in investing activities (112,780) (59,151) (688,865)
------------ ------------- -------------
Cash flows from financing activities:
Warrant conversion 629,204
Borrowings from stockholders 253,623
Repayment of borrowings from stockholders (21,609) (127,683)
Sale of common stock and units 478,742 7,947 7,706,106
Sale of option to purchase units 100
Public offering costs (1,343,502)
Issuance of preferred stock 450,000 450,000
------------ ------------- -------------
Net cash provided by financing activities 478,742 436,338 7,567,848
------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents 820,766 (380,654) 2,527,865
Cash and cash equivalents at beginning of period 1,707,099 2,087,753
------------ -------------
Cash and cash equivalents at end of period $ 2,527,865 $ 1,707,099 $ 2,527,865
============ ============= =============
Supplemental cash flow information:
Cash paid during the year for interest $ 16,224
See Note F with respect to noncash transactions.
See notes to financial statements
</TABLE>
<PAGE>
NOTE A - CERTAIN TRANSACTIONS AND DESCRIPTION OF BUSINESS
The Company was formed to develop and commercialize proprietary iodine-based
products for infection control and treatment in biomedical and bioagricultural
industries. The Company is in the development stage and its efforts since
inception have been principally devoted to research and development, securing
patent and trademark protection and raising capital. Management of the Company
anticipates that additional losses will be incurred as these efforts are
pursued. Management will seek additional financing when, and if, required
although there can be no assurance that such financing will be available or on
terms acceptable to the Company.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Cash and cash equivalents:
Cash and cash equivalents are short-term, highly liquid investments with
maturities of less than three months when acquired.
[2] Inventory:
Inventory is stated at the lower of cost or market.
[3] Revenue recognition:
The Company recognizes revenue when the Company fulfills all of its
obligations under its collaborative research and licensing agreements or
when its products are shipped. Through December 31, 1997 the Company has
generated its revenue from a small number of customers and agreements.
[4] Depreciation and amortization:
Equipment is depreciated over its estimated useful life using the
straight-line method. Leasehold improvements are being amortized by the
straight-line method over the term of the lease which is less than their
estimated useful lives.
Patent and trademark costs are being amortized over their estimated
useful lives of 17 years by the straight-line method. Such costs are
reviewed for impairment periodically. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of such costs, a
loss will be recognized.
[5] Income (loss) per share:
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per share. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts
for all periods have been presented, and where appropriate, restated to
conform to the Statement 128 requirements.
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[6] Stock-based compensation:
The Company accounts for its employee stock-based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees". In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 establishes
a fair-value-based method of accounting for stock-based compensation
plans. The Company adopted the disclosure only alternative in 1996 which
requires disclosure of the pro forma effects on loss and loss per share
as if SFAS No. 123 had been adopted, as well as certain other
information.
[7] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE C - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost and consist of the
following:
December 31,
1997 1996
----------- ----------
Equipment and fixtures $ 201,519 $ 218,528
Leasehold improvements 61,811 36,791
----------- ----------
263,330 255,319
Less accumulated depreciation and amortization 116,462 130,856
----------- ----------
Equipment and leasehold improvements, net $ 146,868 $ 124,463
=========== ==========
NOTE D - PATENT AND TRADEMARK COSTS
December 31,
1997 1996
----------- ----------
Patent costs $ 339,340 $ 298,704
Trademark costs 8,520 16,272
----------- -----------
347,860 314,976
Less accumulated amortization 194,703 187,879
----------- -----------
Patent and trademark costs, net $ 153,157 $ 127,097
=========== ===========
<PAGE>
NOTE E - LINE OF CREDIT
On March 27, 1997 the Company signed a loan and security agreement with a bank
which expires on March 26, 1998 and provides for advances to the Company of up
to $500,000 and interest on the advances of 1.5% plus prime. Any advances are
collateralized by essentially all of the assets of the Company. At December 31,
1997 there were no advances outstanding under this agreement.
NOTE F - CAPITALIZATION
The Company has issued both Class A and Class B common stock. The Class A and
Class B common stock are substantially identical except that holders of Class A
common stock have the right to cast one vote for each share held and the Class B
shareholders have the right to cast five votes for each share held. The Class B
shares are automatically convertible into an equal number of Class A shares upon
the sale or transfer of Class B shares by the original holders thereof, subject
to certain exceptions.
On December 13, 1996 the Company requested its Class B common stockholders to
voluntarily convert their outstanding shares of Class B common stock into an
equal number of shares of Class A common stock which convert on a one-for-one
basis. In 1997, 1,180,537 of the 1,196,275 shares of Class B common stock were
converted.
On August 14, 1996 the Company completed a private placement of 444,444 shares
of a new series of convertible preferred stock at a price of $1.125 per share.
In exchange for the shares issued in the private placement, the Company received
net proceeds of approximately $450,000 and the cancellation of $50,000 of
principal and accrued interest on a demand note payable to a stockholder. In May
1997 the preferred stock was converted into an equal number of shares of Class A
common stock.
On August 4, 1997, the Company entered into a Stock Purchase Agreement with a
pharmaceutical company whereby the Company sold 266,667 shares of Class A common
stock for $500,000. Under this agreement, the pharmaceutical company has the
right, up to August 4, 1998, to purchase an additional $350,000 of common stock
at the then fair market value. Pursuant to certain restrictions, the stock is
redeemable at the per share price that it originally paid, as an offset against
future milestone payments. If the collaboration and license agreement is
terminated by the pharmaceutical company before August 4, 2001, then, for the
calendar years ended December 31, 2001, 2002 and 2003 the pharmaceutical company
has the right to require the Company to purchase, at the per share price that it
originally paid, the number of shares which equals 25% of the Company's positive
cash flows from operating activities, not to exceed $350,000.
<PAGE>
NOTE F - CAPITALIZATION (CONTINUED)
In addition to the outstanding options under the Company's stock plans (Note G),
the Company has the following options and warrants outstanding at December 31,
1997:
Number of Exercise Expiration
Units/Warrants Price Date
-------------- -------- ----------
Redeemable Class A warrants 1,572,080 See below December 1998
Redeemable Class B warrants 1,227,920 See below December 1998
Unit purchase option 100,000 units $9.00 December 1998
Each Class A warrant entitles the holder to purchase, for $8.50, one share of
Class A common stock and one Class B warrant. Each Class B warrant entitles the
holder to purchase, for $11.00, one share of Class A common stock. The exercise
prices of the warrants are subject to adjustment and the warrants are subject to
redemption in certain circumstances. The unit purchase option entitles the
holder to purchase one share of Class A common stock, one Class A warrant, and
one Class B warrant.
In connection with the Company's public offering, certain stockholders agreed to
restrictions on 700,000 shares of the then 1,250,000 Class B common shares
outstanding prior to the offering. In January 1997 684,950 of the restricted
shares converted to Class A common stock. These shares will be transferred to
the Company for no consideration if the future earnings thresholds described
below are not achieved. When, and if, the share restrictions are released, the
Company will incur an expense based on the fair market value of the shares at
the time the restrictions lapse, which is a nondeductible expense for tax
purposes.
The restricted shares are to be released if the Company meets any of the
following earnings levels, (defined as income before income taxes, extraordinary
items or any charge related to the release of shares):
Fiscal Year Ending Earnings
December 31, Level
------------------ --------
1998 $ 10,000,000
1999 15,000,000
NOTE G - STOCK PLANS
[1] Stock plans:
The Company has adopted three stock plans: a stock option plan, an
employee stock purchase plan and a nonemployee directors' stock option plan.
The stock option plan provides for the grant of incentive stock options,
nonqualified stock options and stock appreciation rights. At December 31,
1997 the Company has reserved 800,000 shares for issuance under this
plan.
<PAGE>
NOTE G - STOCK PLANS (CONTINUED)
[1] Stock plans: (Continued)
The employee stock purchase plan provides for the purchase of Class A
common stock at 85 percent of the fair market value at specific dates, to
encourage stock ownership by all eligible employees. At December 31,
1997, the Company has reserved 200,000 shares for purchase under this
plan. During the year ended 1997, the plan purchased 3,052 shares from
the Company to satisfy its obligation under the plan.
On May 17, 1995 the Company adopted a nonemployee directors' stock option
plan that provides for the grant of nonstatutory stock options
automatically on January 1 of each calendar year commencing on January 1,
1996. The Company has reserved 100,000 shares for issuance under the
plan. Each outside director shall be granted an option to purchase 2,500
shares of Class A common stock at fair market value, vesting 50% on each
of the first two anniversaries of the grant.
Under the above plans 558,532 shares are available for future grant or
purchase.
On July 1, 1996 all 128,333 of the then outstanding employee stock
options were repriced to the current market price, using the existing
exercise durations.
The Company had the following option activity in 1996 and 1997:
Number Weighted-Average
of Exercise Price
Shares Per Share
----------- ----------------
Balance - December 31, 1995 221,833 $3.74
Granted 251,500 $2.32
Repriced options:
Original (128,333) $5.74
Repriced 128,333 $2.31
Cancelled (16,833) $2.98
Balance - December 31, 1996 456,500 $2.99
Granted 170,562 $1.39
Cancelled (98,167) $4.36
-----------
Balance - December 31, 1997 528,895 $2.21
===========
Options for 342,166 shares are exercisable as of December 31, 1997 at
exercise prices ranging from $1.13 to $10.00 and a weighted-average
exercise price of approximately $2.29 per share, with a weighted-average
remaining contractual life of approximately eight years.
<PAGE>
NOTE G - STOCK PLANS (CONTINUED)
[1] Stock plans: (Continued)
The exercise prices of options outstanding at December 31, 1997 range
from $1.02 to $10.00 per share and have a weighted-average exercise price
of approximately $2.21 per share, with a weighted-average remaining
contractual life of approximately eight years.
All options outstanding at December 31, 1997 are categorized by the
following ranges in the table below:
Weighted-Average Number of
Range Exercise Price Shares
---------------- ---------------- ----------
$1.00 to $4.00 $1.76 465,395
$4.00 to $10.00 $5.50 63,500
----------
528,895
==========
[2] Stock-based compensation:
The Company has adopted the disclosure-only provisions of SFAS No. 123,
but applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its plans. There was no compensation
expense recognized in 1997 or 1996. If the Company had elected to
recognize compensation cost for the plans based on the fair value at the
grant date for awards granted as of January 1, 1995 under the plans,
consistent with the method prescribed by SFAS No. 123, net income or loss
per share would have been changed to the pro forma amounts indicated
below:
Year Ended
December 31,
----------------------------
1997 1996
------------ ------------
Net income (loss) As reported $ 511,464 $ (905,415)
Pro forma 370,530 (1,019,725)
Net income (loss) per share As reported .24 (.52)
Pro forma .17 (.57)
The fair value of the Company's stock options used to compute pro forma net
income (loss) and net income (loss) per share disclosures is the estimated
present value at grant date using the Black-Scholes option-pricing model with
the following weighted-average assumptions for 1997 and 1996: dividend yield of
2.5%; expected volatility of 40%; a risk-free interest rate of between 5.25% and
7.88%; and an expected holding period of 2 to 5 years.
The per share weighted-average grant-date fair value of options granted during
the years ended December 31, 1997 and 1996 was $.20 and $1.23, respectively.
<PAGE>
NOTE H - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share at December 31, 1997:
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS:
Net income and income available
to common stockholders $ 511,464 2,168,783 $.24
Effect of Dilutive Securities:
Convertible preferred stock 170,472
Stock options 21,078
----------- --------- ----
Diluted EPS:
Income available to common
stockholders $ 511,464 2,360,333 $.22
=========== ========= ====
Options to purchase 391,895 shares of common stock at $1.05 to $10.00 per share,
the unit purchase option and warrants (see Note F) were outstanding during 1997
but were not included in the computation of diluted EPS because the exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
At December 31, 1996 the effect of dilutive securities has not been considered
as they are antidilutive.
NOTE I - INCOME TAXES
At December 31, 1997, the Company had no current tax liability or deferred tax
liability. It had deferred tax assets due to net operating loss carryforwards
and research and development tax credits amounting to approximately $1,820,000
and $140,000, respectively, all of which had been fully reserved because the
likelihood of realization of the benefits cannot be established. The net income
for 1997 results in no current tax liability because of the utilization of the
net operating loss carryforwards. The expected tax expense or benefit derived by
applying statutory tax rates to the income or loss before income taxes has been
offset by the increase or decrease in the valuation reserve.
At December 31, 1997, the Company had a net operating loss carryforward
amounting to approximately $4,555,000 which expires at various dates through
2011.
The Company is subject to Internal Revenue Code provisions which limit the loss
carryforwards available for use in any given year if significant changes in
ownership occur.
<PAGE>
NOTE J - COMMITMENTS
[1] Facilities lease:
The Company leases its research facilities under an operating lease that
expires August 31, 2002 with an option to extend for five additional
years. The lease requires payment of real estate taxes and other common
area maintenance expenses. Rent expense for the years ended December 31,
1997 and December 31, 1996 was $32,000 and $34,000, respectively.
Future minimum rental payments due during the years ended December 31,
amount to approximately:
1998 $ 26,100
1999 30,150
2000 31,500
2001 32,850
2002 22,500
-----------
$ 143,100
[2] Employment agreements:
The Company has entered into employment agreements with its principal
officers providing for minimum base compensation and severance pay. For
the years ended December 31, 1997 and December 31, 1996, the aggregate
amount paid under these agreements was $280,000. The employment
agreements provide for inflationary adjustments and are subject to other
increases based on the Board of Director's approval. Two employment
agreements are in effect which expire December 31, 2000. Amounts to be
paid under these agreements in 1998 total approximately $305,000.
[3] Royalty agreement:
A royalty agreement with one of the inventors who assigned certain patent
rights to the Company provides for royalties based on a percentage of the
licensing revenues received by the Company from products falling within
the scope of the patent rights. The percentage varies from 1.5% to 5%
depending on the gross revenues received, with maximum royalty payments
under the agreement not to exceed $2,884,000. Through December 31, 1997
no royalties have been earned under this agreement.
[4] Consulting agreements:
The Company has entered into various scientific advisory and consulting
agreements, including agreements with certain directors of the Company,
to support its development activities. These agreements generally expire
over several future years. Amounts charged to operations in connection
with these agreements for the years ended December 31, 1997 and December
31, 1996 amounted to approximately $42,400 and $162,564, respectively.
The Company expects to incur similar or higher expenses in future years.
<PAGE>
NOTE J - COMMITMENTS (CONTINUED)
[5] Finder's fees:
The Company has entered into an agreement whereby it pays a fee for
agreements entered into with certain companies for investment or revenue
purposes. A percentage of the investment or revenue is paid up to a
maximum of $150,000 with increases if more than one product is
commercialized under the agreements.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act
The Company incorporates herein by reference the information appearing
under the caption "Board of Directors" in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's 1998 Annual Meeting of Stockholders.
Information concerning executive officers of the Company is contained
in Part I of this report under the caption "Executive Officers."
Item 10. Executive Compensation
The Company incorporates herein by reference the information appearing
under the caption "Executive Compensation" in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's 1998 Annual Meeting of Stockholders.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The Company incorporates herein by reference the information appearing
under the caption "Principal Stockholders" in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's 1998 Annual Meeting of Stockholders.
Item 12 Certain Relationships and Related Transactions
The Company incorporates herein by reference the information appearing
under the caption "Certain Transactions" in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's 1998 Annual Meeting of Stockholders.
<PAGE>
Item 13 . Exhibits, List and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits on Page E-1. Compensatory plans and arrangements
required to be filed as exhibits are as follows:
1 1993 Stock Option Plan.
2 Form of Stock Option Agreement to be entered into between the Company
and each option holder.
3 1994 Employee Stock Purchase Plan.
4 1995 Non-Employee Directors' Stock Option Plan.
5 Employment Agreement, dated December 23, 1995, between the Company
and Dr. Jack H. Kessler.
6 Employment Agreement, dated July 1, 1996, between the Company and
Paul C. Desjourdy.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the year
ended December 31, 1997.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SYMBOLLON CORPORATION
By: /s/ Paul C. Desjourdy
------------------------
Paul C. Desjourdy
Executive Vice President, Chief Financial Officer
Date: March 30, 1998
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ Jack H. Kessler Executive Vice-President, March 30, 1998
- ----------------------- Chief Scientific Officer,
Jack H. Kessler Secretary and Chairman
of the Board of Directors
(Principal Executive Officer)
/s/ Paul C. Desjourdy Executive Vice President March 30, 1998
- ----------------------- Treasurer, Chief Financial
Paul C. Desjourdy Officer, and Director (Principal
Financial and Accounting Officer)
/s/ James C. Richards Director March 30, 1998
- -----------------------
James C. Richards
<PAGE>
Symbollon Corporation
Index to Exhibits
3.1 Certificate of Incorporation of the Company; including Certificate of
Designations, Preferences and Rights of Series A Preferred Stock of the
Company. (previously filed as an exhibit to Form 10-QSB for the quarter
ended September 30, 1996 and incorporated by reference.)
3.2 By-Laws of the Company. (1)
3.3 Agreement of Merger, dated as of August 4, 1993, between the Company
and Symbollon Corporation, a Massachusetts corporation, (including
Certificate of Merger and other state filings). (1)
4.1 Form of Warrant Agreement among the Company, D.H. Blair Investment
Banking Corp. (the "Underwriter") and American Stock Transfer and Trust
Company, including forms of Class A and Class B Warrant Certificates.
(1)
4.2 Form of Specimen Class A Common Stock Certificate. (1)
4.3 Form of Stock Restriction Agreement among the Company, the Class B
Stockholders and the Underwriter. (1)
10.1 1993 Stock Option Plan of the Company, as amended. (incorporated by
reference to Exhibit A to the Company's 1994 Annual Stockholders
Meeting Proxy Statement filed under cover of Schedule 14A dated
May 4, 1994.)
10.2 Form of Employment Agreement, effective July 1, 1996, between the
Company and Paul C. Desjourdy. (previously filed as an exhibit to Form
10-QSB for the quarter ended June 30, 1996 and incorporated by
reference.)
10.3 Employment Agreement, dated December 23, 1995, between the Company and
Dr. Jack H. Kessler. (previously filed as an exhibit to Form 10-KSB for
the year ended December 31, 1995 and incorporated by reference.)
10.4 Commercial Lease dated June 5, 1997, between Pine Street Realty Trust
and the Company. (previously filed as an exhibit to Form 10-QSB for
the quarter ended March 31, 1997 and incorporated by reference.)
10.5 Loan and Security Agreement, dated March 26, 1997, between the Company
and Silicon Valley Bank. (previously filed as an exhibit to Form 10-QSB
for the quarter ended March 31, 1997 and incorporated by reference.)
10.6 Form of Indemnification Agreement between the Company and each officer
and director of the Company. (1)
10.7 Marketing and Supply Agreement, dated January 11, 1995 between the
Company and West Agro. (previously filed as an exhibit to Form 8-K of
the Registrant dated January 11, 1995 and incorporated by reference). *
10.8 Agreement, dated August 31, 1992 among the Company, Dr. Jack H. Kessler
and Dr. Robert Rosenbaum. (1)
10.9 Promissory note dated August 1, 1993 issued by the Company to Dr. Jack
Kessler. (1)
10.10 Form of Stock Option Agreement to be entered into between the Company
and each option holder. (1)
10.11 Stock Purchase Agreement, dated August 14, 1996, among the Company,
Anthony J. Cantone and Jack H. Kessler. (previously filed as an exhibit
to Form 10-QSB for the quarter ended September 30, 1996 and
incorporated by reference.)
10.12 Consultant Agreement between Dr. Mason and the Company dated June 1,
1994 (previously filed as an exhibit to Form 10-QSB for the quarter
ended June 30, 1994 and incorporated by reference).
10.13 1994 Employee Stock Purchase Plan of the Company. (incorporated by
reference to Exhibit B to the Company's 1994 Annual Stockholders
Meeting Proxy Statement filed under cover of Schedule 14A dated
May 4, 1994.)
10.14 1995 Non-Employee Directors' Stock Option Plan of the Company.
(previously filed as an exhibit to Form 10-QSB for the quarter ended
June 30, 1995 and incorporated by reference.)
10.15 Collaboration and License Agreement, dated May 14, 1996, between the
Company and Oclassen Pharmaceuticals, Inc. (previously filed as an
exhibit to Form 10-QSB for the quarter ended June 30, 1996 and
incorporated by reference.), as amended on August 14, 1997. (previously
filed as an exhibit to Form 10-QSB for the quarter ended September 30,
1997 and incorporated by reference.) *
10.16 Collaboration and Sale/License Agreement, dated August 4, 1997, between
the Company and Bausch & Lomb Pharmaceuticals, Inc. (previously filed
as an exhibit to Form 10-QSB for the quarter ended June 30, 1997 and
incorporated by reference.) *
10.17 Stock Purchase Agreement, dated August 4, 1997, between the Company and
Bausch & Lomb Pharmaceuticals, Inc. (previously filed as an exhibit to
Form 10-QSB for the quarter ended June 30, 1997 and incorporated by
reference.)
11.1 Statement re Computation of Earnings per Share.
23.1 Consent of Richard A. Eisner & Company, LLP
27.1 Financial Data Schedule
(1) Incorporated by reference to the corresponding exhibit number of the
Registration Statement on Form SB-2 (Registration No. 33-68828) filed on
November 24, 1993 and declared effective on December 7, 1993.
* Indicates that material has been omitted and confidential treatment has been
granted or requested therefore. All such omitted material has been filed
separately with the Commission pursuant to Rule 24b-2.
Exhibit 11.1
SYMBOLLON CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
The Years Ended December 31,
-------------------------------------
1997 1996
-------------- --------------
Net Income (Loss) ..................... $ 511,464 $ (905,415)
Preferred Stock Dividend............... (15,233)
-------------- --------------
Net Income (Loss) on Per Share Basis... $ 511,464 $ (920,648)
============== ==============
Net Income (Loss) per common share:
Weighted average common shares
outstanding........................ 2,868,783 2,434,019
Shares subject to restriction...... (700,000) (700,000)
-------------- --------------
2,168,783 1,734,019
============== ==============
Net Income (Loss) per common share..... $ 0.24 $ (0.52)
============== ==============
Net Income (Loss) per common share - assuming dilution:
Weighted average common shares
outstanding........................ 2,868,783
Weighted average dilutive potential
common shares outstanding.......... 191,550
Shares subject to restriction...... (700,000)
--------------
2,360,333
==============
Net Income per common share
- assuming dilution (1)............ $ 0.22
==============
(1) For the year ended December 31, 1996, there is no difference between basic
and duluted loss per share.
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of Symbollon Corporation of our report dated January 22,
1998, which appears in this annual report on Form 10-KSB for the year ended
December 31, 1997.
Richard A. Eisner & Company, LLP
Cambridge, Massachusetts
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED FINANCIAL STATEMENTS OF SYMBOLLON CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AS FILED IN THE FORM 10-KSB.
</LEGEND>
<CIK> 0000912086
<NAME> Symbollon Corporation
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,527,865
<SECURITIES> 0
<RECEIVABLES> 24,972
<ALLOWANCES> 0
<INVENTORY> 73,629
<CURRENT-ASSETS> 2,701,622
<PP&E> 263,330
<DEPRECIATION> 116,462
<TOTAL-ASSETS> 3,004,011
<CURRENT-LIABILITIES> 70,603
<BONDS> 0
500,000
0
<COMMON> 2,916
<OTHER-SE> 2,433,408
<TOTAL-LIABILITY-AND-EQUITY> 3,004,011
<SALES> 376,660
<TOTAL-REVENUES> 1,697,349
<CGS> 178,531
<TOTAL-COSTS> 178,531
<OTHER-EXPENSES> 562,360
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,224
<INCOME-PRETAX> 511,464
<INCOME-TAX> 0
<INCOME-CONTINUING> 511,464
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 511,464
<EPS-PRIMARY> .24
<EPS-DILUTED> .22
</TABLE>