As filed with the Securities and Exchange Commission on June 23, 2000
Registration No.
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
ELECTROPHARMACOLOGY, INC.
(Exact name of registrant as specified in charter)
Delaware 95-4315412 2834
--------------------- ----------------------- ----------------------
(State or other (IRS Employer Identification (Primary Standard
jurisdiction of No.) Industrial Classification
Incorporation or Code Number)
organization)
ELECTROPHARMACOLOGY, INC.
12085 RESEARCH DRIVE
ALACHUA, FLORIDA 32615
Telephone: 904-462-2249
Telecopier: 904-462-0985
(Address including zip code, and telephone number, including
area code, of registrant's principal executive offices
------
Arup Sen, Ph.D.
Electropharmacology, Inc.
12085 Research Drive
Alachua, Florida 32615
904/462-2249
Telecopier: 904/462-0985
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
COPIES OF ALL COMMUNICATIONS TO:
---------------------
Wendy Mitchler, Esq.
2691 East Oakland Park Boulevard
Suite 200,
Fort Lauderdale, Florida 33306
954/630-8295
Telecopier: 954/630-9602
Approximate Date of Commencement of Proposed Sale to Public: As
soon as practicable after effective date.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box: /X/
The Registrant hereby amends this registration statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission acting pursuant to said
Section 8(a) may determine.
<PAGE>
===============================================================================
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Maximum
Amount Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities To be Offering Price Per Offering Registration
to be Registered Registered Share (1) Price (1) Fee
------------------------------------ ------------------ -------------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Common Stock ................... 5,000,000 Shares $0.25 $1,250,000 $379
-----------
TOTALS: .......................... 5,000,000 Shares $0.25 $1,250,000 $379
===========
</TABLE>
-------------
(1) Estimated solely for calculation of the amount of the registration fee
calculated pursuant to Rule 457.
The Exhibit Index appears on page 111 of the sequentially numbered pages
of this Registration Statement. This Registration Statement, including exhibits,
contains 113 pages.
ii
<PAGE>
CROSS REFERENCE SHEET
ITEM SECTIONS IN PROSPECTUS
NO. -------------------------
1. Front of the Registration Statement
and Outside Front Cover of Prospectus ...... Cover Page
2. Inside Front and Outside Back Cover
Pages Of Prospectus ........................ Inside Front Cover Pages;
Table of Contents
3. Summary Information and Risk Factors ....... Prospectus Summary, High
Risk Factors
4. Use of Proceeds ............................ Prospectus Summary; Use
of Proceeds
5. Determination of Offering Price ............ Not Applicable
6. Dilution ................................... Not Applicable
7. Selling Security Holders ................... Not Applicable
8. Plan of Distribution ....................... Prospectus Summary; Plan
of Distribution
9. Legal Proceedings .......................... Legal Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons ........................ Management - Directors and
Executive Officers
11. Security Ownership of Certain Beneficial
Owners and Management ...................... Principal Shareholders
12. Description of Securities .................. Description of Common
Stock; Dividend Policy
13. Interest of Named Experts and Counsel....... Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities ................................ Management-Limited
Liability and
Indemnification of
Directors
15. Organization within Last Five Years ........ Management's Discussion
and Analysis
16. Description of Business .................... Prospectus Summary; High
Risk Factors; Our Business
17. Management's Discussion and Analysis or
Plan of Operation .......................... Management's Discussion
and Analysis
18. Description of Property .................... Our Business
19. Certain Relationships and Related
Transactions ............................... Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters......................... High Risk Factors; Certain
Market Information
Description of Common
Stock; Dividend Policy
21. Executive Compensation ..................... Executive Compensation
22. Financial Statements ....................... Index to Financial
Statements
23. Changes In and Disagreements With
Accountants On Accounting and Financial
Disclosure ................................. Changes in and
Disagreements with
Accountants on
Accounting and Financial
Disclosure
iii
<PAGE>
[GRAPHIC OMITTED]
5,000,000 Shares of Common Stock
The shares are being offered on a "best efforts" basis through officers
and directors of Electropharmacology, Inc.
Electropharmacology's common stock is quoted on the OTC Bulletin Board
under the symbol 'EPHI'. The last reported sale price of the common stock
on June 23, 2000 was $.21 per share.
=======================================================================
Price to Proceeds Before
Public Commissions Expenses to EPI
Per Share ......... $ $ $
Total.............. $ $ $
-----------------------------------------------------------------------
This investment involves a high degree of risk. You should purchase these
securities only if you can afford a complete loss. See "High Risk Factors"
beginning on page 5. These are speculative securities.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------------
The date of this prospectus is __________, 2000.
<PAGE>
PROSPECTUS SUMMARY
Our Business
Electropharmacology, Inc. doing business as Gemini Health Technologies
Inc. is a biotechnology company specializing in creating novel products for
improving the treatment of complex human diseases such as cancer, wound,
infection, inflammation, and tissue degeneration associated with aging or
autoimmune disorders. Our products combine commercially feasible developments
of two proprietary technologies:
DRUG DELIVERY - targeting drugs preferentially to diseased tissues and
DRUG DESIGN - creating drugs to target specific genes and proteins.
Our primary focus is on products for diseases that affect superficial
tissues such as skin, breast, brain, prostate and joints. We also make and
sell custom products for genomics research.
We were incorporated in Delaware in 1995. Our corporate offices are
located at 12085 Research Drive, Alachua, Florida 32615. Our telephone number
is 904-462-2249.
The Offering and Our Securities
Securities Offered................ 5,000,000 shares of common stock
Offering Price.................... $0.50 per share (based on estimated market
market price of $.50 at time of offering)
Estimated Net Proceeds to Us ..... $2,210,000
OTC Bulletin Board Symbol ........ 'EPHI'
Shares of Common Stock Outstanding:
Prior to the Offering..... 17,550,308 shares of common stock
After the Offering........ 22,550,308 shares of common stock
(assuming all 5,000,000 shares
offered hereunder are sold).
In addition to the shares of common stock that will be outstanding after
the offering, we will have 2,752,821 warrants, 1,345,988 options, 481,879
shares of common stock issuable under contract, and 8,697 shares of preferred
stock convertible into 7,569,894 shares of common stock.
2
<PAGE>
Use of Proceeds................... We will use a significant portion of the
proceeds to advance our most promising
product candidates based on our
technologies toward human clinical trials.
During the next eighteen months, we plan
to test our prototype drug delivery
products to determine the extent to which
our proprietary technologies increase the
delivery of certain types of prescription
dermatology drugs through the skin. The
results will be used to pursue corporate
partners who may be interested in sub-
licensing the use of our technology to
improve the delivery of their drugs. We
also plan on using a portion of the
proceeds to screen our small molecule
drug library in laboratory tests on
diseased cells and selected gene targets
being identified through genomics research.
These results will be used to select our
most promising small molecule drug
candidates and their initial disease
applications in infection or inflammation.
We will seek corporate partners to pursue
further development of these initial
products. We also intend to use a portion
of the funds to expand our web-based
business of making custom products for use
in the research, drug discovery and
database markets in the growing field of
genomics. The balance of the proceeds will
be used for working capital and general
corporate purposes.
Market for Our Securities
Our common stock has been trading on the Over The Counter
Bulletin Board since our stock was de-listed from the NASDAQ
Small Cap listing in September 1997. There is only limited
trading of our stock and we can give no assurance that a market
in the stock will be sustained in the future.
Summary Financial Data
The following summary financial data summarizes the financial
statements at the end of this prospectus. Those financial
statements include notes which the investor should read. The
financial statements at the end of this prospectus for the years
ended December 31, 1998 and 1999 have been audited by Sweeney,
Gates & Co., independent certified public accountants. The
results of operations in the past do not necessarily indicate the
results to be expected in the future.
3
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS DATA
Years Ended 3 Months Ended
------------------------------- -----------------------------
12/31/99 12/31/98 03/31/00 03/31/99
------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales ........................ $ 513,021 $ 620,484 $ 57,912 $ 124,163
Gross Profit (loss)............... (52,080) 210,397 (7,990) 19,525
Net Loss Available to Common
Stockholders.................. (1,710,947) (15,490,504) (574,294) 617,484
Basic and Diluted Loss Per Share.. (.11) (2.15) (.03) (.04)
Weighted Average Shares Out-
standing Used in Computing
Basic and Diluted Loss Per
Share .......................... 16,101,254 7,214,469 17,268,325 15,276,758
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
---------------------------------------------------
As adjusted
DECEMBER 31, March 31, 2000 for sale of
1999 UNAUDITED 5,000,000 shares
------------- ---------------- ----------------
<S> <C> <C> <C>
Cash ................................... $ 6,577 $ 41,305 $ 2,251,305
Current Assets ......................... 348,128 240,332 2,450,332
Total Assets ........................... 691,453 565,380 2,775,380
Current Liabilities .................... 2,157,618 2,320,517 2,320,517
Long-term Liabilities and Mandatorily
Redeemable Preferred Stock ............ 8,976,161 9,181,589 9,181,589
Shareholders' Deficit .................. (10,442,326) (10,936,726) (8,726,726)
</TABLE>
The "As Adjusted" column in the Balance Sheet Data assumes the sale of
all 5,000,000 shares at an offering price of $.50 in this offering and the
use of proceeds of $2,210,000 after estimated offering expenses of $40,000
and commissions of $250,000 as if that sale had taken place on March 31, 2000.
4
<PAGE>
HIGH RISK FACTORS
You should carefully consider the following risks before making an
investment decision. The trading price of our securities could decline due to
any of these risks, and you could lose all or a part of your investment. You
also should review the other information in this prospectus.
We Will Need to Successfully Restructure a Defaulted Loan From Our
Major Creditor. Our long-term debt consists primarily of a secured loan to
an insurance company in the current principal amount of $1,163,090, which our
company guaranteed in connection with the acquisition of Gemini Biotech, Ltd.,
a biotechnology company, in August 1998. Collateral for the loan includes
Gemini's assets as well as 65 medical devices our company owns for research
purposes. Gemini is not been in compliance with the financial covenants of the
loan principally relating to net worth and working capital. In addition, we
stopped making the required monthly payments of $19,000 on the loan in April
1999. The loan is currently in default and the lender has the right to
accelerate payment of the loan although it has not yet notified us of its
intent to accelerate. We believe that this loan must be restructured and
reduced in order for our custom products business to continue to operate.
We are currently conducting settlement negotiations with the lender in an
attempt to reach a mutually acceptable restructuring and reduction of this
loan obligation; however, we can not assure you that we will succeed in our
negotiations.
We Will Require Additional Financing To Continue Our Business. Even if
we are able to sell all 5,000,000 shares in this offering, it will be necessary
for us to obtain additional financing in 2001 or 2002 in order for us to
have adequate cash to continue to support our business and advance our
technologies. If the net proceeds to vary our company from the maximum
anticipated proceeds due to a difference in the stock price or if all the
shares being offered are not sold, we may need to obtain additional financing
in 2000 to continue our business. We can not assure you that we will be able
to obtain additional financing on terms acceptable to us, if at all.
Depending on the amount of future funds we raise and the terms of such
financing, especially if we sell additional shares of our company, there may
be a significant dilution suffered by current investors. Some of the major
factors that will affect our need to raise more money are:
5
<PAGE>
- How fast our testing of the drug delivery patches with
dermatology drugs and the laboratory studies on small
molecule drugs proceed;
- Whether we get additional federal grants to fund, at least
in part, any of our testing;
- Whether we need to hire additional staff or buy equipment
to grow the web-based custom product business to capitalize
on the growth of the research, drug discovery and database
markets in genomics;
- Whether we are able to enter into corporate partnerships or
license agreements for our technologies and the terms of
these agreements; and
- Whether we need more funds to expand our patent portfolio.
If this Offering is Not Completed We Will Not Have Sufficient Cash to
Conduct Our Operations. Our cash flow from our web-based sales of custom
products for genomics research and from our sale of common stock of ADM
Tronics Unlimited that we own is not sufficient to pay for all of our
expenses on a current basis. We have received the cooperation of some of
our suppliers who are continuing to supply materials and services to us even
though we are in arrears on our payments to them. We are relying upon the
completion of this offering to start advancing our technologies and to
support the production of custom products that we sell through the Internet.
We Are Not Profitable and Will Continue to Incur Losses for
the Foreseeable Future. Our company was incorporated in 1995, and
following a major asset sale and corporate reorganization in
1998, consolidated its multiple operational sites into our
current location. During the entire time since inception, we have
experienced significant operating losses. Despite changes
initiated by our management, you cannot be certain that we will
ever become profitable.
There is Substantial Doubt About Our Ability to Continue as
a Going Concern. Revenues from our previous business of renting
and selling a medical device ceased in 1998 because we sold
this business. We started selling custom products for genomics
research and drug discovery which generated only $513,021 in
revenues in 1999 and $57,912 in revenues in the first three
months of 2000. For the year ended December 31, 1998, we had a
net loss of $15,490,504. Our 1998 losses included a one-time
write-down of $15,542,607 in purchased research and development
and inventory. For the year ended December 31, 1999, we had a net
loss of $1,710,947. For these reasons and others, our auditor's
opinion contains an explanatory paragraph expressing doubt as to
our ability to continue as a going concern.
We May Lose Rights to Our Future Products. Our ability to retain rights
to the drug delivery patches we have licensed from Elan Pharmaceutical depends
on our continued ability to develop potential products based on these
technologies. If we fail to do so, the licensor may revoke the license and
we will lose the rights to these products.
6
<PAGE>
Our Business Will Not Survive if We Do Not Advance Our Technologies
into Products or Enter into Agreements with Corporate Partners. To achieve
our strategic goals, we must, alone or with others, successfully develop,
obtain regulatory approval for, introduce and market new products. If we do
not develop new products, our business will be limited or may not survive.
Neither of our two drug delivery technologies nor any of our small molecule
drug candidates have undergone the testing necessary to prove their
commercial feasibility. The use of our drug design technologies to make
custom products for research and drug discovery in the emerging genomics
field is unlikely to yield sufficient revenues to sustain our operations. We,
by ourselves or with any prospective corporate partners, may not be able to
develop new products. Even if a product is developed, it may not be approved
for commercial sale or may not be successfully marketed.
We Will Be Dependent on Corporate Partners. Even if we are able to
raise more funds in the future and continue to advance our technologies, our
resources and expertise will be limited, especially since our technologies
have many possible applications in different products for different diseases.
Our business success will depend on our ability to form corporate
partnerships with larger companies with the resources necessary to complete
the development of products and then to manufacture and market these
products. We expect to be dependent on funding from these partners and other
license fees, or royalties or profit sharing from our partners' sales, to
continue developing our technologies. The major risks associated with our
strategy of taking our technologies into products through corporate
partnerships include:
7
<PAGE>
- Competition - Almost all small companies look for
corporate partners. We will face competition from those
companies who have similar drug delivery technologies or
small molecule drugs, including those that are in more
advanced stages. Also, the potential partners' in-house
research and development groups will be competing with us
for the same resources that we will have to draw upon.
- Product Licensing - The decision making process in
larger companies to license a product candidate or
technology from another company such as ours is often
different from that of ours. The initial testing of our
patches to improve the delivery of the drug candidates we
select may not convince a potential licensor. Similarly,
the laboratory tests or animal models we select for testing
our small molecule drugs may be different from what a
potential partner would have chosen. We cannot predict if
our strategy of initial product testing will satisfy a
corporate partner to fund ongoing development of our
products.
- Product Development - After selecting one or
more of our products, the partner's development and
marketing strategy is likely to be different from ours and
will be influenced by factors that we cannot predict and
over which we will not have any control. Since we depend
upon the steady progress of our products through the
development path, a slower path taken by our partner will
have a negative effect on our future revenues and potential
profits.
- Future Events - If the internal strategy of the
partner changes later on, they may abandon our products.
Regaining the rights to our products and finding another
partner may be difficult and cause significant delays in
our ability to generate revenues and profits.
- Alternative Opportunities - Larger companies will explore
multiple technologies and products for the same medical
condition. Therefore, they are likely to enter into
agreements with our competitors for similar products and
medical conditions as our products. Depending on how the
other products advance, the partner may slow down or
abandon our products and terminate the agreement with us.
- Relationship - We intend to leverage each of our
technologies with different corporate partners for
different medical conditions. Managing a good relationship
with multiple partners is a difficult task. At this time,
we do not have a track record in making and managing
corporate partnership agreements.
8
<PAGE>
Our Ability to Develop or Commercialize Products is Impaired by
Extensive Government Regulation. Extensive regulation puts a burden on our
operations. These regulations apply to all competitors in our industry.
However, other industries in which you may be considering an investment are
not as heavily regulated. Our research and development activities, especially
preclinical animal studies and clinical trials, are regulated by several
different government agencies (for example, the Department of Human and
Health Services, and the Food and Drug Administration). Manufacturing and
marketing of our products are subject to additional regulations by the Food
and Drug Administration in the U.S. and its counterparts in foreign
countries. All of these regulations reduce our ability to respond to business
opportunities and to introduce new products. We also face other regulatory
burdens such as the Occupational Safety and Health Act (OSHA) and
Environmental Protection Agency (EPA) with respect to our laboratory
operations. Failure to comply with applicable regulatory requirements can,
among other things, result in fines, suspensions of regulatory approvals
needed to sell our products, product recalls, operating restrictions and
criminal prosecution. Additional government regulation may be established in
the future that could prevent or delay regulatory approval of our product
candidates.
The Cost and Length of the Regulatory Process May Prevent or Delay
Marketing of Products Based on Our Technologies. We, or any of our corporate
partners, must conduct extensive testing and results analyses in order to
satisfy the requirements for the approval of any product that is created
using our drug delivery technology or any formulation of the small molecule
drugs we now have or create in the future. The regulatory approval process
takes many years and requires the expenditure of substantial resources. We do
not have such funds and can not be sure that we will be able to raise such
funds or that our prospective corporate partners will agree to spend such
funds.
The Early Stage Nature of Our Technologies Raises Questions About
Successful Development of Products. Our technologies are at an early stage.
Neither we nor any other company has successfully developed and sold the
types of products we plan to develop using our technologies. Therefore,
there is no certainty that we will be able successfully to develop,
manufacture and market our products. The major product uncertainties
include:
- We do not know if our drug delivery technologies, iontophoresis
patches or PEMS braces, will lead to a product that will
increase the delivery of any drug that will help patients
sufficiently enough to justify product approval and manufacturing
or generate market appeal;
- The field of drug design and creating such drugs to target a
protein or gene that controls a complex disease is just emerging
and we cannot predict if, how, or when a small molecule drug will
be commercially successful.
9
<PAGE>
We Are Not Sure About the Valuation of Acquired Businesses,
Technologies and Licenses, Divested Product(s), and License Grants.
The success of our business and the achievement of our financial
objectives are expected to be derived through acquiring licenses
or businesses as well as granting licenses or selling product lines
to others for consideration. Any determination of potential return
on investment in our common stock will be affected by a variety of
factors:
- The value we have paid for any of the businesses or licenses
that we have acquired;
- The consideration we have received for any product or business
line or technology licenses that we grant to a third party
relative to the actual realizable value of the product or
technology;
- The consideration we pay for any future technology or product
or business that we acquire; and
- The consideration that we receive in the future from a future
corporate partner or a third party for different market
applications of our technologies or products.
The determination and financial reporting of these elements is difficult
because of the early stage of development of our current technologies and
the technologies we expect to acquire for the foreseeable future. Therefore,
many of the standard criteria used in estimating return on investment are not
applicable to our business for the foreseeable future.
We Are Uncertain About Our Patents, Confidential Information and Trade
Secrets and The Rights of Third Parties. Patent protection for our
technologies and products will be a critical factor in our ability to raise
funds by selling our common stock in the future or engaging corporate
partners to fund product development. Without the possibility of reasonable
patent protection, it will be difficult to justify the time and money
investment that is necessary to complete the development of a product. The
major risk factors regarding the types of technologies and products we are
developing include:
- The rules and criteria for receiving an issued patent to claim
biotechnology products or processes are still developing
and unclear. We cannot predict our ability to obtain
patent issuance from either the United States Patent and
Trademark Office or its foreign counterparts. We are also
not sure as to the scope of the claims that would be
allowed by the different patent offices. Even after a
patent issues, another party may challenge it and the
patent office may either then declare it invalid or reduce
the scope of the claim that was originally granted. One
recent change during the last five years in The United
States Patents and Trademark Office also has changed the
life of validity of a patent. Patents issued or filed
before June 1995 are valid for 17 years from the issue
date. However, patent applications filed after June 1995
are valid for 20 years from the date of filing the patent
application and thus may have a shorter life if it takes
longer than three years from the date of filing to receive
an issuance. In the biotechnology industry, sometimes it
takes several years of processing before a patent is issued
based on a patent application.
10
<PAGE>
- The cost of prosecuting patents can be high, especially in
foreign countries where each country has its own office and
many offices require expensive translation from the
original patent application that we usually file in the
English language. We may not have the financial resources
to pursue patent protection in all major countries where
our products may be marketed.
- Even after we receive a patent, we may still need to obtain
licenses from others whose patents may be of a broader
scope. In addition, others may challenge the validity of
our patents or assert that we are infringing on their
patent claims. Even if these activities or assertions by
others may be incorrect, the process for resolving these
arguments in the court system is long, expensive and
unpredictable. Similarly, others may violate our patent
rights and start producing a competing product. To enforce
our patent rights against them in a court of law will be
expensive. Since the rules and criteria regarding patent
claims in biotechnology are still evolving, we cannot
predict the outcome of any litigation with respect to our
and others' patent rights.
- If we decide or we are forced to obtain a license for another
party's patent in order to use our technology, we cannot be
sure that such other party will agree to give us a license
on reasonable terms, if at all. In this event, we or our
corporate partner may have to abandon the development or
marketing of the product. Since we expect to be dependent
upon corporate partners for the development and marketing
of many of our products, the partner's view about another
party's patent may be different than ours. If the partner
decides that another party's patent blocks our products
then the partner may stop developing or marketing the
product even though we may not agree with that decision. We
will then need to pursue the expensive and time consuming
process of regaining the rights to our products back from
the partner and trying to either fund it ourselves or find
another corporate partner.
We also rely upon trade secret protection for some of our confidential and
proprietary information. All of our employees are required to sign a
confidentiality and non-disclosure agreement prohibiting them from disclosing
or using our trade secrets or proprietary information. However, we cannot
guarantee that all employees will abide by the agreements, especially after
they leave our employment, and such agreements are often difficult to
enforce.
Although we have licensed and have been granted some patents, we cannot be
sure that others will not develop technologies or products around the scope
of our patent claims and compete with us. We are aware of a number of
pharmaceutical and biotechnology companies and many academic researchers
working on drug delivery and drug design technologies. Many of the companies
have significantly more cash and other resources than we have. Therefore,
the risk of competition from many of these companies is substantial.
11
<PAGE>
Our Marketing Ability is Limited. We have achieved only minimal
marketing success and only in selling custom products for molecular research
and genomics drug discovery through our web-based system. We have no
capability in marketing any of the drug delivery or custom drug products that
we believe will arise from our technologies.
We Have Not Held an Annual Meeting to Elect Directors since 1997. Under
Delaware law, any stockholder may apply to the Delaware Court of Chancery and
require us to hold a meeting to elect directors. If this occurs, the
composition of our company's board of directors could change based on the
stockholder vote.
You May Not be Able to Sell Your Shares Because There May Be a Limited or
No Market For Our Securities After this Offering. We cannot assure you that
a trading market will be sustained after completion of the offering or that
the market price of the common stock will remain at or above the public
offering price. The offering price is dependent on the trading price at the
time this prospectus becomes effective. Historically, the price of our
common stock has been volatile and has had little or no relationship to our
operating results, book value, net worth or financial criteria of value used
to evaluate other businesses.
You May have Difficulty Selling Your Shares Because Our Securities Are
Classified as Penny Stocks. For the foreseeable future, our common stock
will be sold only in the over-the-counter market in what are commonly known
as the "pink sheets" or the NASD Electronic Bulletin Board. Because our
securities are subject to the Securities and Exchange Commissions's penny
stock rules, broker-dealers will be restricted in their ability to sell the
securities in the open market. The "penny stock" trading rules impose
additional duties and responsibilities upon broker-dealers and salespersons
in recommending and effecting purchases of our stock. These "penny stock"
trading rules would adversely affect the ability of a holder of our common
stock to resell his or her shares because they have the effect of reducing
the number of potential purchasers. Many broker-dealers will not effect
transaction in penny stocks except on unsolicited basis in order to avoid
compliance with the "penny stock" trading rules. For these reasons, you
may have difficulty in selling your shares and may have difficulty in
obtaining accurate quotations of the market price of the shares.
Sales of Substantial Amounts of Common Stock in the Public Market
Following the Offering Could Adversely Affect the Market Price for the
Common Stock. In addition to the shares that will be sold in this proposed
offering, other current holders of our company's stock may decide to sell
some or all of their shares. Such sale of shares may significantly reduce
the share price at any time in the future.
FORWARD LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "High Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus
constitute forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements.
Such factors include, among other things, those listed under "Risk Factors"
and elsewhere in this prospectus.
12
<PAGE>
In some cases, you can identify forward-looking statements by terms such
as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the
negative of such terms or other comparable terminology.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance, or achievements. Moreover, neither
we nor any other person assumes responsibility for the accuracy and
completeness of such statements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus.
USE OF PROCEEDS
The net proceeds from the sale of the shares after deducting the
expenses of the offering will be approximately $2,210,000 if all 5,000,000
shares are sold. The following table summarizes our intended use of these
proceeds.
<TABLE>
<CAPTION>
Approximate Percent of
Use of Proceeds Amount Proceeds
--------------- ------ --------
<S> <C>
Research and Development
- testing of drug delivery device prototypes $1,000,000 45%
- testing of selected small molecule drugs 600,000 27%
- expansion of custom genomics products/services 100,000 5%
Working Capital 300,000 14%
General Corporate Purposes 210,000 9%
---------- ----
Total $2,210,000 100%
</TABLE>
We will use most of the funds raised in this offering to advance our
technologies, allocate a small portion to expand our web-based custom products
business for the genomics market and use the remainder for working capital and
general corporate purposes. The working capital and general corporate purposes
include payment of certain accrued payables that primarily consist of past
due payables to certain large vendors for laboratory supplies, as well as
previous legal and accounting fees. Depending on the amount of funds raised,
a portion of the funds designated for general corporate purposes may be used
to repay a portion of a loan from our company's largest secured creditor if
we are able to successfully restructure and reduce the debt. The amount of
funds to be spent in the different categories will be adjusted if the proceeds
to our company vary due to a difference in the stock price or if all of the
shares being offered are not sold. In the event we are unable to sell all
5,000,000 shares, our primary focus will be on testing the prototype flexible
patches for drug delivery through the skin and initial testing of one or two
of the most promising small molecule drug candidates. We will reduce funds
intended to be used for our web-based business, working capital and general
corporate purposes.
We also will have the discretion to change the amount of funds used for
each purpose.
13
<PAGE>
We may make temporary investments in bank certificates of deposit,
interest bearing, insured savings accounts, United States government notes,
bills or bonds and insured money market funds, until it is time to use the funds
for the purposes outlined above. Any income derived from these short-term
investments will be used for working capital.
DIVIDEND POLICY
You cannot expect to receive cash flow from this investment. We do not
anticipate paying cash dividends in the foreseeable future. We intend to
retain future earnings, if any, to fund the operation of our business.
CAPITALIZATION
The following table presents the capitalization of our company as
of March 31, 2000. The "As Adjusted" columns in the table presents the
capitalization taking into account the receipt of the estimated net proceeds
from the sale of all 5,000,000 shares at a price of $0.50 per share after
estimated offering costs of approximately $290,000 as if it had occurred
on March 31, 2000.
The capitalization of our company will not change if no shares are
sold under this "best efforts" offering. The table does not take into
account any shares which may be issued on exercise of warrants or
options, or conversion of preferred stock into common stock, or shares
which are currently issuable under contract.
<TABLE>
<CAPTION>
Actual As Adjusted
------ -----------
<S> <C> <C>
Short-term debt:
Current portion of long-term debt $ 1,408,738 $ 1,408,738
Current portion of capital leases 13,921 13,921
---------- ----------
$ 1,422,659 $ 1,422,659
========== ==========
Long-term debt:
Long-term debt $ 14,807 $ 14,807
Capital leases 7,593 7,593
Notes payable - related parties 65,926 65,926
---------- ----------
88,326 88,326
Mandatorily redeemable convertible
preferred stock, $.01 par value,
7,887 shares, issued and
outstanding 9,093,263 9,093,263
---------- ----------
Stockholders' deficit:
Convertible preferred stock, $.01 par
value, 9,992,113 shares authorized, no
shares issued and outstanding - -
Common stock, $.01 par value, 30,000,000
shares authorized; 17,268,325 shares
issued and outstanding and 22,268,325,
as adjusted 172,683 222,683
Additional paid-in capital 21,738,152 23,898,152
Accumulated other comprehensive loss (8,505) (8,505)
Accumulated deficit (33,081,056) (33,081,056)
------------ ------------
(11,178,726) (8,968,726)
Common stock reserved 242,000 242,000
------------ ------------
Total stockholders' deficit (10,936,726) (8,726,726)
------------ ------------
Total capitalization (deficit) $ (1,755,137) $ 454,863
============ ============
</TABLE>
14
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data summarizes the financial
statements included at the end of this prospectus. Those financial statements
include notes which the investor should read. The financial statements at the
end of this Prospectus for the years ended December 31, 1998 and 1999 have
been audited by Sweeney, Gates & Co., independent certified public
accountants. The results of past operations are not necessarily indicative of
future results.
<TABLE>
<CAPTION>
Year Ended Three Months Ended
--------------------------------- --------------------------------
12/31/99 12/31/98 03/31/00 03/31/99
-------------- ---------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ................................... $ 513,021 $ 620,484 $ 57,912 $ 124,163
Cost of sales................................ 565,101 410,087 65,902 104,638
Write-down of inventory...................... - 731,493 - -
Gross profit(loss)........................ (52,080) (521,096) (7,990) 19,525
Selling general and administrative........... 2,027,908 1,962,403 267,409 543,795
Research and development..................... 298,354 53,823 19,609 88,047
Impairment losses............................ - 14,811,114 - -
Total operating expenses.................. 2,326,262 16,827,340 287,018 631,842
Interest expense............................. 147,010 108,892 39,835 34,476
Net loss available to common stockholders.... (1,710,947) (15,490,504) (574,294) (617,484)
Basic and diluted loss per share............. (.11) (2.15) (.03) (.04)
Weighted average shares used in computing
basic and diluted loss per share............ 16,101,254 7,214,469 17,268,325 15,276,758
</TABLE>
<TABLE>
<CAPTION>
------------------------------
December 31, March 31,
1999 2000
------------- -------------
(UNAUDITED)
Balance Sheet Data:
<S> <C> <C>
Total Assets ........................... 691,453 565,380
Current Liabilities .................... 2,157,618 2,320,517
Long-term Liabilities and Mandatorily
Redeemable Preferred Stock ............ 8,976,161 9,181,589
Shareholders' Deficit .................. (10,442,326) (10,936,726)
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a review of our financial condition and results of
operations for the years ended December 31, 1998 and 1999 and for the
quarters ended March 31, 1999 and 2000. This review should be read together
with the financial statements and notes included at the end of this
Prospectus.
Introduction
We are a biotechnology company engaged in developing novel
products based on our proprietary drug delivery and drug design
technologies to treat complex diseases that are not effectively
treated by available drugs or treatment methods. We also generate
revenues from a Web-based service business that uses our drug design
expertise to design and sell custom products for research and drug
discovery in the genomics field.
All of our technologies are under development and not commercially marketed.
In addition, our Web-based custom products business currently is not
profitable. As a result, we need additional capital from financing,
corporate partnerships or federal grants in order to advance our technologies
toward commercial feasibility. If we are unable to obtain sufficient
additional funds in a timely manner, the development of our technologies and
our financial condition will be materially adversely affected.
Our company was originally incorporated under the laws of the State of
California in August 1990 under the name Magnetic Resonance Therapeutics,
Inc. We reorganized through a merger with and into Electropharmacology, Inc.,
a Delaware corporation, in February 1995. During 1998, we concluded a
corporate reorganization in order to focus on the biopharmaceutical
applications of our proprietary PEMS technology. We sold our previous
business of manufacturing and renting our SofPulse medical device to the
nursing home and physical therapy markets and acquired two businesses engaged
in developing new molecular technologies for drugs for cancer and
inflammation. We also acquired in 1998 an iontophoresis flexible patch
technology for topical dermatology applications from Elan Corporation, plc.
and received an equity investment from Elan. Pending shareholder
approval, we will change our name to Gemini Health Technologies Inc. Our
executive offices are located at 12085 Research Drive, Alachua, Florida
32615 and our telephone number is (904) 462-2249.
16
<PAGE>
Results of Operations
First Three Months 2000 Compared to First Three Months 1999
Our revenue for the three months ended March 31, 2000 was $57,912, as
compared to $124,163 for the three months ended March 31, 1999. This 53.4%
decrease was attributable to the downsizing of our Gemini operation and its
relocation from The Woodlands, Texas, to Alachua, Florida in July 1999 in
order to reduce operating losses from that operation.
Cost of revenue for the three months ended March 31, 2000 decreased to
$65,902, as compared to $104,638 for the three months ended March 31, 1999,
a decrease of 37.0%, due to decreased production of Gemini's products and
services in the first quarter of 2000, offset in part by fixed personnel
costs associated with the production.
Selling, general and administrative expenses decreased to $267,409 in the
three months ended March 31, 2000, as compared to $543,795 for the three
months ended March 31, 1999. This 50.8% decrease in expenses is primarily
attributable to the reduced volume of sales, as well as a $124,642 decrease
in personnel, sales and marketing, and administrative expenses associated
with the downsizing and relocation of the Gemini operation.
Research and development expenses decreased to $19,609 in the first quarter
of 2000 as compared to $88,047 in the first quarter of 1999. Basic
scientific research was curtailed in the first quarter of 2000 due to lack of
available funds, as compared to the same period in 1999, when we had the cash
resources to conduct research in connection with our iontophoresis technology
we acquired from Elan. Interest income for the three months ended March, 2000
was $17 due to no funds being available for short term investment in that time
period. In comparison, interest income of $10,506 for the comparable period in
1999 was primarily attributable to interest earned on cash received from Elan's
$900,000 investment in our common stock in January 1999.
Interest expense increased to $39,835 for the three months ended March 31,
2000 as compared to $34,476 for the three months ended March 31, 1999, an
increase of 15.5%, due primarily to the accrual of interest starting in May
1999 on a $98,430 note payable to our company's former audit firm and a
$35,000 note payable entered into by our company in December 1999 in
settlement of a lease obligation for the former Gemini facility in Texas.
In the three months ended March 31, 1999, minority interest of $206,303 was
recorded as a reduction to our company's net loss and relates to the former
minority shareholders' 32% interest in Gemini Health Technologies L.P., an
operating subsidiary that was 68% controlled by our company prior to
September 1999. In September 1999, we acquired the minority interest in the
partnership as part of a litigation settlement, resulting in no related
minority interest in the three months ended March 31, 2000.
The above resulted in a net loss of $367,575 for the three months ended March
31, 2000, as compared to a net loss of $429,984 for the three months ended
March 31, 1999.
1999 Compared to 1998
Our revenue for the year ended December 31, 1999 was $513,021, as compared to
$620,484 for the year ended December 31, 1998, a decrease of 17.3%. This
variance was attributable to our change in business in 1998. In May 1998, we
sold our medical device business, which was generating sales and rental
revenue in the first five months of 1998. In August 1998, we acquired the
Gemini business which has generated revenue from the manufacture and sale of
custom products for genomics research since August 1998.
17
<PAGE>
Cost of revenue for the year ended December 31, 1999 increased to $565,101,
as compared to $410,087 for the year ended December 31, 1998, or 37.8%, due
to increased costs associated with supporting growth in Gemini's custom
products business in the first six months of 1999, as compared to the winding
down of the previous medical device business in 1998.
Research and development expenses increased to $298,354 in 1999, as compared
to $53,823 in 1998, due to our lack of funds available for basic scientific
research during 1998, and the availability of such funds during 1999 from
Elan's investment in our company.
The primary contributors to expenses in the year ended December 31, 1998 were
a $8,811,114 permanent impairment loss on intangible assets acquired in our
reorganization into a biotechnology company; a $6,000,000 impairment loss on
research and development purchased from Elan; and a $731,493 write-down of
Gemini's inventory of reagents due to obsolescence. No such losses were
recorded in 1999.
Interest income of $12,634 for the year ended December 31, 1999, and $31,882,
for the year ended December 31, 1998, was primarily attributable to interest
earned on amounts we received from Elan's purchase of our common stock and
other equity securities.
Interest expense increased to $147,010 for the year ended December 31,1999,
as compared to $108,892 for the year ended December 31, 1998, primarily due
to the addition in August 1998 of a note payable to finance Gemini's
operations in the approximate amount of $1.2 million.
Loss on sale of securities of $106,935 in the year ended December 31, 1999
relates to the difference in the carrying value and the market value of
shares of ADM Tronics stock we sold during the year.
Loss on disposal of equipment of $94,502 in the year ended December 31, 1999
primarily relates to our $73,008 write-down of obsolete and/or surplus office
and laboratory equipment acquired in the Gemini transaction. In the year
ended December 31, 1998, we recognized a one-time $780,723 gain on sale of
our medical device assets to ADM Tronics, offset in part by a $64,500 loss on
disposal of excess or obsolete office equipment.
We recorded a one-time gain on settlement of litigation in the year ending
December 31, 1999 in the amount of $1,150,577 as a result of litigation we
initiated in September 1999 against Dr. Jayaraman, our former Vice Chairman
and President of our Gemini partnership, regarding our Company's
acquisition of Gemini from Dr. Jayaraman. As part of the settlement
agreement, Dr. Jayaraman agreed to resign from his positions with our
company and we agreed to pay Dr. Jayaraman certain amounts in order to
secure a release of all our obligations to him, including those agreements
entered into as part of our Gemini acquisition. We agreed to issue Dr.
Jayaraman 950,000 shares of our common stock in exchange for his minority
interest in the Gemini partnership, in lieu of the 6 million shares
previously issuable to him, resulting in a gain to our company and less
dilution to existing shareholders. We also recorded a $282,000 compensation
expense in connection with cash payments and the future issuance of our
common stock to Dr. Jayaraman to settle our obligations under Dr.
Jayaraman's employment agreement.
18
<PAGE>
The above resulted in a net loss available to common stockholders of
$1,710,947 for the year ended December 31, 1999, as compared to a net loss
available to common stockholders of $15,490,504 for the year ended December
31, 1998. Since July 1999, our company has been implementing plans to
significantly reduce its operating losses and cash outflows while retaining
the value of Gemini's custom products business. In accordance with these
plans, our company downsized Gemini's operations, including a significant
reduction in personnel and occupancy expenses. In order to reduce its
occupancy expenses, in August 1999, our company relocated the Gemini
operations from The Woodlands, Texas to Alachua, Florida, where our company's
Florida-based research laboratories have been located since December 1998.
In connection with settlement of the Gemini office lease obligation in the
Woodlands, Texas, in November, 1999, Gemini executed a $35,000 note
payable over 26 months. Our company is also attempting to restructure
Gemini's balance sheet, including the compromise and settlement of certain
other Gemini liabilities, including the secured note to a life insurance
company in the approximate principal amount of $1.16 million, trade payables
and an equipment lease obligation in the approximate amount of $52,000.
Other strategies being evaluated for the Gemini operation include strategic
alliances, including mergers and acquisitions of related or complementary
custom molecular businesses and raising additional investment capital in
order to sustain operations.
Liquidity and Capital Resources
Our cash requirements have been and will continue to be significant. From
our inception to March 31, 2000, we have financed our operations primarily
through the issuance of equity and debt securities, loans from stockholders,
sales of products and services to customers, and sales of marketable
securities. At March 31, 2000, we had a working capital deficit of
$2,080,185 and an accumulated deficit of $33,081,056.
Net cash used in operating activities for the three months ended March 31,
2000 was $262,324 and $1,509,463 in the year ended December 31, 1999. Net
cash was used primarily to fund the losses from operations.
Net cash provided by investing activities for the three months ended March
31, 2000 was $211,078, and for the year ended December 31, 1999, was $115,426,
primarily from the sale of ADM Tronics common stock. At March 31, 2000, we did
not have any material commitments for capital expenditures.
Net cash provided by financing activities was $85,974 for the three months
ended March 31, 2000, primarily from financing $100,315 in insurance
premiums, and $1,240,603 in the year ended December 31, 1999, primarily
attributable to an investment of $1,400,000 in common stock and other equity
securities by Elan, partially offset by repayments of $155,682 on notes
payable. Under our licensing agreement with Elan, we must use a substantial
portion of the proceeds from Elan's investment to fund futher development of
certain products. We are currently in violation of our license
agreement with Elan because we have not made the minimum investment required
by Elan for research and development activities as specified by the
agreement. Elan has not exercised any of its rights regarding the violation.
We expect our cash needs will continue to increase in future periods,
primarily because we will incur additional expenses related to the development
of our drug delivery and drug design technologies prior to seeking corporate
partnerships for future development and marketing of products based on these
technologies. Our company will need to raise substantial additional funds to
continue the development and commercialization of its technologies and
products.
19
<PAGE>
Our long-term debt consists primarily of a secured loan to an insurance
company in the current principal amount of $1,163,090, which our company
guaranteed in connection with the Gemini acquisition. In addition to our
guarantee, other collateral for the loan includes Gemini's assets, including
accounts receivable, inventory, and property and equipment owned now or
acquired in the future, as well as 65 SofPulse devices our company owns. The
former President of Gemini and his wife also have personally guaranteed the
repayment of the indebtedness. The terms of the loan include maintaining
certain financial covenants, principally relating to working capital
liquidity and net working capital ratios, and permitted purchases and
expenses. The covenants also include a limitation on compensation and
distributions. All of the amounts outstanding under the loan become due and
payable if an event of default occurs. Gemini has not been in compliance
with the financial covenants of the loan principally relating to net worth
and working capital. In addition, we stopped making the required payments in
April 1999. The loan is currently in default and the lender has the right
to accelerate payment of the loan although it has not yet notified us of its
intent to accelerate. We believe that this loan must be restructured and
reduced in order for our custom products operation to continue. We are
currently conducting settlement negotiations with the lender in an attempt
to reach a mutually acceptable restructuring and reduction of this loan
obligation; however, we cannot assure you that we will be successful in our
negotiations.
Under the present circumstances, our ability to continue as a going concern
depends on our ability to obtain additional financing. We are exploring
alternative sources of financing, including raising additional
investment capital through a private placement and a follow-on public
offering, and seeking federal grants directly (such as Small Business
Innovation Research Grants) or through collaborations. In April 2000, we
were awarded an SBIR Grant from the National Institute of Allergy and
Infectious Diseases in the amount of approximately $97,000 to test a novel
means of delivering a genetically engineered vaccine in an animal model
system. We have not identified any definite sources of additional financing,
and we can not assure you that additional financing will be obtained on
favorable terms, if at all. Our company's common stock is quoted on the
OTC Bulletin Board, but we can not assure you that a public trading market
for our common stock will continue to exist. If additional capital is
raised through the issuance of equity or securities convertible into equity,
our stockholders may experience dilution, and such securities may have
rights, preferences or privileges senior to those of the holders of the
common stock.
We cannot predict whether the operating and financing strategies and plans
described above, if implemented by us, will be successful. If we
are unable to improve our operations and ultimately obtain additional
financing, we may be forced to discontinue further development of our
technologies, discontinue marketing of our custom products business or
sell our assets.
As of December 31, 1999, we had net operating loss carryforwards of
approximately $4,288,000 available to offset future taxable income. Such
carryforwards, which may provide future tax benefits, expire in the years
2008 through 2019. Research tax credits of $187,000 expire in the years 2008
through 2018. During the years 1993, 1995 and 1998 changes in ownership of
greater than 50% occurred as a result of our company issuing equity
securities. As a result, a substantial limitation may be imposed upon the
future utilization of our net operating loss carryforwards.
20
<PAGE>
OUR BUSINESS
Our business is to create novel products for improved treatment of complex
human diseases such as cancer, wounds, chronic infections, inflammation and
tissue degeneration associated with aging or autoimmune disorders. Our
primary focus is on products for diseases that affect superficial tissues
such as skin, breasts, brain, prostate and joints. Our products combine
commercially feasible developments of two proprietary technologies:
DRUG DELIVERY - delivering drugs preferentially to diseased
tissues; and
DRUG DESIGN - creating drugs to target specific disease-related
genes and proteins.
Our drug delivery technologies can be applied from the outside to bring more
drugs to superficial tissues without the use of needles and pumps or the need
to reformulate a drug into a slow release capsule, an implant or an inhaler.
We exclusively licensed from Elan Corporation a flexible patch technology
that applies a mild electrical current (iontophoresis) to increase the local
delivery of dermatology drugs through and into the skin. We also developed
and commercially marketed proprietary devices that deliver pulsed
electromagnetic signals (PEMS) to increase local blood flow. We believe PEMS
treatment will increase the delivery, to superficial tissues, more of orally
taken as well as injected drugs as these travel through the bloodstream to
reach the diseased tissues. Our drug design focuses on small molecule drugs
created from proprietary modifications of the building blocks of genes ("gene
base modifications"). We are building and testing a proprietary library of
small molecule drugs designed to look like or bind to selected portions of
certain genes and proteins that are being identified by genomics research as
drug targets. We are in a unique position to generate large proprietary drug
libraries using a combination of natural gene bases and proprietary gene base
modifications. We also are designing gene base modifications that resemble
currently approved anti-cancer and anti-viral drugs that are derived from
natural gene bases. While our small molecule drug library is expected to have
broad applications against many drug targets identified by genomics research,
we will initially focus on drug targets that are identified by clinical
research through collaborations.
Our ultimate goal is to develop products that not only contain proprietary
drugs targeted at disease-causing genes or proteins to achieve specific
clinical effects but also deliver the drugs to the diseased tissues to
increase efficacy and reduce side effects. These should address large and
growing markets needs for diseases that affect superficial tissues:
dermatology (cancer, ulcer, acne, herpes, psoriasis, wrinkle, aging- and
sunlight-damage); cancer of breast, brain or prostate; degeneration of brain;
and inflammatory or degenerative diseases of joints (arthritis,
osteoporosis).
Our near-term revenues are expected to be derived from selected applications
of our core technologies and related expertise:
- We are generating revenues by using our drug design capabilities
to make and sell custom products for genomics research and drug
discovery markets through a web-based business -
www.geminibio.com. We intend to expand this business
internationally as an e-business and through strategic alliances.
We will also form partnerships with researchers to develop
genomic databases with commercial applications in drug discovery
for selected rare diseases.
21
<PAGE>
- We intend to enter into corporate partnerships to generate
license fees and R&D funds as well as future royalty payments
based on potential near-term commercial applications of our core
technologies:
- application of our drug delivery technologies
to improve the delivery of drugs developed and/or marketed
by our partners; and
- use of our small molecule drug library against
diseases or as product candidates targeted at genes
selected by our partners.
Industry Overview
As the population ages, providing quality care in a cost-effective
manner to patients who suffer from complex diseases is becoming a growing
challenge worldwide. With the evolution of managed care, health care
providers are searching for better drugs and more effective methods to
deliver the drugs to reduce the need for hospital facilities or skilled
staff.
More effective drugs with predictable therapeutic outcomes as well as
side effects and without special shipment or storage requirements are highly
desirable. Two major benefits of such drugs are
- increased patient compliance and
- reduced costs of monitoring unexpected
problems.
The availability of superior and controlled drug delivery technologies is
expected to allow ambulatory patients to receive long-term treatment without
the need to be hospitalized for chronic intravenous delivery of drugs. The
ability to deliver a drug to the diseased tissues should increase the
efficacy and reduce the toxicity of drugs. Effective drug delivery
technologies should reduce
- the cost of drug and
- the costs for treating side effects.
Based on the needs of patients with complex diseases, the emerging
trend in the managed care system is "disease management" to achieve
acceptable clinical outcomes at reasonable costs since a total cure for most
chronic/complex diseases is unlikely. For example, the treatment of a young
diabetic patient will be different from treating a seventy year old diabetic
patient with chronic ulcer. Similarly, a young patient with malignant
prostate cancer will require a different treatment scheme than an eighty year
old individual with benign prostate hypertrophy. In the near-term, products
that improve the delivery of approved drugs to diseased tissues are expected
to improve patient outcomes at lower costs. In the long-term, we expect that
the rapidly emerging knowledge about the genetics and biochemistry of complex
diseases will enable us to design safer new drugs for cost-effective patient
care by reducing the cost of disease management.
22
<PAGE>
Drug Delivery. A number of biotechnology as well as traditional
pharmaceutical drugs can be made more effective and less toxic if they are
targeted to the tissues affected by the disease being treated. Standard
injection or oral administration usually leads to a sharp rise in blood level
followed by the clearance from the blood stream within a few hours for most
pharmaceutical drugs (that are small molecules) or a couple of days for most
biotechnology drugs (that are large protein molecules). The amount of the
drug delivered to the diseased tissue during any time period is a function of
its concentration in blood multiplied by the total amount of blood flowing
through the tissue while the substance is in the blood stream. As the
substance is cleared from the blood stream over time, the rate of deposition
of the substance into the tissue also drops. A drug that clears rapidly from
the blood stream (commonly, the traditional small molecule pharmaceutical
drugs) must be taken in large quantities in order for sufficient drug to be
delivered to the diseased tissues within the time period that the drug is in
the blood stream. Such high levels in the blood stream may be toxic to other
tissues that are disease-free. A drug that persists in for a long time (the
large molecule biotechnology protein drugs) may be injected in smaller
amounts. However, these large molecule drugs are usually inefficient in
their ability to diffuse through the walls of the blood vessels and be
deposited in the tissues. Additionally, disease-free tissues are exposed for
longer periods of time to such drugs and may experience toxic effects.
Controlled slow release capsules, mist inhalers, slowly biodegradable
implants, skin patches and programmable pumps have been used to extend their
duration of small pharmaceutical drugs in the blood stream and avoid the need
for high dose.
In recent years, drug delivery technologies have moved beyond the
traditional extended or controlled release pills and metered dose inhalers.
Drug delivery is being increasingly used to allow the right dose of an active
pharmaceutical ingredient to be delivered at the right time - and more
increasingly, at the right target tissue site. Some analysts estimate that
there are more than 200 products in the pipeline of the drug delivery
industry. The approaches to achieve better delivery include biodegradable
implants, injectable microparticles, pumps, aerosols and electric fields.
Traditional drugs have also been chemically linked to large biotechnology
proteins and then injected into patients in order to increase the duration of
these small molecules in the blood stream and the delivery to a target tissue
recognized by the protein (for example, antibody-chemotherapeutic drug
conjugates). The principal routes of administration for the
delivery/administration of products are oral, the bloodstream, the
respiratory system (nasal and lungs) and the skin. Different drug delivery
technologies are being developed to address the specific needs arising from
the nature of the drugs and the preferred routes of delivery for the drug to
reach the diseased tissue.
The value of drug delivery technologies arises from increasing the
effectiveness of drugs, reducing the toxicity to disease-free tissues and
reducing the cost of drugs by lowering the dosage administered to the
patient. As a result, there is likely to be increased patient compliance and
improved patient outcome. An efficient drug delivery technology is
especially beneficial to the highly potent (and frequently, more toxic) drugs
and the high value biotechnology products that are large molecules, are
expensive to manufacture and are inefficiently delivered into tissue sites.
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Drug Design. Traditionally, pharmaceutical products have been
discovered through the screening of thousands of compounds, either from
existing chemical libraries (such as aspirin) or compounds produced in a
fermentation broth (such as penicillin). The advent of genetic engineering
founded the biotechnology industry where naturally occurring biological
molecules (primarily, protein drugs and most recently, the gene therapy) are
produced by monoclonal antibody and recombinant DNA technologies. While the
traditional pharmaceutical approach is a random and inefficient process, the
biotechnology products are large molecules that are expensive to produce,
store/ship and administer. Emerging knowledge about genes, the proteins
encoded by these genes and the genetic elements that regulate the activities
("expression") of genes in normal and disease states of cells has created the
opportunity to "design" novel small molecule drugs.
Genes, Proteins and Diseases. Most normal functions carried out
by a cell are dependent on a well controlled production and
action of various proteins that either perform a structural
function (for example, the cell membrane and the organelles such
as the nucleus and mitochondria inside the cell) or a catalytic
function (such as enzymes that synthesize vitamins or reproduce
the genetic material of the cell). The blueprint for the
production of proteins is encoded in the genetic material, DNA,
that constitute the chromosomes of a cell. In addition to
containing the information needed to encode the proteins (the
"coding sequences"), the genetic material of all cells contains
genetic sequences (the "regulatory sequences") that regulate the
activity of the coding sequences. Each coding sequence is read
("transcribed") by various enzymes to create an instructional
template ("messenger RNA") that represents a different form of
nucleic acid and that is used by the protein synthesis machinery
of the cell to assemble the correct amino acids into the
functional polymer, a protein, the workhorse of a cell's
activities. Regulatory sequences customarily interact with
certain proteins and regulate the activity of coding sequences
and thus affect the levels of the proteins encoded by such coding
sequence in a cell. Information related to the proteins and genes
and their involvement in maintaining the healthy state of a cell
or organ or in causing or exacerbating a disease process provides
new tools for effective and accurate diagnosis and safe and
efficacious therapy.
Gene Mutation and Activity (expression). A defect (a genetic
mutation) in a coding sequence can alter the encoded protein
resulting in an alteration of the function of the protein. A
defect in a regulatory sequence can alter the activity of the
coding sequence it regulates. A defect in a coding sequence that
encodes a protein which interacts with a regulatory sequence can
also affect the activity of the coding sequence regulated by the
regulatory sequence. These minor perturbations in genes or
proteins that perform critical functions can lead to the
malfunctioning of a cell, which is the basis of a disease. Even
without a genetic mutation, various substances (such as
chemicals, pollutants, diet) or conditions (such as infection,
aging, degenerative diseases, hormonal changes) can alter the
physiology of a cell and cause changes in the activities of genes
(and thus the levels of proteins encoded by them) or proteins.
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Genetics and Biochemistry of Complex Diseases. Unlike acute
diseases (such as an acute infection or bone fracture caused by
an accident), complex diseases (such as cancer, chronic
infection, autoimmune diseases, chronic wounds in diabetic
patients) may result from and/or involve a multitude of genes or
proteins. Often a mutation in a single gene or a change in the
activity of a gene or a protein encoded by the gene can initiate
a cascade of events that, in turn, affect other genes and
proteins and lead to the progression or exacerbation of a disease
condition. In many cases, the disease is not diagnosed until the
cascade has already been in progress (such as cancer metastasis,
arthritis, Alzheimer's disease, osteoporosis and many other
diseases) well beyond the initial alteration. Also, a drug or a
treatment method that can counteract the initial alteration may
have significant unwanted or adverse side effects since the
initial gene or protein may be required for certain normal
"housekeeping" activities of the unaffected healthy cells (such
as in the case of many autoimmune diseases, chronic wounds and
aging-related diseases that cause tissue degeneration).
Biomedical research, especially the emerging genomics research,
and the knowledge developed through the use of biotechnology
products (naturally occurring proteins) are leading to a better
understanding of the various stages of complex diseases and the
roles of various genes (or their protein products) in the
different stages.
Small molecule drugs that are designed based on the knowledge of the
functions of the protein or gene targets implicated in complex diseases have
the advantages of traditional pharmaceuticals (easy to produce, store, ship
and administer) as well as of biotechnology products (specific, predictable
action that mimics natural cellular processes). In addition, these drugs are
designed to reduce the disadvantages of either the traditional
pharmaceuticals (as far as the unpredictable safety and efficacy profile are
concerned) or the biotechnology products (especially, the expensive
manufacturing and cumbersome storage as well as shipment requirements). Small
molecule drugs can be designed to specifically target the individual gene or
protein responsible for each of the different stages in the progression of
complex diseases and thus revolutionize patient care. The success of the
small molecule drug design approach is dependent on:
- correctly identifying the protein/gene
target(s),
- validating the role of the target (the
mechanism of action of the target) in the specific stage of
a complex disease, and
- designing compounds that effectively and
predictably affect the action or the production of the
target.
Gene bases (the building blocks of the genetic material) and amino acids (the
building blocks of proteins) are naturally occurring small molecules. These
can be chemically synthesized less expensively than biotechnology drugs and
also can be modified (gene base modifications) or used to build small
molecules (oligonucleotides and peptides) with novel biological activities
that affect the function of a disease-linked gene and/or its protein product.
Alternatively, these small molecules can affect the regulation of a gene's
activity in a cell by affecting the molecular processes required in
expressing the product of a gene. In addition to the potential to be used as
drugs, these small molecules are being extensively used in research and drug
discovery in the rapidly growing fields of genomics.
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Our Technologies
Background. Our technology selection and product development strategy
are based on the growing realization that effective products for complex
human diseases should
- deliver the active drug preferentially to the
diseased tissue(s); and/or
- be designed to target genes or proteins
implicated in specific biochemical process(es) underlying
diseases.
There has been a growing appreciation for the need to deliver drugs
more effectively or selectively to the diseased tissues. The current practice
of prescribing large doses of anti-herpes drugs to treat localized herpes
lesions (oral or genital), steroids or NSAIDs to treat a single arthritic
joint, and chemotherapeutic drugs to treat localized cancers of breast,
brain, prostate or skin are only a few examples of situations where effective
means to deliver the drug to the diseased tissue are highly desirable. The
results would include increased patient compliance, improved patient outcome
and lower cost of drugs.
Based on a better understanding of the biochemical and cellular
processes, novel drugs have been created during the past decade to treat
specific stages or subsets of complex diseases. Examples include (i) viral
genome reproduction blockers (such as AZT) and viral protein production
blockers (such as the protease inhibitors) to treat different stages of AIDS,
(ii) antibody protein product (herceptin) and specific chemical molecule
(tamoxifen) to treat distinct subsets of breast cancers, and (iii) steroid
hormone (estrogen) and peptide hormone (calcitonin) to treat bone
degeneration in patients at different stages of osteoporosis.
The past five years has experienced an explosion in genomics
research - determining the complete genetic blueprint of humans (and other
living organisms) and studying the expression pattern of genetic elements
(genes and expression tag sequences). It is expected that genomics research
will substantially contribute to the discovery and development of future
pharmaceutical drugs. The two primary outcomes expected from the genomics
efforts are (i) hundreds of thousands of cloned genetic sequences, including
sequences that contain the information to encode whole functional proteins or
their fragments; and (ii) large bodies of information on the activity
("expression") and sequence variations (mutation and population diversity) of
genes related to disease conditions. Large genomics efforts in the public and
the private sectors are pursuing massive searches on the entire genetic
blueprint (the "genome") of humans and other living organisms. The sequence
information is being used to
- develop gene chips/arrays that can monitor tens
of thousands of genes simultaneously in normal or diseased
tissues and enable screening of the effects of large
numbers of potential drug candidates; and
- create databases to store and/or software to
process massive amounts of information (bioinformatics) on
the sequences and activities of genes with the hope of
identifying better points of attack on a particular disease
process and superior drug candidates that target the
relevant genes.
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In addition to identifying potential gene targets for the design and
discovery of new drugs, the genomic technologies are also expected to yield
new information (safety, drug-drug interaction) on existing drugs. As more
information from various genomics projects come into the public domain as
recently indicated by U.S. President Clinton and UK Premier Blair, the
participation in genomics is expected to experience significant growth. More
academic researchers and companies without large data generating/processing
capabilities will engage in verifying the accuracy of available genomics data
and using the information. These activities will greatly increase the demand
for the design of novel small molecules with unique gene targeting properties
as research tools and product (diagnostic or therapeutic) candidates.
Product Rationale. We believe that safe and effective treatments
for complex diseases will be best achieved by drugs designed to aim specific
disease-linked genes (or their products) AND delivered to the tissue where
the action of the gene or its product is actually responsible for the type or
the stage of the disease. It is also desirable that the delivery of the drug
to the target tissue be started and stopped based on the manner (local versus
through the bloodstream) in which the drug travels from the site of
administration to the diseased tissue. Our strategy to combine commercially
feasible drug delivery and drug design technologies are intended to create
two broad classes of products:
I. A drug designed to act locally on disease-linked genes or
proteins in tissues and delivered by a device that promotes drug
transfer across the skin in a controlled manner.
II. A drug designed to act on disease-linked genes or proteins in
tissues, administered through the bloodstream, and used with a
delivery device that increases local blood flow in the diseased
tissue in a controlled manner.
Non-Invasive Drug Delivery Technologies. Most drug delivery technologies
(injection, implantation, inhalation and ingestion) are invasive and require
that the drug is mixed, chemically combined or incorporated into the delivery
vehicle and that the delivery vehicle is non-toxic to the site of application
and/or human tissues. These requirements limit the applicability of most drug
delivery technologies to selected types of drugs, especially for approved
formulations of drugs or new drugs that are sensitive to many of the substances
used to control drug delivery. Our drug delivery is based on the application of
either (i) a mild electrical current ("iontophoresis") to the skin surface from
a flexible patch and/or (ii) pulses of electromagnetic energy in the radio
frequency range ("PEMS") that can be broadcast to superficial tissues such as
breast, brain, prostate and joints. These non-invasive means to increase drug
delivery to superficial tissues may not need significant reformulation of the
drug or changing its route of administration (oral, injection or topical).
Iontophoresis is based on the application of a mild electrical
current to facilitate the transport of drugs across the charge gradient
through the layers of skin. It is a non-invasive means that takes advantage
of the electrical charge of a drug molecule and the largest available
delivery surface (the skin) of the body. PEMS broadcast increases local
blood flow in tissues. It is a non-invasive means that is potentially
applicable to facilitate the delivery of any systemic drug (a drug carried by
the bloodstream) following an injection or an oral administration, to a
superficial organ (such as breast, brain, prostate and joints) into which the
PEMS can penetrate. Both of these modalities have been used in various human
applications and have not shown demonstrable adverse effects. Recent
advances in engineering have led to the ability to design novel non-invasive
products based on these modalities to target specific tissues in a human
body.
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IONTOPHORESIS FLEXIBLE PATCH. For the local delivery of drugs to
treat skin diseases, we licensed from Elan Corporation a
technology that enables the application of a mild electric
current from a fabric-like material in a controlled manner to
facilitate the transfer of drugs across the skin. It has been
reported in the scientific literature that iontophoresis of ionic
drugs (drug molecules that carry an electrical charge) can
provide between a 20 - 60 fold increase in penetration over
traditional topical application. The most significant advantages
of our iontophoresis patch are:
- eliminating or reducing general toxic effects
of a drug by limiting the release of only a small quantity
of the drug into the bloodstream,
- delivering a relatively high concentration of a
drug at the diseased tissue site where the drug will
potentially achieve the maximum benefit,
- improving the delivery of a broad range of
drugs - any drug with an electrical charge or one that can
be easily formulated or modified to acquire an electrical
charge,
- starting, stopping and controlling the delivery
of a drug with our proprietary microelectronic controls,
- facilitating uniform delivery of a drug over a
skin surface area regardless of the anatomical location or
the size and contour of the treatment site, and
- eliminating any cleaning and maintenance
requirements with respect to the patches (disposable and
sterilizable skin-compatible materials).
Dermatologists are well aware of the shortcomings of current
methods of topical application and have begun to study and adopt
advanced drug delivery technologies. Studies have shown that
iontophoresis may become an important new, safe and effective
technique for enhancing drug delivery in such diverse
applications as local neuralgia and anesthesia; antiviral,
anticancer and anti-inflammatory therapies; and the application
of various other dermatology drugs for infections as well as
wounds. We intend to focus first on the use of the iontophoresis
patch technology in delivering approved drugs for inflammation
(psoriasis), cancer and infection of the skin. Our flexible
iontophoretic patch licensed from Elan is applicable to an entire
family of unique products that we hope will be distinguished as
the leading iontophoretic delivery system for the multi-billion
dollar dermatology drug market.
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The development of the iontophoresis patch into the first product
prototype for dermatology is essentially complete. We believe
that we may be able to initiate clinical studies within nine
months for some of the approved dermatology drugs that would not
require any substantive changes in formulation.
PEMS - SOFPULSE. PEMS is expected to increase the delivery
of drugs in the blood stream by increasing local blood flow to
superficial tissues treated with these energy fields. Almost all
drugs taken orally or by injection are carried to the tissues via
the blood stream. The amount of a drug delivered to a tissue
depends on the level of the drug in blood, the length of time
that the drug is present in the blood stream the level of the
drug in blood and the amount of blood flowing through a tissue.
As a result, the more vascular tissues receive more drugs.
Electropharmacology Inc. (the predecessor to our company)
developed and commercially marketed the SofPulse device for the
reduction of pain and edema in superficial soft tissues (for
example, in surgical, chronic and burn wounds) by delivering
PEMS. Extensive clinical use of SofPulse during the past seven
years showed PEMS to be a unique noninvasive approach with no
known adverse effect in humans as the pulsing of energy fields
are designed to avoid tissue heating. In addition, studies
conducted at the Miami Heart Institute showed that PEMS increases
the local blood flow in treated superficial soft tissues. Upon
cessation of PEMS treatment, the blood flow returned to the
original level. This reversible increase in blood flow should
facilitate the delivery of products to treat or diagnose cancer
as well as other lesions to superficial tissues such as breast,
prostate and brain or anti-inflammatory drugs to joints affected
by rheumatoid arthritis or osteoarthritis. Some of the
significant advantages of our PEMS technology are:
- PEMS increases local blood flow at a desired
time when a drug is in the blood stream and thus direct
more of the blood-borne drug to a superficial soft tissue,
- PEMS can be delivered through clothing and
bandage by broadcast without any direct contact and PEMS
travels uniformly through superficial tissues,
- Increasing local blood flow should improve the
delivery of
- a drug without requiring changes in
the formulation or the route of administration of the
drug,
- both traditional pharmaceutical
drugs as well as large molecule biotechnology
products such as proteins and genes
- We own a commercially marketed product, the
SofPulse, that has been shown to be safe in humans for the
initial evaluation of clinical benefits, and
- We have the ability to optimized PEMS profiles
(strength, duration and energy spectrum) for molecular size
and pharmacokinetics of products carried in the blood
stream.
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PEMS is distinct from other similar technologies based on
electromagnetic and/or electrotherapeutic signals - namely, low
frequency pulsed electromagnetic fields ("PEMF"), direct
Electrical Stimulation ("E-Stim") and pulsed radio frequency
("PRF") diathermy. Although these other technologies have been
reported to facilitate wound healing or tissue repair, these
technologies are not suitable for drug delivery.
PEMS may be used to enhance the delivery of anti-cancer drugs or
contrast imaging agents to superficial tissues (such as breast,
brain, skin, prostate), anti-inflammatory drugs to arthritic
joint cartilage, and anti-infective or growth-promoting products
to skin diseases. PEMS may also be used in combination with
other drug delivery approaches such as "transdermal patches" and
"controlled release implants". We own three issued U.S. patents
claiming certain uses of PEMS and devices that can be used to
deliver PEMS.
We developed and commercially marketed our first PEMS device,
SofPulse, in 1991. SofPulse can deliver one of 36 potential PEMS
fields. The safety information with our SofPulse should enable us
to expedite clinical studies on the ability of PEMS to increase
and measure the extent of such increase in the delivery of
biotechnology and pharmaceutical drugs to superficial organs such
as breast, brain, prostate and major joints. We also intend to
leverage the fact that PEMS technology does not require any
changes in the formulation or the mode of administration of a
drug. This feature is expected to simplify formation of corporate
partnerships to apply PEMS in enhancing the delivery of the
partners' drugs. PEMS may also complement some of the other drug
delivery approaches such as "transdermal" and biodegradable
implant-based local release.
Small Molecule Drug Design Technologies. During the past five years,
biomedical discoveries have focused on the elucidation of mechanisms of
action of genes and proteins in controlling or causing biochemical processes
that underlie diseases. More recently, the Human Genome Project and
commercial efforts in the field of genomics-based drug discovery
("pharmacogenomics") have led to the elucidation of the functions of genes
(including gene mutations and genetic diversity or polymorphism) in disease
processes as well as responses to drug treatments. These advances are
facilitating the design and use of novel drug candidates that are "small
molecules" (unlike the biotechnology products) and can be designed (unlike
traditional pharmaceuticals) to have predictable actions. Our small molecule
drugs may be designed to have predetermined features with exquisite
specificity and potency for protein or gene targets that are implicated in
the onset or progression of a wide variety of diseases. The action of such a
small molecule drug may be brought about by its binding to, and thus causing
a change in the activity of, a disease-linked protein or gene target to
achieve a therapeutic activity. Alternatively, the binding of the small
molecule to the disease-linked gene or protein target may be used in
sensitive and rapid diagnosis of diseases.
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We specialize in the design and synthesis of novel gene base
modifications ("GBM"). These are used to create novel small polymer molecules
- "oligonucleotides". Our GBM's are proprietary chemical variants of
the five building blocks (two "purine" bases called A and G and three
"pyrimidine" bases called T, C and U) of natural genetic materials. The
structural diversity and functional attributes of gene base modifications and
small molecules made from these far exceed those achievable with traditional
pharmaceuticals. Our proprietary position in GBM's are expected to allow the
creation of as many as 1024-times more compounds than that achievable with
only the natural gene bases.
Our small molecule drugs made from GBM's are uniquely suitable for a
range of potential applications that previously had been attained using
natural gene bases and attaching various chemical modifications, such as 5-FU
(a cancer drug), AZT (an HIV drug) and acyclovir (a herpes drug). The unique
feature of our GBM's is that we have changed the atomic composition of the
base itself to which previously successful chemical modifications may be
attached to create a whole new family of patented drugs. These include:
- anti-infective drugs targeted at genes/proteins
that control the reproduction or the activity of the genes
of bacteria, virus, yeast, or fungus;
- anti-cancer or anti-inflammation drugs targeted
at proteins that reproduce the genetic material during the
reproduction of living cells;
- anti-inflammation, anti-cancer or tissue
regeneration drugs targeted at proteins that regulate gene
activity ("expression")
- anti-cancer or anti-inflammatory drugs targeted
at proteins that control energy transfer in biochemical
processes; and
- anti-cancer, tissue regeneration or
anti-inflammatory drugs targeted at genes that undergo
changes in structure (mutation or amplification) or
activity (expression);
- molecular diagnostics based on their ability to
recognize the above gene or protein targets.
Our initial focus has been on GBM's for the "purine bases", A and G.
Preliminary tests conducted in the laboratories of our collaborators show
that our current library of proprietary GBM's contain candidate small
molecule drugs that:
- target genes/proteins involved in the
deleterious effects of tumor necrosis factors on cells in
laboratory tissue culture,
- attack "polymerase" enzymes that reproduce the
genomes of a number of viruses such as cytomegalovirus and
hepatitis virus,
- target the effects, in cells in laboratory
culture, of selected "transcription factors" on the
expression of genes that have been implicated in disease
processes, and
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- can be used to design novel probes to detect
minute changes in DNA for use in gene chips (i) for high
throughput drug discovery and drug toxicology, (ii) to
detect mutations in diseases such as cancer, tissue
degeneration and heart diseases; and (iii) to analyze
genetic diversity (gene polymorphisms) underlying the
predisposition to complex diseases or the effectiveness of
emerging drugs that are designed to target specific genes.
Our near-term strategy for the commercial application of our small
molecule drug design technologies is based on the use of "clinically
validated drug targets" i.e., genes and/or proteins that have been shown to
be linked to clinical outcomes in specific disease conditions. We have used
collaborations with academic researchers to gather the know-how on these
targets that would be relevant in small molecule drug design. We believe that
this early strategy will expedite the use our small molecule drugs and
related design expertise into early products, at least for selected clinical
applications. Clinical development of small molecule drugs designed for these
drug targets also will provide us with valuable information in designing and
developing second generation products. At the present time we have two
specific targets:
- a protein that is found on some cancerous cells
and that appear to make these cells more "metastatic" i.e.,
make the tumors more malignant; and
- an enzyme that is attacked by a small molecule
drug and is involved in brain damage in children with a
rare genetic defect.
We are designing small molecules that look like selected portions of the
cancer target, would thus interfere with the action of the target and provide
us with a novel class of drugs that prevent metastasis, the primary cause of
death from cancer. We are in final stages of negotiating a license to a
small molecule drug targeting the enzyme implicated in the brain damage
condition and all know-how related to the clinical outcomes of attacking this
enzyme. Both of these "clinically validated targets" represent promising
candidates for second generation GBM products.
Products and Commercialization Plan
We intend to pursue the initial commercial applications of our drug
delivery and drug design technologies through partnerships.
A. Drug delivery: We intend to develop applications of our flexible
iontophoresis patches in combination with corporate partners' dermatology
drugs:
- steroids for psoriasis,
- antibiotics for wounds or acne,
- anti-virals for local herpes blisters,
- anti-proliferation drugs for cancer or actinic
keratosis, and
- agents to treat wrinkles or aging/sunlight
damages.
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Similarly, we will use our know-how related to the SofPulse product to design
braces that deliver PEMS to facilitate the delivery of our corporate
partners' products:
- anti-inflammatory drugs to joints,
- anti-cancer drugs to breast and brain, or
- contrast imaging agents to brain and breast.
B. Drug design: In collaboration with scientists at medical research
institutions, we have conducted initial tests on several of our small
molecule GBM drugs using human and animal cells in tissue culture. Our plans
are to form partnerships or collaborations to screen our existing library of
GBM drugs against disease-linked gene or protein targets identified by our
partners. The results are expected to provide us with information for further
design and/or development of one or more small molecule drugs for various
disease targets:
- anti-viral drugs - targeted at enzymes in
viruses (HIV, herpes, CMV);
- anti-cancer drugs - targeted at genes or their
products responsible for deleterious action of tumor
necrosis factors; and
- anti-inflammatory drugs - targeted at genes
triggered by specific transcription factors in inflammatory
cells
Our scientists cloned the gene for the cancer metastasis protein and
developed a laboratory test system that we can use to quickly evaluate drugs
which would potentially prevent the spreading of cancer cells caused by this
protein. Our current library consists of two types of small molecule peptide
drugs against this protein target:
- interfere with the action of the protein on
cancer cells, or
- trigger an immune response that destroys the
protein.
We are acquiring rights to the small molecule drug in Phase II/III
clinical trial for the congenital defect that causes debilitating brain
damage in children with a genetic birth defect. Based on the results of the
ongoing trial, we expect to design a pivotal trial for the registration of
this initial product in an "orphan" indication. We also plan to use the
information to design GBM drugs as second generation products that would have
expanded applications in brain and heart damage in conditions of oxygen
deprivation where this enzyme target is involved.
We intend to form corporate partnerships to support the ongoing
development of initial applications of all of our small molecule drug
candidates described above. We expect to receive near-term revenues
(licensing fees, research and development contracts, and milestone fees) from
our partners in exchange for marketing and manufacturing rights. We intend to
use some of these funds to expand our small molecule drug library and use the
results to gain insights into strategies for the design of future small
molecule drug candidates.
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Our long-term goal is to create safe and innovative products by
combining our technologies. Our products will incorporate our small molecule
drugs in iontophoresis patches to achieve effective local delivery to target
diseases affecting the skin:
- Products for skin herpes lesions, wounds and
acne by targeting reproduction of viral or bacterial
genetic material;
- Products to treat psoriasis and local allergic
reactions by targeting gene activity regulators implicated
in inflammation;
- Products to treat cancers of skin as well as
head and neck, actinic keratosis, and ulcers by targeting
genes implicated in cell growth and/or metabolism.
We also will design drug delivery devices as tissue coverings
programmed to deliver PEMS to increase local blood flow for predetermined
time periods that can be adjusted according to the pharmacologic properties
of drugs:
- Coverings for breast and brain for use with
proprietary gene base modifications targeted at genes and
their products implicated in breast/brain cancers;
- Coverings for knee, elbow and other joints for
use with proprietary gene base modifications targeted at
gene activity regulators implicated in
arthritis/inflammation.
"www.geminibio.com". We have established a web-based e-business
that generates revenues by selling custom products that are used in research
and drug discovery in the emerging fields of molecular biology and genomics.
This business leverages our drug design technology and is focusing first on
the design and custom synthesis of (i) DNA snippets ("oligonucleotides")
designed for use in gene sequencing, activity and polymorphism analyses
(functional genomics/pharmaco genomics), (ii) complete genes used to produce
and study the products encoded by these genes, and (iii) peptides as well as
antibodies against selected peptide portions of disease-linked proteins. The
client base for our custom products is potentially large and worldwide - from
an academic researcher studying the role of a gene or protein in a rare disease
to pharmaceutical companies developing comprehensive arrays of drugs to treat
complex diseases involving multiple genes and affecting millions of people.
The two primary markets for our custom products are
- Genomics - elucidating the sequence of genes
and understanding their roles in disease processes; and
- Proteomics - characterizing the structure and
function of protein products of disease-linked genes.
Large bodies of information are being rapidly generated in genomics
and proteomics. A new discipline called bioinformatics is emerging to integrate
databases that may be used to identify new gene or protein targets for drug
discovery. We use a proprietary software platform in our custom products
business to manage and link the design of these products with the information
generated from their use. We intend to create value from this business through
partnerships/collaborations that provide us with commercial rights in high
value genomic databases for drug targets for selected diseases.
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Patents and Proprietary Position
We have exclusive licenses to and/or ownership of certain patents and
pending patent applications relating to our core technologies. We actively
seek, when appropriate, protection of our products and proprietary
information by means of United States and foreign patents, trademarks and
contractual arrangements. We also rely upon trade secrets and contractual
agreements to protect certain of our proprietary information and products.
Drug Delivery Intellectual Property. In the area of the flexible
iontophoretic patch technology, we licensed from Elan certain rights to
several patent applications pending in the U.S. and certain foreign
countries. In the PEMS field, we have been granted three patents by the U.S.
Patents and Trademark Office on our PEMS technology (i) #5,370,680 dated
December 6, 1994 entitled "Athermapeutic Apparatus Employing Electromagnetic
Fields", (ii) #5,584,863 dated December 17, 1996 entitled "Pulsed Radio
Frequency Electrotherapeutic System"; and (iii) #5,723,001 dated March 3,
1998 entitled "Apparatus and Method for Treating Human Body Tissue with
Electromagnetic Radiation". We have one issued patent in Canada and pending
applications in some foreign countries on our PEMS technology.
We are the assignee of one U.S. patent application number 08/381,769
(filing date February 1, 1995) entitled "Calcium Phosphate Precipitate
Formulations and Uses Therefor" related to controlled delivery of biological
and drug substances with potential use in tissue regeneration.
Drug Design Intellectual Property. We are the exclusive licensee of
Aronex Pharmaceutical under two patent applications pending in the U.S.
entitled "Phosphazole Compounds" and "Methods for making Phosphazole
compounds" and all corresponding foreign counterparts of these applications.
These applications claim certain families of gene base modifications and the
method of producing them. On May 30, 2000, United States Patents and Trademark
Office granted patent no. 6,069,132 that claims one group of these gene
base modifications.
Operating Plan & Key Milestones
A. Near-term Objectives: We will first focus on advancing the
commercial feasibility of our core technologies - noninvasive drug delivery
and small molecule drug design - through corporate partnerships that exploit
potential near-term applications for, and generate certain revenues from,
each of our technologies. The specific tasks we will focus on are:
Drug Delivery: Measure changes in the local delivery of approved
dermatology drugs (anti-inflammatory, anti-viral
and anti-cancer) using the iontophoresis patch in
laboratory and animal test systems.
Drug Design: Screen our growing library of small molecule drugs
first against known gene/protein targets
implicated in cancer and viral infection to
identify lead compounds for animal testing.
Continue our web-based business
(www.geminibio.com) to make custom products for
the growing genomics (and proteomics) research
market(s) and form collaborations with academic
researchers to acquire certain rights to selected
disease-related genomic databases.
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Drug delivery: We have concluded the design of initial flexible patches
for iontophoresis. Prototype control units have been designed for laboratory
experiments that will test a wide variety of electrical current parameters.
Prototype miniature control units have been designed that will be used to
encase the electronic circuit for the electric current parameters selected
from the results of laboratory experiments. Initial experiments using human
cadaver skin or fresh surgical skin from different anatomical locations of
the body are under way to develop a standardized system for rapidly screening
a number of drug compounds and formulations. We expect that the results will
predict the potential effectiveness of our iontophoresis patches in actual
clinical situations. Our initial focus will be on anti-inflammatory (steroid
and non-steroid) and anti-metabolite (anti-cancer or anti-viral) compounds.
We anticipate that within nine months we will identify the lead classes of
drugs and the current parameters needed to achieve significant augmentation
of delivery by the application of our iontophoresis patch that would be
likely to cause clinical benefit. Based on these results, we will first
pursue licensing agreements with corporate partners for the improved delivery
of approved drugs that are already marketed.
Drug design: We have initially focused on two groups of proprietary
small molecule drugs. The first group is a family of proprietary gene base
modifications, called phosphazoles (created by our scientists by replacing a
nitrogen atom in the natural gene base molecule with a phosphorus atom). The
phosphazoles can be used to design small molecule drugs that look like
("mimic") and/or bind to selected portions of genes and proteins with a high
degree of specificity. We have initially started laboratory tests on
individual phosphazoles as drug candidates against biochemical processes in
cancer cells and enzymes involved in reproducing genomes of viruses (such as
HIV, CMV and herpes). The second group of small molecule drugs consists of a
family of proprietary small peptides. These peptides have been designed to
mimic selected segments of a protein that is found on cancer cells and appear
to promote their spread - a phenomenon called metastasis that is
characteristic of malignant cancers. We believe that sufficient laboratory
tests can be completed in approximately twelve months to enable us to select
a lead compound from each group of small molecule drugs for animal testing.
We are in the final stages of negotiations for an agreement relating to
a small molecule drug that is currently in Phase II/III clinical trial to
treat a rare brain damage condition caused by lactic acid build up in the
brain in children with a genetic defect. Successful completion of the
clinical trial will provide us with our first approved drug, albeit for a
limited market - an "orphan" indication, in three to four years. We intend
to seek a marketing partner for this product for the initial indication and
to expand the use of this drug in treating brain and heart damages caused by
ischemia (oxygen deprivation). The licensed small molecule drug may also be
coupled with our gene base modifications to provide improved drug covered
under our patents. A major contribution of this drug to our product
development strategy is that the ongoing development program will clinically
validate the importance of the enzyme targeted by the licensed drug as a
disease-linked protein target. This protein target then becomes the target
for the design of proprietary gene base modifications as second generation
drugs with improved characteristics and patent protection.
During 1999, we used our drug design capabilities through
www.geminibio.com to make and sell custom DNA and peptide products to
scientists engaged in research and drug discovery in the field of genomics.
Our next goal is to exploit the custom product design capability and the
software we developed for this web-based business will facilitate growth of
our business internationally in the near future. More importantly, we are
leveraging this business to form strategic partnerships that would allow us
to participate in the development and commercialization of high value
genomics databases related to selected diseases and drug discovery programs.
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B. Mid-term Objectives: We will focus on growing our revenues from
corporate partnerships for early applications of our technologies with the
goal to achieve a break-even operation by the end of the third year. Toward
this goal, our primary tasks in the second and the third years are:
Drug Delivery: Expand licensing agreements for iontophoresis patch for
additional approved drugs as well as locally
acting dermatology drugs that are under
development;
Quantify the improvement in the delivery of
injected drugs to breast cancer and brain
lesions (degeneration or cancer) using PEMS.
Drug Design: Conduct pivotal trial for the childhood brain
damage drug to seek product registration;
Initiate Phase I/II clinical trials on at least
two small molecule drugs and form corporate
partnerships for their development and marketing;
Use www.geminibio.com to identify and acquire
rights to drug targets and product candidates
through collaborative projects funded through SBIR
and other grants.
Drug Delivery: We believe that our work during the first year will
provide us with information that would enable us to start designing our own
products where a drug formulation is directly incorporated in iontophoresis
flexible patches. These products are expected to be developed and
commercialized through business arrangements that provide us with a larger
participation in the commercial success of products than that resulting from
initial license agreements in narrow fields of use we grant during the first
year. We expect that additional laboratory data and animal as well as
clinical data from work conducted under our initial licensing agreement(s)
for inotophoresis flexible patch will be available in the second year. These
data will be used to expand the applications of the patch to cell-modulating
(hormone and vitamin), wound healing (growth factors and antibiotics),
additional anti-cancer as well as anti-infective (virus, bacteria and fungus)
dugs and other dermatology products (such as for wrinkle, photodamaged skin).
We intend to conclude certain preliminary studies on the effects of
PEMS delivered by the SofPulse device that is commercially marketed for the
palliation of pain and swelling of superficial soft tissues. These initial
studies are expected to be conducted through academic collaborations and
using federal grants. These studies are intended to extend our prior studies
to quantify local blood flow in superficial tissues by PEMS delivered by
SofPulse. We also intend to extend our prior work on the design of small
electromagnetic coils in flexible material that can be designed to fit target
tissues such as breast, brain and joints (knee, elbow, wrist). During the
second year, we plan to design PEMS treatment methods to improve the delivery
of contrast imaging agents to brain, anti-inflammatory agents to joints and
cancer treatment agents to breast. Based on the results of these studies, we
believe that we will be able to initiate licensing and other corporate
partnership agreements by the third year. In general, these agreements are
expected to provide us with certain license fees and production contracts.
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Drug Design: We believe that, in the second year, we will select
at least one GBM and one peptide as our first two lead small molecule drug
candidates for cancer treatment based on the results of laboratory tissue
culture and animal model tests. Assuming that we are able to conclude the
agreement regarding the small molecule drug for the brain damage in children,
then we will be engaged in conducting a pivotal trial. In addition to these
drug candidates in various stages of clinical trial, our small molecule drug
library is expected to continue its growth at a rate of several dozen new
drug candidates per month and will be designed to target disease-linked
molecules that are expected to be identified from genomics research.
C. Summary and Long-term Objectives: Our objective is to generate
reasonable annual revenues in year two and grow such revenues to fund a
substantial portion of our operating expenses in year three from corporate
partnerships and grants for initial applications of our drug delivery
technologies and small molecule drug library. The funds will be used to not
only conduct the research and development work needed to support the
development of the product candidates for which a corporate partner is
licensed but also pursue new applications in potential products for which
we expect to retain all rights. We are implementing a program to collaborate
with academic researchers pursuing commercially feasible technologies related
to the design of drugs or disease-linked gene/protein targets. We will
participate in Small Business Innovations Research (SBIR) grants that are
expected to provide the primary initial funding for these collaborations.
In exchange for providing the laboratory facilities and management, we expect
to acquire an exclusive license to selected commercial applications relevant
to our business focus. We are in discussions with basic and clinical research
scientists to start our SBIR Collaboration program.
We anticipate that initial applications of the iontophoresis patch
technology will be commercialized by its early licensees within four or five
years and provide us with revenues for which we will incur no additional
operating expense. Ongoing licensing revenues and other fees are expected
from various licenses and/or joint venture arrangements for expanded
applications of iontophoresis and PEMS technologies in improving the delivery
of dermatology, oncology and inflammation drugs. These funds and other grant
funded collaborations will be used to fund the development of proprietary
products where our own small molecule drugs for inflammation or cancer will
be incorporated in the flexible patches. We also intend to design and screen
new PEMS based on their effects on cells for potential application in the
repair and regeneration of damaged tissues. Anecdotal human and animal
experiments reported in the literature suggest that PEMS may promote the
regeneration of skin in wounds, fractured bones and nerve fibers.
Our initial small molecule drugs for oncology comprise small peptides
for the prevention of cancer spread (following surgical removal of tumor
masses) and gene base modifications that interfere with biochemical processes
involving tumor necrosis factor alpha. It is anticipated that commercially
feasible drug formulations based on either or both of these will be in
advanced clinical trials by year four under corporate partnership agreements.
Second generation improvements upon these compounds will be developed under
these partnerships also. Our continuing work on small molecule drugs will
focus on gene base modifications and peptides that target some of the enzymes
(called "kinases" and "transferases") that control or modulate disease-linked
biochemical processes. These enzymes are desirable targets for our future
products since our small molecule drugs are designed to compete with natural
molecules that serve as energy donors in the biochemical processes controlled
by these enzymes.
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We believe that there is a window of opportunity to grow the revenues
of www.geminibio.com as a provider of novel molecular tools to a growing
number of pharmaceutical companies that are pursuing genomics-based drug
design and basic as well as clinical researchers studying disease genomics.
In addition, the DNA diagnostics industry is expected to introduce chips and
arrays made of custom DNA probes designed to monitor both the genetic
diversity in human population a well as its effect on predisposition to
diseases. We intend to pursue alliances and partnerships to target these
growing markets and thus expand our small molecule drug production
capabilities that will support the discovery, production and molecular
testing of our small molecule drugs at substantially reduced costs.
We anticipate that our SBIR Collaboration program will provide us with
additional disease-linked targets for our small molecule drugs during the
third or fourth year. We intend to pursue the development of new products
based on the results of this program during the third or fourth year. The
commercial development is expected to include corporate partnerships that
include the evaluation of the partners' drugs against new targets and
out-licensing of new mall molecule drugs identified from these collaboration
programs.
Potential Markets for Company's Products
Drug Delivery. The segment of the drug delivery market that is being
targeted as a field of application for our non-invasive drug delivery
technologies was estimated to be more than $10 billion and growing at an
annual rate of about 20% for the past five years. An attractive aspect of
the emerging drug delivery technologies is that their commercial value can be
demonstrated by improving the utility of available approved products. In
addition, regulatory approval for commercial marketing for such value
enhancement application is expected to be less time consuming than the
development of a new drug. A number of technologies are being developed and
evaluated by different companies for various clinical indications. The market
for iontophoresis for prescription dermatology drugs includes severe acne,
psoriasis, dermatitis, aging-associated wrinkling, pigmentation disorders,
baldness and localized viral, bacterial and fungal infections. The
prescription dermatology drug market is estimated to be more than $3 billion
annually. The potential for noninvasively achieving increased local blood
flow by PEMS to organs such as the breast and brain may have significant
advantage over other methods of delivering cancer drugs, especially the highly
toxic chemotherapeutic agents or the biotechnology products that are large
molecules with limited tissue delivery. Additional applications of PEMS
include the delivery of anti-inflammatory drugs for the treatment of
arthritis and tissue repair drugs in wound care and osteoporosis.
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Drug Design - Small Molecule Drugs. The small molecule drugs being
initially designed by our scientists target biochemical pathways inside of
cancer cells or on enzyme molecules released by cancer cells for growth and
spread. Our drug delivery technology based on PEMS is expected to improve the
delivery of cancer imaging and treatment drugs. The global market for cancer
drugs exceeds $4 billion annually and over $5 billion is spent annually for
cancer diagnosis. Approximately 1.4 million new cases of cancer are diagnosed
each year. In addition, millions of cancer patients who underwent remission
following traditional treatments during the past three to five years will
relapse with a higher mortality rate. Cancer is the second leading cause of
death in the U.S., and approximately one of every three Americans will get
cancer. The National Cancer Advisory Board reports that more than 8 million
people in the U.S. have cancer. The most difficult aspect of effectively
treating cancer is the treatment of cancer spread, or "metastasis", since it
requires high and toxic dosages of chemotherapy or available biotechnology
drugs and cannot be treated by radiation or surgery.
In addition to cancer, the proteins and genes that are expected to be
targeted by our small molecule drugs are implicated in inflammation (such as
arthritis), other chronic diseases (such as Alzheimer's and osteoporosis) and
certain infections (such as warts and acne) with potential combined markets
of several billion dollars. The flexible iontophoretic patch technology is
expected to improve the efficacy of our anti-infective small molecule drugs.
www.geminibio.com. The market for custom products used as molecular
tools in genomics research and genomics-based drug delivery is growing
rapidly. The market for custom DNA products alone has been estimated at over
$100 million annually. As human genome sequence information becomes
available in the public domain the market for custom products will likely
exceeds $200 million annually worldwide.
Potential Future Markets. Potential long-term markets for our
technologies include:
- Application of our PEMS electromagnetic signals or
iontophoretic electric fields in tissue repair; and
- Genomic databases related to selected rare diseases
that are difficult to treat.
Analysts estimate that the market for products used in the repair and
regeneration of tissues such as skin and cartilage from wounds, inflammatory
diseases and arthritis exceeds $5 billion annually, based on the number of
procedures performed to repair tissue damage from trauma and degenerative
diseases. The potential market size for products or treatment modalities
for peripheral nerve damage and degenerative brain disease such as
Alzheimer's disease is also in the multibillion dollar range. Genomic
databases being developed by the gene sequencing companies ("functional
genomics" and "pharmacogenomics") are being used by pharmaceutical and
biotechnology companies to screen new drug candidates and create
diagnostic gene probes.
Within the past few years, licensing and other revenues paid to
"genomics" companies for the use of these databases have exceeded $200
million. We intend to pursue licensing agreements with corporate partners
for genomic databases for selected rare diseases that we develop through
www.geiminibio.com.
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Manufacturing and Marketing
We will rely, at least in part, on third party manufacturers and
corporate partners to produce our drugs or other products for preclinical and
clinical studies, and also for commercial production of most of our products
that are approved for marketing and sales in various territories of the
world. We have not yet established a quality assurance program, including a
set of standard operating procedures, intended to ensure that third party
manufacturers under contract produce our compounds in accordance with the
FDA's current Good Manufacturing Practices guidelines and other applicable
regulations.
We believe that all of our existing product candidates can be produced
using available methods, primarily through standard techniques of
pharmaceutical synthesis. We currently do not have the capacity to
manufacture our potential products, are dependent on third party
manufacturers or collaborative partners for such production for
preclinical research and clinical trial purposes and expect to be dependent
on such manufacturers or collaborative partners for some or all commercial
production of any of our products that are approved for marketing. We
believe that we will be able to continue to negotiate arrangements on
commercially reasonable terms and that it will not be necessary for us to
develop internal production capability in order to develop our products
successfully. In the event that we are unable to obtain contract
manufacturing, or obtain such manufacturing on commercially reasonable
terms, we may not be able to commercialize our products as planned. Our
objective is to maintain flexibility in deciding whether to develop
internal manufacturing capabilities for certain of our potential products.
To date, our company has not manufactured pharmaceutical or biotechnology
products or conducted manufacturing testing programs required to obtain
FDA and other regulatory approvals. We can not assure that we will develop
such capabilities successfully.
Since our potential products are at an early stage of development, we
will need to improve or modify our existing processes and capabilities to
produce any product for clinical trials or commercial marketing. We cannot
quantify the time or expense that may ultimately be required to improve or
modify our existing process technologies, but it is possible that such time
or expense could be substantial.
The production of our products is expected to be based in part on
technology that we believe will be proprietary. We may license this
technology to contract manufacturers to enable them to manufacture compounds
for our product development programs. We can not assure that such
manufacturers will abide by any limitations or confidentiality restrictions
in licenses with us. In addition, any such manufacturer may develop process
technology related to the manufacture of our products that such manufacturer
owns either independently or jointly with us. This would increase our
reliance on such manufacturer or require us to obtain a license from such
manufacturer in order to have our products manufactured. We can not be sure
that any such license would be available on terms acceptable to us, if at
all.
Our plans for the foreseeable future do not include an investment in
sales and marketing of our products. Our www.geminibio.com currently
promotes custom products through an e-business.
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Competition
We are engaged in biopharmaceutical fields characterized by extensive
research efforts, rapid technological progress and intense competition. There
are many public and private companies, including pharmaceutical companies,
chemical companies and biotechnology companies, engaged in developing
products for the human therapeutic applications targeted by us. Further, we
believe that interest in the application of drug design and related
technologies may continue and may accelerate as the technologies become more
widely understood. We are aware of efforts by others to develop products in
each of the areas in which we have products in development. In order for us
to compete successfully in these areas, we must demonstrate improved safety,
efficacy, ease of manufacturing and market acceptance over our competitors,
who have received regulatory approval and are currently marketing.
Furthermore, academic institutions, governmental agencies and other public
and private research organizations are conducting research to develop
technologies and products that may compete with those under development by
us. In addition, other technologies are, or may in the future become, the
basis for competing products. We can not be certain that our competitors will
not succeed in developing technologies and products that are more effective
than the ones we are developing or that would render our technology and
products obsolete or noncompetitive. We also can not be sure that our
products will be able to compete effectively with products which are
currently on the market.
Many of our competitors have substantially greater financial, technical
and human resources than we do. In addition, many of our competitors have
significantly greater experience than us in conducting preclinical
testing and human clinical trials of new pharmaceutical products, and in
obtaining FDA and other regulatory approvals of products. Accordingly,
certain of our competitors may succeed in obtaining regulatory approval for
products more rapidly than we would. If we obtain regulatory approval and
commence commercial sales of our products, we also will compete with respect
to manufacturing efficiency and sales and marketing capabilities, areas in
which we currently have no experience.
Product Pricing and Reimbursement
Our ability, with or without corporate partners, to commercialize our
products successfully will depend in part on the extent to which appropriate
reimbursement levels for the cost of such products and related treatment are
obtained from government authorities, private health insurers and other
organizations, such as health maintenance organization or HMOs. Third party
payors and government authorities are continuing efforts to contain or reduce
the cost of health care. For example, in certain foreign markets, pricing
and/or profitability of prescription pharmaceuticals are subject to
government control. There can be no assurance that similar controls will not
be implemented in the United States. Also, the trend toward managed health
care in the United States and the concurrent growth of organizations such as
HMOs, which could control or significantly influence the purchase of health
care services and products, may result in lower prices for our products. The
cost containment measures that health care providers and third party payors
are instituting and any proposed or future health care reform measures,
including any reductions in Government reimbursement programs such as
Medicaid and Medicare, could affect our or our partners' ability to sell our
products.
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The success of our products in the United States and other significant
markets will depend, in part, upon the extent to which a consumer will be
able to obtain reimbursement for the cost of such products from government
health administration authorities, third-party payors and other
organizations. Significant uncertainty exists as to the reimbursement status
of newly approved therapeutic products. Even if a product is approved for
marketing, there can be no assurance that adequate reimbursement will be
available. We are unable to predict what additional legislation or regulation
relating to the health care industry or third-party coverage and
reimbursement may be enacted in the future or what effect the legislation or
regulation would have on our business.
Employees
As of June 12, 2000, we had seven full-time employees, one of which
holds a doctorate degree while others possess advanced business or technical
expertise. Of our seven full-time employees on that date, three were engaged
in research and development, one in producing custom products and two in
general administration. Our future success depends in significant part upon
the continued service of our key technical and senior management personnel
and our continuing ability to attract and retain highly qualified technical
personnel. None of our employees are represented by a labor union and we
consider our relations with our employees to be good.
Facilities
We currently lease 3,000 square feet at the Sid Martin Biotechnology
Institute in Alachua, Florida. The lease expires in September 2000.
LEGAL PROCEEDINGS
In August 1994, Diapulse Corporation of America, a former competitor
of EPI in the medical device business, filed a lawsuit against EPI and some
of EPI's former directors and officers. The lawsuit alleged that EPI had
engaged in deceptive acts and practices, false advertising, unfair
competition, and breaches of contracts between Diapulse and several company
employees. Diapulse was seeking an injunction to rectify the effects of the
alleged misconduct, an unspecified amount of compensatory damages,
disgorgement of profits, treble damages, punitive damages and attorney's
fees. EPI recently settled the lawsuit by agreeing to pay Diapulse $50,000
plus interest in monthly payments over a thirty month period.
In July 1999, Copelco Credit Corporation filed suit against our
company alleging breach of lease agreement in connection with a copier lease.
Copelco is seeking to accelerate all sums due under the lease in the amount
of $58,450. We believe we have valid defenses to the lawsuit, and that the
ultimate outcome, even if unfavorable to us, will not materially affect our
liquidity, financial condition or results of operations.
CERTAIN MARKET INFORMATION
From May 1995 to September 1997,our common stock was traded on the
Nasdaq Small Cap Market under the symbol "EPHI." In September 1997, Nasdaq
notified us that our stock would be delisted from the Nasdaq SmallCap Market
due to noncompliance with the minimum capital and surplus requirement and
minimum value of the public market float and trading price of our shares.
Our stock is now trading on the OTC Bulletin Board under the symbol "EPHI".
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The following table sets forth, for the periods indicated, the range of high
and low bid quotations for our common stock as reported by Nasdaq. However,
our common stock generally is not actively traded or is traded in low
volumes. Therefore, we cannot be sure that market quotations for our common
stock are indicative of prices at which actual sales of these shares will
occur. These quotations represent inter-dealer prices, without retail
markup, markdown or commissions, and do not necessarily represent actual
transactions. Further, we cannot be sure that a public trading market for
the our common stock will continue to exist.
High Low
------ ------
For the year ended December 31, 1998:
First Quarter $ .47 $ .26
Second Quarter $ .80 $ .29
Third Quarter $1.32 $ .58
Fourth Quarter $ .97 $ .33
For the year ended December 31, 1999:
First Quarter $ .30 $ .34
Second Quarter $ .95 $ .30
Third Quarter $ .41 $ .22
Fourth Quarter $ .25 $ .07
For the year ended December 31, 2000:
First Quarter $3.00 $ .09
Second Quarter (through June 12) $ .71 $ .19
On June 12, 2000, the closing price of our common stock on the OTC
Bulletin Board was $0.25 per share. As of such date, there were
approximately 92 registered stockholders of record of our common stock. To
date, we have not declared or paid any cash dividends on our common stock.
MANAGEMENT
Directors and Executive Officers
The following table lists the names, positions and ages of our
directors, executive officers and key employees as of June 12, 2000:
NAME AGE POSITION
----- --- --------
Arup Sen, Ph.D. 49 Chairman of the Board, Chief
Executive Officer, President,
Chief Financial Officer and
Secretary
Richard Kneipper 56 Vice Chairman of the Board
Stephen Seiler 44 Director
Murray Feldman 64 Director
Bernard V. Carrico 54 Director
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The following sets forth biographical information concerning our
directors and executive officers for at least the past five years.
DR. ARUP SEN joined us in November 1996 as an Executive Vice President
and a director and was appointed Chairman of the Board of Directors, Chief
Executive Officer and President of our company in April 1997, and Chief
Financial Officer in January 2000. Prior to joining us, he co-founded
HealthTech Development Inc., a biotechnology commercialization company, in
December 1993 and served as its Chairman and Chief Executive Officer until
November 1996. Thereafter, he served as Chairman until HealthTech's merger
into our company in August 1998. From April 1995 until November 1996 he also
served as Vice Chairman of HealthTech Diagnostics Corporation, a specialty
clinical testing laboratory with multiple locations throughout the U.S. Dr.
Sen was President of Dallas Biomedical, Inc., a medical technology venture
capital fund in Dallas, Texas, from July 1992 to August 1993. Dr. Sen
received a Ph.D. in biochemistry in from Princeton University and has served
on the staff of the National Cancer Institute and the Research Institute of
Scripps Clinic. He is an inventor in more than 20 U.S. and foreign patents
related to the diagnosis and treatment of cancer, osteoporosis,
atherosclerosis, immune diseases and AIDS. Dr. Sen serves on the board of
directors of Aquagene, Inc., a development stage biotechnology company
developing transgenic fish for human pharmaceutical production, and is a
courtesy professor for Biotechnology at University of Florida, Gainesville.
RICHARD K. KNEIPPER joined us as Vice Chairman of the Board of Directors in
August 1998. Mr. Kneipper was the co-founder and President and Chief
Executive Officer of HealthTech Development Inc. from 1996 until its merger
into our company in August 1998. He also co-founded in 1995 and served as the
Chairman of the Board of HealthTech Diagnostics Corporation, where he
completed mergers and acquisitions, a private financing and the sale of
substantially all its assets to a public company in January 1997. Mr.
Kneipper was a senior partner at the law firm of Jones, Day, Reavis & Pogue
from 1982 until 1996, when he elected to become of counsel in order to devote
a significant portion of his time to various business activities. He received
his Bachelors of Science degree from Washington & Lee University and his J.D.
degree from Cornell University. Mr. Kneipper is Chief Administrative Officer
and a director of Provider HealthNet Services, Inc., a healthcare information
services company, a director of International Sourcing Ltd., an information
services company, and Genopath Technologies Inc., which provides phenotyping
services for genetically engineered animals.
STEPHEN SEILER is Executive Vice President of Planning, Investment &
Development for Elan Corporation plc., a pharmaceutical company, and became
one of our directors in December 1998. Prior to joining Elan in 1995, Mr.
Seiler was an investment banker with Paribas Capital Markets in New York and
London from 1991 to 1995. Mr. Seiler previously practiced corporate law with
Paul, Weiss, Rifkind, Wharton & Garrison. Elan Corporation, plc, is entitled
to nominate one director to serve on our Board of Directors. Stephen Seiler
is Elan's current nominee for director.
MURRAY FELDMAN is President of Murray Financial Associates, Inc., a
residential mortgage banking company, which he founded in 1982. Mr. Feldman
has been one of our directors since September 1996.
BERNARD V. CARRICO, JR. is President and Chief Executive Officer of Argo
Funding Company, LLC, a private investment firm, which he co-founded in 1998.
Mr. Carrico became one of our directors in 1998. From 1995 to August 1997,
he served as the President and Chief Executive Officer of The Heartland
Capital Appreciation Fund, LP, an investment fund which he co-founded with Ms.
Alice Walton. Prior to Heartland Capital, Mr. Carrico served as First Vice
President of Drexel Burnham Lambert in Dallas from 1987 to 1990; President and
Chief Operating Officer of Western Capital Corporation, a privately owned
investment company in Dallas, Texas, from 1985 to 1987; and as Chief Financial
Officer of Texas Federal Financial Corporation of Dallas. Mr. Carrico
received his B.S. degrees from St. Joseph's College, Indiana and an M.B.A.
from Wayne State University, Detroit, Michigan.
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Scientific and Medical Advisory Board
We have assembled a distinguished panel of scientists to serve on our
Scientific and Medical Advisory Board in order to provide our company with
guidance and advice on various scientific, clinical and intellectual property
matters. The advisors meet as a group as well as individually with our staff
on a project-by-project basis in specific areas of expertise.
SHELDON MARC SCHUSTER, PH.D. Dr. Schuster has served as s Director of
the Biotechnology Program of the University of Florida College of Medicine,
Gainesville, Florida, since 1992; Associate Director for Research of the
University of Florida Cancer Center, from 1991 to 1994; and Professor of
Biochemistry and Molecular Biology, Adjunct Professor of Medicine and Adjunct
Professor of Chemistry at University of Florida since 1989. Dr. Schuster is a
nationally recognized authority on enzyme biochemistry, and is the recipient of
eight patents in the U.S. He is a member of the Board and Chief Scientist of
AquaGene, Inc. (Alachua, Florida); a member of the Scientific Advisory Board
of Ixion Biotechnology, Inc. (Alachua, Florida); a member of the Editorial
Board of Stedman's Medical Dictionary (Baltimore, Maryland); a member of the
Board of BioWeb, Inc. (Alachua, Florida); and a consultant for BioNebraska,
Inc. (Lincoln, Nebraska). In 1988 Dr. Schuster was a Visiting Professor in the
Department of Biological Sciences at Stanford University. From 1981 to 1988, he
had various positions with the University of Nebraska Lincoln, including
Director of its Gene Synthesis Facility and its Peptide Synthesis Facility.
Prior thereto he had acted in various research capacities at the University of
Wisconsin, the University of Arizona and the Syntex Research Institute of
Hormone Biology. Dr. Schuster received a Ph.D. from the University of Arizona
in 1974.
BRIAN M. KINNEY, M.D. Dr. Kinney is Chairman of New Technology
Committee of the American Society of Plastic and Reconstructive Surgery and
since 1991 has engaged in private practice in plastic and reconstructive
surgery in California. He serves as an adjunct faculty member in the Department
of Surgery at the University of Southern California School of Medicine. He also
is an advisor for various medical companies engaged in the development of new
technologies applicable to soft tissue surgery. Dr. Kinney has authored
numerous publications and serves on a number of national and international
committees. He received an M.D. degree from Tulane University, completed his
internship and residency at the University of California, Los Angeles and then
completed his residency and board certification in plastic surgery at the
University of California, Los Angeles. Dr. Kinney also completed a research
fellowship on muscle and bone regeneration at University of California,
Los Angeles.
Limited Liability and Indemnification of Directors
We have included a provision in our Certificate of Incorporation to limit
the personal liability of our directors for violations of their fiduciary
duty. The provision eliminates directors liability to EPI or its stockholders
for monetary damages, except for
o any breach of the director's duty of loyalty to EPI or its
stockholders,
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
o unlawful payment of dividends or unlawful stock purchases or
redemptions, or
o any transaction from which a director derived an improper personal
benefit.
46
<PAGE>
This limitation of liability does not apply to liabilities arising under
the federal or state securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
Our Certificate of Incorporation and By-Laws require us to indemnify
our directors, officers, employees and other agents to the fullest extent
permitted by the Delaware General Corporation Law. We believe that
indemnification under our Certificate of Incorporation and By-Laws covers at
least negligence and gross negligence on the part of indemnified parties. We
are also allowed under our By-Laws to enter into indemnification agreements
with directors and to purchase insurance on behalf of directors. We have
obtained directors and officers' insurance providing indemnification for all
of our directors, officers and employees for certain liabilities.
EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following table presents all compensation paid to or earned by our
President and Chief Executive Officer for the years ended December 31, 1997,
1998 and 1999. No other executive officer who was employed by us in 1999 had
a total annual salary and bonus in excess of $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-term Compensation
----------------------
Annual Compensation Awards Payout
--------------------- --------------------------------------
Securities
Other Annual Restricted Underlying All Other
Fiscal Compensation Stock Options/ LTIP Compensation
Name and -------------------------------------------------------------------------------------
Principal Position Year Salary($) Bonus($) ($) Awards($) Sars(#) Payout($) ($)
------------------ ---- ------- ------ --------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arup Sen, Chairman 1999 131,295 -- 0 0 200,000 - -
President & Chief 1998 132,981 -- 500(1) 0 261,966 63,654(3) -
Financial Officer 1997 123,604 -- 6,000(1) 152,446(2) 25,000 - -
</TABLE>
(1) Represents a car allowance.
(2) Represents the value on the various dates of grant of 116,047 shares of
our common stock received by Dr. Sen in lieu of cash compensation.
(3) Represents amount payable to Dr. Sen representing the aggregate
exercise price of options to purchase 244,823 shares of common stock.
(4) Aggregate restricted stock holdings at December 31, 1999 for Dr. Sen
were 2,278,394 shares of common stock valued at $159,488 on December
31, 1999. All restricted stock awards vest immediately and are
entitled to receive dividends paid on the common stock, if any.
47
<PAGE>
Compensation of Directors
Under our Non-Employee Directors' Equity Compensation Plan, we pay
each outside director $2,500 per quarter in our common stock at a price equal to
the closing price on the last business day of trading in such quarter, payable
after January 1 of the following year. At the time that an outside
director joins the Board of Directors, the director is awarded a non-
qualified stock option for 15,000 shares of our common stock, with each
option granted vesting 20% immediately and an additional 20% on each one
year anniversary after the grant date. The option granted to the outside
director has an exercise price equal to the fair market value on the date
of grant. Directors who are also employees of our company do not receive
compensation for their participation as members of the Board of Directors
of our company.
Employment Arrangements
In August 1998, our Board of Directors issued a memorandum to Arup Sen,
outlining in general the terms of employment of Dr. Sen as Chief Executive
Officer of EPI, effective as of September 1, 1998. The memorandum provides for
an initial base salary of $130,000, which was increased to $150,000 and may
further increase up to $200,000 in a series of stepped increments upon the
achievement of specified milestones. In May 1999, Dr. Sen voluntarily decreased
his annual base salary to $126,000 in order to reduce Company expenses.
The memorandum also provides that our company will grant to Dr. Sen a ten-year
option to purchase 500,000 shares at the stock price at close of trading on the
date of grant (August 25, 1998), 200,000 of which have vested based on the
achievement of specific milestones set by the Board of Directors, with the
remainder to vest upon the achievement of other such milestones. The grant of
these options is subject to an increase in the number of shares available for
issuance under our company's stock option plan sufficient to cover such grant.
In 1999, shares became available to cover 200,000 shares under the grant.
Stock and cash bonuses are to be at the sole discretion of the Board of
Directors. In the event that Dr. Sen's employment is terminated without "cause"
before three years, Dr. Sen is entitled to a severance of six months' base
salary subject to his mitigation of such payment by seeking other employment.
All his stock options will vest immediately and will remain exercisable for the
original term of the option in the event his employment is terminated due to an
acquisition by or merger with a third party not recommended and/or approved by
Dr. Sen, or without "cause".
Prior to our reorganization of our company, Dr. Sen had a previous
employment agreement with us which granted him options in lieu of cash salary
the exercise price of which we were to pay upon a change of control. In August
1998, we recorded a related party payable to Dr. Sen for $63,654 related to the
exercise of these options.
48
<PAGE>
Stock Options
The following table provides information related to options granted to our
Chief Executive Officer during the year ended December 31, 1999.
<TABLE>
<CAPTION>
Individual Grants
Number of % of Total
Securities Options/SARS Exer-
Underlying Granted to cise
Options/SARS Employees in or Exp.
Name Granted Year Base Date
---- --------- ----------- ----- ----
<S> <C> <C> <C> <C>
Arup Sen 200,000(1) 74.1% $.85 08/25/08
</TABLE>
(1) Shares vested immediately on the grant date.
The following table provides information related to options held by our
Chief Executive Officer at December 31, 1999. No stock options were exercised
by our Chief Executive Officer during the year ended December 31, 1999. Our
company does not have any outstanding stock appreciation rights.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Options/SARS at FY-End(#) Options/SAR at FY-End ($)(1)
------------------------- ----------------------------
Shares Acquired Value
on Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
--------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Arup Sen 0 0 561,966 0 0 0
</TABLE>
(1) The closing price for our company's common stock as
reported through the OTC Bulletin Board on December 31, 1999, the
last trading day of 1999 was $.07. Value is calculated on the
basis of the excess of the option exercise price over the product
of $.07 multiplied by the number of shares of common stock
underlying the option.
49
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table lists certain information regarding the beneficial
ownership of our common stock as of June 12, 2000. The "Before Offering"
column lists ownership percentages of certain persons before closing of this
offering. The "After Offering" column lists the percentage of the common stock
owned by these persons taking into account the issuance of all 5,000,000
shares of common stock in this offering.
The table lists shareholdings by:
o Each person known by us to own beneficially more than 5% of our common
stock;
o Each of our directors;
o Our executive officers;
o Our directors and executive officers as a group
Except as otherwise noted, the address of each person listed in the table
is c/o Electropharmacology, Inc., 12085 Research Drive, Alachua, Florida
32615. The table includes all shares of common stock issuable within 60 days
of June 12, 2000, upon the exercise of options and warrants or the conversion
of preferred stock beneficially owned by the indicated stockholders on that
date based on options, warrants and preferred stock outstanding as of June 12,
2000, or otherwise issuable. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and includes voting
and investment power with respect to shares. Except as otherwise indicated
below, the persons named in the table have sole voting and sole investment
control with respect to all shares beneficially owned.
50
<PAGE>
<TABLE>
<CAPTION>
Percent Beneficially
Owned
--------------------
Shares Beneficially Before After
Name of Beneficial Owner Owned Offering Offering
------------------------ -------------------- -------- --------
<S> <C> <C> <C>
Arup Sen, Chairman of the
Board, Chief Executive Officer 2,947,053 (1)(2) 16.27% 12.75%
and President
Richard K. Kneipper, Vice 1,475,103 (2)(3) 8.40% 6.54%
Chairman and Director
Murray Feldman, Director 623,799 (2)(4) 3.55% 2.76%
Bernard Carrico, Director 78,101 (3) * *
Stephen Seiler, Director 75,260 (3) * *
Elan International Services,Ltd.
102 St James Court
Flatts, Smith Parish, Bermuda,
FL04 13,303,237 (5) 48.13% 40.76%
Norton Herrick
2295 Corporate Blvd., NW
Suite 222
Boca Raton, FL 33431 1,623,950 (2)(6) 9.25% 7.20%
James Kaput
1424 Florence Ave
Evanston, Il 60201 1,422,002 (2) 8.10% 6.31%
Krishna and Shashikala
Jayaraman
124 Golden Shadow Circle
The Woodlands, TX 77381 970,939 (7) 5.46% 4.26%
All directors and executive
officers as a group (5 persons) 5,199,316 (2) 28.64% 22.46%
* Less than one percent (1%)
</TABLE>
51
<PAGE>
(1) Includes 561,966 shares issuable upon exercise of stock options.,
(2) Does not include shares beneficially owned by other parties to a Master
Agreement between Norton Herrick, David Saloff, a former director
and executive officer, Murray Feldman (the EPI Group), and Arup
Sen, James Kaput and Richard Kneipper (the HealthTech Group).
Under the Master Agreement, the EPI Group and the HealthTech Group
agreed to vote all shares of common stock they each owned for a
board of directors consisting of two persons nominated by the EPI
Group, two persons nominated by the HealthTech Group and one
person who is the Chief Executive Officer. In addition, in
connection with the election of the EPI Group's nominees, Mr.
Herrick and Mr. Feldman agreed with each other to vote their
shares in favor of a person selected by the other. This Master
Agreement expires on the earlier of August 24, 2000 or the date on
which EPI's market capitalization equals or exceeds $40,000,000
for any period of 20 trading days within any six-month period. To
the extent that these persons share voting power under the Master
Agreement, each person is deemed under the rules of the Securities
and Exchange Commission to beneficially own the shares of common
stock currently beneficially owned by each person with whom this
person shares voting power. As of June 12, 2000, the shares of
common stock beneficially owned by all parties to the Master
Agreement(including 294,914 shares held in the name of David
Saloff) represented approximately 46.63% of the issued and
outstanding shares of common stock and would represent 36.61% of
the outstanding shares of common stock as adjusted for the maximum
number of shares to be sold in this offering.
(3) Includes 6,000 shares issuable upon exercise of stock options.
(4) Includes 22,500 shares issuable upon exercise of stock options.
(5) Includes 7,569,894 shares of common stock issuable upon conversion of
9,083.7 shares of preferred stock and 2,520,821 shares issuable
upon exercise of warrants.
(6) Includes 60,000 shares in the name of Rozel International Holdings,
which are pledged to Mr. Herrick as security for a loan. Mr.
Herrick disclaims beneficial ownership of these shares.
(7) Includes 240,939 shares issuable as of May 16, 2000.
CERTAIN TRANSACTIONS
In February 2000, our company, Arup Sen, our Chairman of the Board,
President and Chief Executive and Financial Officer, and our company's third
party provider of Web-site design and marketing services entered into an
agreement. Due to our lack of funds with which to pay the third party
provider for services rendered to our company, Dr. Sen agreed to assign the
proceeds of the sale of up to 128,520 shares of our common stock held by
Dr. Sen to the third party provider. Dr. Sen agreed to sell 18,360 shares per
month in order to pay the third party provider for services rendered to our
company over the seven-month period from January 2000 to July 2000. As
consideration for this advance of funds to our company by Dr. Sen, we agreed
to issue to Dr. Sen on a monthly basis shares of our common stock equal to the
current value of the number of shares required to be sold by Dr. Sen under the
agreement, and any adverse tax consequences resulting to Dr. Sen as a
result of his sale of these shares. This formula may be modified by our
company's board of directors at their discretion. As of March 31, 2000, we
recorded a related party accrued expense of $22,032 as a result of this
agreement.
52
<PAGE>
In February 1999, Dr. Sen, borrowed $85,000 from our company, evidenced
by a demand promissory note bearing interest at the prime rate plus 1% per
annum. The loan was repaid in full in 1999.
In September 1998, Elan International Services invested $7.5 million in
convertible preferred stock of our company, and agreed to invest an additional
$2 million to buy our common stock or other equity securities. In return for
its $2 million investment, Elan International acquired 3,212,522 shares of our
common stock, $386,667 of our convertible preferred stock and 2,520,821
warrants to purchase shares of our common stock. Under the agreement with
Elan International, we must use a substantial portion of the proceeds from
Elan International's investment to fund further development of iontophoresis
products under a license agreement with Elan Pharma International. We are
currently in violation of our agreement with Elan because we have not made the
minimum investment required by Elan for research and development activities as
specified by the agreement. Elan has not exercised any of its rights regarding
the violation.
In September 1998, we also acquired from Elan Pharma International, a
company under common control with Elan International Services, a worldwide
license to a new flexible iontophoresis patch technology. We paid $7.5 million
to acquire the Elan technology and product prototype design. We are required
to make future payments of prescribed license fees and royalties payable from
any revenues from product sales and/or sublicensing to future corporate
partners.
We acquired in August 1998, Gemini Biotech, Ltd., a privately held
biotechnology limited partnership. The purchase was a complex transaction in
which 6 million shares of our company common stock were to be issued to
Krishna Jayaraman, Vice Chairman and Chief Executive Officer and President of
Gemini Biotech, and his wife in June 1999. Prior to the time that the common
stock was to be issued to the Jayaramans, they would serve as the limited
partners of and have a minority interest in our company's operating entity,
Gemini Health Technologies L.P.
In September 1999, as a result of litigation we initiated against Dr.
Jayaraman alleging certain misrepresentations and omissions in connection with
our acquisition of Gemini, we entered into a settlement agreement with the
Jayaramans in which, among other things, Dr. Jayaraman agreed to resign his
positions with our company and we agreed to pay Dr. Jayaraman certain amounts
in order to secure a release of all our company's obligations to him,
including those agreements entered into as part of the Gemini acquisition.
The settlement agreement provided the following payments to Mr. Jayaraman:
$40,000 payable over eight months, the issuance of 950,000 shares of common
stock of our company in exchange for the Jayaramans' minority partnership
interest, and in lieu of the 6 million shares previously issuable to them and
the issuance of up to an additional $242,000 in value of shares of our common
stock (priced at the greater of $.5022 per share or the average market price
20 days prior to issuance), payable in two annual installments, beginning on
May 16, 2000, to be reduced by any amounts earned by Dr. Jayaraman from other
employment or third party consulting services from the date of the agreement
through May 16, 2001.
53
<PAGE>
In connection with the sale of our medical device assets to ADM Tronics
in August 1998, we used 1,525,000 shares of ADM Tronics common stock we
received to satisfy $650,000 of a $709,379 secured note payable for
previously incurred legal expenses owed to Jones, Day, Reavis and Pogue, our
company's former legal counsel. We also entered into an agreement with Jones,
Day to allow Jones, Day to liquidate its ADM Tronics stock prior to us
liquidating our ADM Tronics stock holdings until August 1999. In addition, in
connection with our company reorganization, we issued to Jones, Day 322,831
shares of common stock valued at $128,166 to satisfy the remaining portion of
the note payable and other past due payables to Jones, Day for legal services
previously rendered. Richard Kneipper, Vice Chairman of our company and a
greater than 5% beneficial owner of our company, serves as of counsel to
Jones, Day.
In connection with the merger of HealthTech Development, Inc. into our
company in August 1998, we issued an aggregate of 6,172,095 shares of common
stock of our company to the shareholders of HealthTech, including Arup Sen,
Chairman of the Board, President and Chief Executive Officer of our company
(2,250,203 shares), Richard Kneipper (1,350,228 shares) and James Kaput, a
greater than 5% beneficial owner of our company (1,422,002 shares).
In connection with our reorganization in August 1998, Mr. Herrick, a
greater than 5% beneficial owner of our company, and our company agreed that
upon consummation of the reorganization all shares of preferred stock and all
warrants held by Mr. Herrick (242,950 and 1,300,000, respectively) would be
redeemed and exchanged 1,575,000 shares of common stock. In addition, Mr.
Feldman, a director and greater than 5% beneficial owner of our company,
agreed with us that upon consummation of the reorganization, all warrants
owned by him (373,607), would be redeemed and exchanged for 160,000 shares of
common stock.
DESCRIPTION OF COMMON STOCK
As of the date of this Prospectus, we have the authority to issue
30,000,000 shares of common stock, $.01 par value per share. There are
currently 17,550,308 shares of common stock outstanding.
If the maximum number of shares is sold in this offering, we will
have 22,550,308 shares of common stock outstanding, assuming:
o no exercise of current outstanding options to acquire 1,345,988
additional shares of common stock
o no exercise of current outstanding warrants to purchase 2,752,821
additional shares of common stock;
o no conversion of 8,697 shares of preferred stock convertible into
7,569,894 shares of common stock
o no issuance of the 481,879 shares issuable under contract obligations.
We are in the process of preparing an amendment to our Certificate of
Incorporation to increase the authorized number of shares of our common stock
to 50,000,000 shares. This amendment will require shareholder approval.
54
<PAGE>
Common Stock
o Holders of common stock are entitled to receive dividends only if we
have funds legally available and the Board of Directors declares a
dividend, and after any preferences to which holders of the preferred
stock may be entitled.
o Holders of common stock do not have any rights to purchase additional
Shares.
o Holders of common stock are entitled to one vote per share on all
matters
requiring a vote of shareholders.
o Since the common stock does not have cumulative voting rights in
electing directors, the holders of more than a majority of the
outstanding shares of common stock can elect all of the directors whose
terms expire that year, if they choose to do so.
o In the event of our liquidation, dissolution or winding up, holders of
common stock would be entitled to share in our assets remaining after
the payment of liabilities and the satisfaction of any liquidation
preference granted the holders of any outstanding shares of preferred
stock.
Voting Requirements
Our By-Laws require the approval of the holders of a majority of our
voting securities for most actions requiring shareholder approval. These
actions include
o election of directors
o mergers
o sales of substantially all of our assets
o amendment to our Articles of Incorporation.
Our Certificate of Incorporation authorizes the issuance of 10,000,000
shares of undesignated preferred stock. This provision makes it possible for
our board of directors to issue additional preferred stock with voting or
other rights or preferences that could impede the success of any attempt to
change control of us. There are no provisions in our By-Laws that would
delay, defer or prevent a change in control of EPI.
Transfer Agent
The transfer agent and registrar for our common stock is Continental
Stock Transfer Company, 2 Broadway, New York, NY 10004. The telephone number
of Continental is 212-509-4000.
55
<PAGE>
PLAN OF DISTRIBUTION
We are offering our common stock to the public through our officers
and directors. No officer or director of our company will receive any
compensation in connection with the sale of shares. We may retain the services
of selling agents who are members of the National Association of Securities
Dealers to assist us. On any sales made by the selling agents, a commission
of up to ten percent (10%) may be paid. To date there exist no arrangements
or commitments to retain any selling agent.
This is a "best efforts" offering, and there is no minimum number of
shares which must be sold. The maximum number of shares which will be sold is
5,000,000. All funds received will go immediately to us. If few shares of our
common stock are sold, all the proceeds may be used to pay the expenses of
this offering. This offering will begin on the date of this Prospectus and
continue for up to six months (unless extended) or until the 5,000,000 shares
of common stock are sold or we terminate the offering.
There is only a limited public market for our common stock, and we can
not assure you that a more active trading market will develop after the
offering or that the common stock will continue to trade at a price at or
higher than the offering price in this offering.
LEGAL MATTERS
Wendy Mitchler, Esq., Ft. Lauderdale, Florida, will pass upon the
validity of the common stock offered hereby.
EXPERTS
The financial statements of our Company at December 31, 1999 and for the
two years ended December 31, 1999 appearing in this Prospectus and Registration
Statement have been audited by Sweeney, Gates & Co., independent certified
public accountants, as set forth in their report on the financial statements
appearing elsewhere herein. The financial statements are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION ABOUT OUR COMPANY
EPI has filed a registration statement under the Securities Act of 1933,
covering the common stock offered by this prospectus, with the United States
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. This prospectus, which is a part of the registration statement, does
not contain all of the information contained in the registration statement and
the exhibits and schedules to the registration statement. For further
information with respect to EPI and the common stock offered by this
prospectus, reference is made to the registration statement.
56
<PAGE>
We are required to file periodic reports with the Securities and Exchange
Commission. Copies of materials we file with the SEC may be read and copied at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0300. The SEC maintains an
Internet Site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The
address of the SEC's Internet Site is http://www.sec.gov. We file our required
reports and other information electronically with the SEC.
We intend to provide to our stockholders with annual reports containing
financial statements audited and reported on by independent auditors. We will
make quarterly reports containing unaudited financial information for each of
the first three quarters of each year available to our stockholders upon
request. Stockholders can obtain the most recent copies of these reports by
sending a written request to Arup Sen, Chairman and CEO, at our principal
executive offices located at 12085 Research Drive, Alachua, Florida 32615.
57
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999 F-3
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999 (unaudited) and for the years
ended December 31, 1999 and 1998 F-4
Consolidated Statements of Changes in Stockholders' Deficit
for the three months ended March 31, 2000 (unaudited) and
for the years ended December 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 (unaudited) and for the
years ended December 31, 1999 and 1998 F-7
Notes to the Consolidated Financial Statements F-9
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Electropharmacology, Inc.
We have audited the accompanying consolidated balance sheet of
Electropharmacology, Inc. as of December 31, 1999 and the related
consolidated statements of operations, stockholders' deficit and cash
flows for the two years ended December 31, 1999. These consolidated
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 audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Electropharmacology, Inc. as of December 31, 1999, and the results of
its consolidated operations and its consolidated cash flows for the two
years ended December 31, 1999, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the
Company has suffered recurring losses from operations that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note
2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Sweeney, Gates & Co.
Fort Lauderdale, Florida
April 7, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
Electropharmacology, Inc.
Consolidated Balance Sheets
March 31, December 31,
2000 1999
-------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41,305 $ 6,577
Accounts receivable, net of allowance for
doubtful accounts of $30,203 at March 31,
2000 and December 31, 1999 53,829 61,554
Other receivable - 32,612
Inventory 3,172 7,172
Investment 46,249 210,182
Prepaid expenses 95,777 30,031
--------- ---------
Total current assets 240,332 348,128
Property and equipment, net of accumulated
depreciation of $272,782 at March 31, 2000
and $255,012 at December 31, 1999 248,186 265,956
Patents, net of accumulated amortization of
$26,892 at March 31, 2000 and $26,385 at
December 31, 1999 76,462 76,969
Other assets 400 400
--------- ---------
TOTAL ASSETS $ 565,380 $ 691,453
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 395,929 $ 403,964
Accrued expenses 394,185 354,606
Accrued expenses - related parties 107,744 63,654
Current portion of long term debt 1,408,738 1,280,890
Current portion of capital leases 13,921 54,504
--------- ---------
Total current liabilities 2,320,517 2,157,618
Notes payable - related parties 65,926 65,926
Long term debt, less current portion 14,807 15,503
Long term capital leases, less current portion 7,593 8,188
Mandatorily redeemable convertible preferred
stock, $.01 par value, 7,887 shares authorized,
issued and outstanding at March 31, 2000 and
December 31, 1999 9,093,263 8,886,544
---------- ----------
Total Liabilities 11,502,106 11,133,779
---------- ----------
Stockholders' deficit
Convertible preferred stock, $.01 par value
9,992,113 shares authorized, no shares issued
and outstanding
Common stock, $.01 par value, 30,000,000 shares
authorized; 17,268,325 shares issued and
outstanding at March 31, 2000 and December 31,
1999 172,683 172,683
Additional paid-in capital 21,738,152 21,738,152
Accumulated other comprehensive loss (8,505) (88,399)
Accumulated deficit (33,081,056) (32,506,762)
---------- ----------
(11,178,726) (10,684,326)
Common Stock Reserved 242,000 242,000
---------- ----------
Total stockholders' deficit (10,936,726) (10,442,326)
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT $ 565,380 $ 691,453
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Three Months
December 31, Ended March 31,
1999 1998 2000 1999
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Rentals $ - $ 359,143 $ - $ -
Sales 513,021 261,341 57,912 124,163
------- ------- ------ -------
Total revenue 513,021 620,484 57,912 124,163
------- ------- ------ -------
Expenses:
Cost of revenue 565,101 410,087 65,902 104,638
Selling, general and administrative 2,027,908 1,962,403 267,409 543,795
Research and development 298,354 53,823 19,609 88,047
Inventory obsolescence - 731,493 - -
Impairment loss on intangible assets - 8,811,114 - -
Impairment loss on in-process research
and development - 6,000,000 - -
-------- --------- -------- -------
Total operating expenses 2,891,363 17,968,920 352,920 736,480
--------- --------- ------- -------
Operating loss (2,378,342) (17,348,436) (295,008) (612,317)
--------- ---------- --------- ---------
Other income (expense):
Gain on settlement of litigation 1,150,577 - - -
Loss on sale of securities (106,935) - (32,749) -
Gain (loss) on disposal of equipment (94,502) 716,223 - -
Interest and other income 12,634 31,882 17 10,506
Interest expense (147,010) (108,892) (39,835) (34,476)
Other expense (6,844) (6,210) - -
-------- -------- ------- -------
Total other income (expense) 807,920 633,003 (72,567) (23,970)
-------- -------- -------- --------
Loss before minority interest (1,570,422) (16,715,433) (367,575) (636,287)
Minority interest 671,852 2,040,000 - 206,303
------- --------- -------- -------
Net loss (898,570) (14,675,433) (367,575) (429,984)
Preferred stock dividends (812,377) (815,071) (206,719) (187,500)
--------- --------- -------- ---------
Net loss available to common stockholders $(1,710,947) $(15,490,504) $(574,294) $(617,484)
============ ============ ======== =========
Net loss per share - basic and diluted $(0.11) $(2.15) $(0.03) $(0.04)
======= ======= ======== =======
Weighted average number of common shares
outstanding - basic and diluted 16,101,254 7,214,469 17,268,325 15,276,758
========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Preferred Stock Common Stock Additional
$.01 par value $.01 par value paid-in Deferred
Shares Amount Shares Amount capital compensation
------ ------ ------ ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1998 242,950 $2,430 4,071,194 $ 40,711 $15,254,912 $(67,678)
Issuance of common stock for services - - 67,610 676 24,041 -
Induced conversion of preferred stock (242,950) (2,430) 1,872,000 18,720 730,081 -
Issuance of stock in settlement
of accounts payable - - 322,581 3,226 124,940 -
Issuance of common stock
for acquisition - - 6,172,100 61,721 3,253,576 -
Issuance of common stock and
stock subscription receivable - - 777,202 32,126 1,967,875 -
Issuance of warrants with convertible
mandatorily redeemable
preferred stock - - - - 400,000 -
Dividend on convertible
preferred stock - - - - - -
Amortization and cancellation of
deferred compensation - - - - (28,496) 67,678
Comprehensive loss:
Unrealized gain on securities - - - - - -
Net loss - - - - - -
Total comprehensive loss - - - - - -
------------------------------------------------------------------------------------
Balance, December 31, 1998 - - 13,282,687 $157,180 $21,726,929 $ -
</TABLE>
F-5
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Accumulated
other Common Total
comprehensive Retained Subscription stock stockholders'
income (loss) deficit receivable reserved deficit
------------- -------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1998 $ - $(15,305,311) $ - $ - $ (74,936)
Issuance of common stock for services - - - - 24,717
Induced conversion of preferred stock - (627,571) - - 118,800
Issuance of stock in settlement of
accounts payable - - - - 128,166
Issuance of common stock for acquisition - - - - 3,315,297
Issuance of common stock and
stock subscription receivable - - (500,000) - 1,500,001
Issuance of warrants with convertible
mandatorily redeemable preferred
stock - - - - 400,000
Dividend on convertible preferred
stock - (187,500) - - (187,500)
Amortization and cancellation of
deferred compensation - - - - 39,182
Comprehensive loss:
Unrealized gain on securities 803,279 - - - -
Net loss - (14,675,433) - - -
Total comprehensive loss - - - - (13,872,154)
--------- ------------- ---------- ------- ------------
Balance, December 31, 1998 $803,279 $(30,795,815) $(500,000) $ - $(8,608,427)
</TABLE>
F-5(cont)
<PAGE>
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Preferred Stock Common Stock Additional
$.01 par value $.01 par value paid-in Deferred
Shares Amount Shares Amount Capital Compensation
------ ------ ------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 - $- 13,282,687 $157,180 $21,726,929 $-
Issuance of stock on collection of
subscription receivables - - 2,435,320 - (386,667) -
Issuance of common stock for services - - 600,318 6,003 190,025 -
Issuance of stock options for services - - - - 8,365 -
Dividend on convertible
preferred stock - - - - - -
Issuance of stock for settlement
of litigation - - 950,000 9,500 199,500 -
Reserve for stock to be issued
in settlement of litigation - - - - - -
Comprehensive loss:
Net change in unrealized loss
on available-for-sale securities - - - - - -
Net loss - - - - - -
Total comprehensive loss - - - - - -
--------------------------------------------------------------------------------
Balance, December 31, 1999 - - 17,268,325 172,683 21,738,152 -
Net change in unrealized loss
on available-for-sale securities - - - - - -
Dividend on convertible
preferred stock - - - - - -
Net loss (unaudited) - - - - - -
--------------------------------------------------------------------------------
Balance, March 31, 2000 (unaudited) - $- 17,263,325 $172,683 $21,738,152 $-
================================================================================
</TABLE>
F-6
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Accumulated
other Common Total
comprehensive Retained Subscription stock stockholders'
income deficit receivable reserved deficit
--------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ 803,279 $(30,795,815) $(500,000) $ - $ (8,608,427)
Issuance of stock on collection of
subscription receivable - - 500,000 - 113,333
Issuance of common stock for services - - - - 196,028
Issuance of stock options for services - - - - 8,365
Dividend on convertible
preferred stock - (812,377) - - (812,377)
Issuance of stock for settlement
of litigation - - - - 209,000
Reserve for stock to be issued
in settlement of litigation - - - 242,000 242,000
Comprehensive loss:
Net change in unrealized loss
on available-for-sale
securities (891,678) - - - (891,678)
Net loss - (898,570) - - -
Total comprehensive loss - - - - (1,790,248)
--------------------------------------------------------------------------
Balance, December 31, 1999 (88,399) (32,506,762) - 242,000 (10,442,326)
Net change in unrealized loss
on available-for-sale securities 79,894 - - - 79,894
Dividend on convertible
preferred stock - (206,719) - - (206,719)
Net loss (unaudited) - (367,575) - - (367,575)
--------------------------------------------------------------------------
Balance, March 31, 2000 (unaudited) $ (8,505) $(33,081,056) $ - $242,000 $(10,936,726)
==========================================================================
</TABLE>
F-6(cont)
<PAGE>
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Three Months Ended
December 31, March 31,
1999 1998 2000 1999
------ ------ ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (898,570) $(14,675,433) $(574,294) $(617,484)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 90,236 167,865 18,277 28,984
Issuance of common stock and warrants for services 176,029 37,217 - 12,500
Issuance of stock options to purchase common stock 8,365 - - -
Reserve for stock to be issued in settlement of litigation 242,000 - - -
Issuance of notes payable for services - 63,654 - -
Gain on settlement of litigation (1,150,577) - - -
Loss on sale of available for sale securities 106,935 - - -
(Gain) loss on disposal of equipment 94,502 (716,223) 32,749 -
Increase in inventory obsolescence allowance - 731,493 - -
Issuance of common stock in settlement of accounts payable - 128,166 - -
Induced conversion of warrants - 118,800 - -
Amortization of deferred compensation - 67,678 - -
Accretion of redeemable convertible preferred stock 228,571 171,429 206,719 187,500
Impairment loss of in-process research and development 6,000,000 - - -
Impairment loss of purchased intangible assets - 8,811,114 - -
Loss attributable to minority interest (671,852) (2,040,000) - (206,303)
Changes in operating assets and liabilities
Decrease in accounts receivable 21,943 85,907 7,725 (39,413)
Decrease in other receivables 2,769 29,979 32,612 -
Decrease in inventory - 145,061 4,000 (4,332)
Decrease in prepaid expenses 103,706 23,328 (65,746) 27,788
Decrease/increase in deposits - - - (5,000)
Decrease in other assets 8,350 9,251 - -
(Increase) decrease in accounts payable (79,838) 102,329 (8,035) (59,204)
Increase in notes payable for services 35,000 - - -
Increase (decrease) in accrued expenses 172,968 (78,421) 39,579 (7,359)
Increase in accrued expenses - related parties - - 44,090 -
----------- --------- --------- ---------
Net cash used in operating activities (1,509,463) (816,806) (262,324) (682,223)
----------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (42,747) (41,694) - (23,044)
Proceeds from sale of property and equipment - 164,420 - -
Cash paid for licensing and technology - (7,500,000) - -
Sale of available for sale securities 158,173 - 211,078 -
Net cash acquired from acquisitions - 346,820 - -
Loan to related party - - - (85,000)
---------- ------------ --------- ---------
Net cash provided by (used in) investing activities $ 115,426 $ (7,030,454) $ 211,078 $ 108,044
---------- ------------ --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
ELECTROPHARMACOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended For the Three Months Ended
December 31, March 31,
1999 1998 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from financing activities: (Unaudited)
Proceeds from the issuance of mandatorily redeemable,
convertible preferred stock $ - $7,500,000 $ - $ -
Proceeds from issuance of common stock, net
of subscription receivables - 600,000 - -
Proceeds from notes payable 7,106 - - -
Proceeds from notes payable to finance insurance premium - - 100,315 -
Proceeds from receipt of stock subscription receivable 1,400,000 - - -
Proceeds from issuance of common stock - - - 900,000
Proceeds from capital leases 1,340 - - -
Repayment of notes payable (155,682) (192,193) - -
Repayment of capital leases (12,161) (12,032) (14,341) (88,033)
---------- ---------- ------- --------
Net cash provided by (used in)financing activities 1,240,603 7,895,775 85,974 811,967
---------- ---------- ------- --------
Net increase (decrease) in cash (153,434) 48,515 34,728 21,700
Cash at the beginning of year 160,011 111,496 6,577 160,011
---------- ---------- ------- --------
Cash at end of year $ 6,577 $ 160,011 $ 41,305 $181,711
========== ========== ======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 35,428 $69,153 $ 917 $ 23,862
========== ========== ======= ========
Supplemental disclosure on non-cash investing and
financing activities:
Issuance of common stock for services $ 196,029 $ 37,217 $ - $ 22,500
Issuance of notes payable
Issuance of notes payable for services 35,000 63,654 - -
Reserve for stock to be issued in settlement
of litigation 242,000 - - -
Issuance of notes payable for audit fees, net - 118,430 - -
Notes payable for prepaid insurance 7,716 137,268 - -
Purchase of assets under capital lease financing 1,340 28,343 - -
Conversion of preferred stock to common stock - 627,571 - -
Conversion of warrants to common stock - 118,800 - -
Common stock subscriptions receivable - 1,400,000 - -
Sale of a business - 1,865,673 - -
Issuance of common stock in settlement with
President of Gemini 209,000 - - -
Settlement with outside legal counsel - 778,166 - -
Issuance of common stock for an acquisition - 3,315,297 - -
Net value of partnership units acquired in an acquisition - 4,071,429 - -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
AND THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business and major suppliers - Electropharmacology, Inc., a
Delaware corporation (the "Company") was incorporated on August 31,
1990 in California under the name Magnetic Resonance Therapeutics,
Inc., and reorganized through a merger in February 1995 with
Electropharmacology, Inc. Until August 24, 1998, the Company
manufactured and marketed, primarily to nursing homes and plastic
surgeons, SofPulse devices that deliver pulsed electromagnetic signals
in the radio frequency range ("PEMS").
The Company consummated a corporate reorganization on August 24, 1998
when it became a biotechnology company through a series of
transactions, including (i) the acquisition of two privately held
business entities engaged in developing molecular technologies for the
design of drugs to combat cancer and arthritis, infection and other
complex diseases of humans, and (ii) the sale of the past business
operations related to the manufacturing and leasing of SofPulse devices
in order to focus on potential applications of the underlying PEMS
technology in drug delivery and tissue regeneration. Since the
reorganization, the Company has been engaged in developing drug
delivery technologies to deliver pharmaceutical drugs and biotechnology
products more effectively to diseased tissues, and drug design
technologies to create new drugs aimed at the genes and proteins that
cause or control complex diseases. The Company has used its drug
design technologies to make and sell custom products for molecular
biology and genomics research.
The research activities of the Company focus on the design and
discovery of therapeutic drugs and diagnostic agents using
modifications of the building blocks of the genetic material, namely
gene bases. The Company has built a library of proprietary and
exclusively licensed compounds that target genes or proteins implicated
in cancer and rheumatoid arthritis. The Company, through Gemini
Biotech, Ltd. ("Gemini" and "Gemini Division"), also makes and sells
custom products for genomics research and drug discovery to academic
researchers and biopharmaceutical companies.
Unaudited Interim Financial Statements - The unaudited interim
financial statements for the three months ended March 31, 2000
have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form SB-2. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for
the year ending December 31, 2000.
Principles of consolidation - The accompanying consolidated
financial statements include the accounts of the Company, its
wholly owned subsidiaries and partnerships. All material
intercompany accounts and transactions have been eliminated in
consolidation. Minority interest consists of the ownership
interest of the minority partners of Gemini Health Technologies,
L.P. (the "Partnership") through September 17, 1999. On that
date the minority partners exchanged their partnership interests
in Gemini for common shares of the Company (see Note 14).
F-9
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition - Rental revenue during 1998 was recognized
over the period in which the related equipment was under lease to
a customer, primarily on a per use basis (see Note 3). Sales
revenue was recognized upon shipment and the transfer of
ownership of the product.
Cost of Revenue - Cost of revenue for the year ended December 31,
1998 included costs associated with rental of the SofPulse units
of approximately $169,380 (see Note 3).
Investments - The Company accounts for marketable securities in
accordance with the provisions of Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). Securities held
are classified as "available for sale" and are carried in the
financial statements at fair value. Realized gains and losses
are included in earnings, while unrealized gains and losses are
excluded from earnings and reported as comprehensive income
(loss), a component of stockholders' deficit.
Inventory - Inventory at December 31, 1999, consisted primarily
of chemicals used in the Company's custom products business, and
is valued at the lower of cost or market.
Patents - Patents are amortized using the straight-line method
over 17 years from the date of issuance of the patents, or over
the remaining useful lives.
Property and equipment - Property and equipment are stated at
cost. Major improvements are capitalized, while maintenance and
repairs are expensed when incurred. The cost and accumulated
depreciation for property and equipment sold, retired, or
otherwise disposed of are relieved from the accounts, and
resulting gains or losses are reflected in income.
The cost of property and equipment is depreciated over the
estimated useful lives of the related assets. The cost of
leasehold improvements is amortized over the lesser of the length
of the related leases or the estimated useful lives of the
improvements. Depreciation is computed on the straight-line
method for financial reporting purposes, and on the declining
balance method for income tax purposes.
Asset impairment - The Company periodically evaluates the
recoverability of its long-lived assets, comparing the respective
carrying values to the current and expected future cash flows to
be generated from such assets. In accordance with Statements of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets" ("SFAS 121"), the recoverability
of property and equipment, intangible assets and goodwill are
evaluated on a separate basis for the Company and each
acquisition.
F-10
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock based compensation - The Company elected to follow Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations in accounting for
its employee stock options. Accordingly, no compensation expense was
recognized for its stock options granted to employees because the
exercise price is equal to or greater than the market value of
the underlying stock at the date of the grant. The Company
provides additional pro forma disclosures as required under
Statement of Financial Accounting Standard, No. 123 "Accounting
for Stock-Based Compensation" ("SFAS 123").
Deferred Compensation - Deferred compensation related to stock
options is amortized over the period during which the options
become exercisable. Deferred compensation was fully amortized
during the year ended December 31, 1998.
Income taxes - The Company provides for income taxes under the
provisions of Statement of Financial Accounting Standard, No.
109, "Accounting For Income Taxes" ("SFAS 109"), which requires
the asset and liability method of accounting for income taxes in
which deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using the enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation
allowance is recognized if, based on the weight of available
evidence, it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
Advertising costs - Advertising costs included in selling,
general and administrative expenses are expensed as incurred and
were $11,633 and $4,086 for 1999 and 1998, respectively.
Net loss per share - The Company adopted the Financial Accounting
Standards Board No. 128, "Earnings Per Share" ("SFAS No. 128"),
which established standards for computing and presenting earnings
per share. SFAS No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings
per share.
All loss per share amounts are presented to conform to SFAS No.
128. For the years ended December 31, 1999 and 1998, options and
warrants were excluded from the computation of net loss per share
because the effect of inclusion would be anti-dilutive due to the
Company's net operating losses.
Reclassifications - Certain items presented during the year ended
December 31, 1998 have been reclassified to conform with the
presentation for the year ended December 31, 1999.
F-11
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of estimates and concentration of credit risk - 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 revenue and expenses during the reporting
period. Actual results could differ significantly from those
estimates.
The Company provides credit to customers based on an evaluation
of the customer's financial condition, generally without
requiring collateral. Exposure to losses on receivables is
principally dependent upon each customer's financial condition.
The Company monitors its exposure for credit losses and maintains
an allowance for anticipated losses.
Sales to two customers during the years ended December 31, 1999
and 1998, consisted of approximately 17% and 10%, respectively,
of total sales. The accounts receivable balances of these
customers at December 31, 1999 and 1998 were $13,740 and $9,243,
respectively.
Fair value of financial instruments - The fair value of the
Company's financial instruments such as accounts receivable,
accounts payable, notes payable and capital leases approximate
their carrying value.
Business segment - The Company operates principally in one
business segment that develops technology and development stage
products for the health care industry.
Organizational costs - In April 1998, the Accounting Standards
Executive Committee released Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" ("SOP 98-5").
SOP 98-5 requires that start-up costs, including organizational
costs, be expensed as incurred. The Company accepted early
adoption of SOP 98-5 and expensed all start-up costs during the
year ended December 31, 1998.
2. LIQUIDITY AND GOING CONCERN
The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities and commitments in the normal
course of business.
F-12
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
2. LIQUIDITY AND GOING CONCERN (continued)
The Company reported a net loss of $656,570 and $14,675,433 for
the years ended December 31, 1999 and 1998, respectively, and
cumulative net operating losses aggregating $32,264,762 through
December 31, 1999. In addition, at December 31, 1999, the
Company had a net capital deficiency of $10,442,326, and a
working capital deficiency of $1,809,490. Delinquent accounts
payable over 90 days past due were approximately $400,000 at
December 31, 1999. The Company was also in default on a note for
$1,163,090 to an insurance company, a note payable of $98,430 to
an accounting firm, and capital leases totaling approximately
52,000 (see Notes 7 and 9). The holders of the Company's
defaulted debt have not exercised their rights and remedies in
the respective agreements, but there is no assurance that the
holders of the debt will not pursue the defaults and exercise all
of their rights and remedies.
On August 24, 1998, the Company reorganized to better enable the
Company to focus its efforts on research and development
activities in the field of biotechnology. On August 24, 1998,
the Company sold substantially all of the assets and certain
liabilities related to the manufacturing, sales and marketing of
its SofPulse device while retaining rights to uses of the
underlying PEMS technology in biotechnology applications such as
drug delivery and tissue regeneration. This transaction resulted
in receipt of cash of $150,000, marketable securities with a
value of $596,721 and the satisfaction of $778,166 of notes
payable, accrued interest and accounts payable (see Note 3).
Also, as more fully described in Note 3, on September 30, 1998,
the Company received a commitment from Elan International
Services, Ltd. ("Elan International"), a subsidiary of Elan
Corporation plc, to invest $2,000,000 in shares of the Company's
common stock. The Company received $600,000 during 1998 and
$1,400,000 during 1999.
During 1999, the losses from the Gemini operations consumed
significant cash resources from the Company. While the custom
products business of Gemini grew during 1999, the operation
continued to require additional investment in personnel, materials,
facilities and equipment, resulting in substantially higher
operating expenses. Beginning in July 1999, the Company implemented
a plan to significantly reduce the operating expenses and cash
outflows while retaining the value of the custom product business.
In accordance with the plan, the Company closed the Gemini facility in
The Woodlands, Texas, and substantially reduced personnel and salaries.
The Company also reached an agreement with a former Vice Chairman of
the Company and President of Gemini, resulting in a settlement of
certain employment and other contractual obligations of the
Company to this individual that had been entered into by the
Company in connection with the Gemini acquisition transaction
(see Note 14). The Company is attempting to restructure Gemini's
balance sheet, including settlement of certain Gemini
liabilities, principally the secured note to an insurance company
in the amount of $1,163,090, and equipment lease obligations
totaling approximately $52,000.
F-13
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
2. LIQUIDITY AND GOING CONCERN (continued)
In order to reduce its occupancy expenses, the Company relocated
the Gemini operations from Texas and its executive offices from
Gainesville, Florida to Alachua, Florida where the Florida-based
research laboratories have been located since 1998. In
connection with the settlement of the Gemini office lease
obligation in Texas, Gemini executed a $35,000 note payable
bearing interest at 10% with payments of $1,500 monthly over 26
months, beginning December 1, 1999 (see Note 7).
At December 31, 1999, the Company was in violation of its license
agreement with Elan Pharma International Ltd. ("Elan Pharma")
because it did not make the minimum investment required by Elan
Pharma for research and development activities as specified by
the investment agreement. Elan Pharma has not exercised any of
its rights regarding the violation.
The Company's 2000 operating plan contemplates stringent cost
controls and postponement of research and development activities
until additional funds are obtained. Strategies include
alliances, including mergers and acquisitions of related or
complementary custom product businesses for the genomic research
market for Gemini, the raising of additional investment capital
by the Company through a private placement and a follow-on public
offering, and seeking federal grants directly (such as Small
Business Innovation Research Grants) or through collaborations.
Until a private placement or a follow-on public offering occur,
the Company intends to supplement its revenues from the custom
products business of Gemini by selling the remainder of its ADMT
stock (see Note 4) and from loans from its President and CEO.
The Company cannot predict whether the operating and financing
plans described above will be successful. If the Company is
unable to successfully obtain additional financing, it may not be
able to continue as a going concern and may be unable to meet its
obligations. The financial statements do not include any
adjustments that might be necessary if the Company is unable to
continue as a going concern.
F-14
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
3. CORPORATE REORGANIZATION
On August 24, 1998, the Company consummated a corporate
reorganization, consisting of five steps. First, the Company
contributed all its assets and liabilities (other than those
assets and liabilities related to its business of manufacturing
and distributing the SofPulse device)(the "SofPulse Business") to
its wholly-owned subsidiary, EPI HealthTech Inc. ("EPI Sub"), a
Delaware corporation in exchange for 100 shares of EPI Sub's
common stock. Second, HealthTech Development Inc. ("HTD"), a
privately held Company, was merged into EPI Sub, with the
stockholders of HTD receiving 6,172,100 shares of the Company's
common stock (the number of shares being substantially equivalent
to the number of shares of the Company's common stock
outstanding). Third, EPI Sub contributed all its assets and
liabilities (including both the assets and liabilities
contributed to it by the Company and the assets and liabilities
of HTD) to Gemini Health Technologies, L.P., a newly formed
Delaware limited partnership (the "Partnership") in exchange for
12,505,480 partnership units of the Partnership (such number of
partnership units corresponding to the number of shares of the
Company's common stock issued and outstanding following the
issuance of shares of the Company's common stock to the
shareholders of HTD). Simultaneously with the contribution of EPI
Sub's assets and liabilities to the Partnership, the partners of
Gemini, a privately held Texas limited partnership, transferred
all of their limited partnership interests in Gemini Biotech,
Ltd., and all the stock of Gemini's general partner, Gemini
Biotech, Inc. ("GBI"), to the Partnership in exchange for
6,000,000 partnership units in the Partnership. The partnership
units were exchangeable, subject to certain restrictions, for
shares of the Company's common stock, on the basis of one share
of the Company's common stock for each partnership unit (see Note
14 for the settlement of litigation regarding this transaction).
Fourth, the Company issued 1,872,000 shares of its common stock to
holders of certain warrants and all outstanding preferred stock of
the Company in exchange for such warrants and preferred stock.
Fifth, the Company sold substantially all its assets and specified
liabilities relating to the SofPulse Business to a wholly-owned
subsidiary of ADM Tronics Unlimited, Inc. ("ADMT"), a publicly traded
company.
F-15
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
3. CORPORATE REORGANIZATION (continued)
Sale of operation
------------------
On August 24, 1998, the Company completed the sale of its SofPulse
business as part of the corporate reorganization. Prior to completion
of the transaction, management and operation of the SofPulse business
were assumed by ADMT on May 27, 1998. The assets sold consisted of
inventory, supplies and SofPulse units. The Company was paid $1,396,721
for the SofPulse assets; $150,000 in cash and 2,925,000 shares of ADMT
stock valued at $1,246,721, the market value of ADMT shares on August
24, 1998 (see Note 4). The Company transferred 1,525,000 shares to a
law firm to satisfy a note payable, accrued interest thereon and certain
accounts payable. The Company retained 1,400,000 of the shares and sold
some of the shares during the year ended December 31, 1999 (see Note 4).
Conversion of preferred stock and exchange of warrants
------------------------------------------------------
On August 24, 1998, in connection with the merger of HTD, the Company
issued 1,575,000 common shares, valued at $627,571 for the conversion
of 242,950 shares of preferred stock. The preferred stock was
convertible at a price of $4.74 per share which was at a discount
from the market price of $6.50 per share, at the option of the holder,
into one share of common stock, subject to adjustment in certain
circumstances, at any time until November 13, 2000 at which time the
preferred stock would have automatically converted to common stock.
Additionally, on August 24, 1998, the Company issued 297,000 common
shares, valued at $118,800, in exchange for 1,961,107 of outstanding
warrants. These warrants were exercisable at prices between $5.42 and
$9.00 per warrant and expired on various dates through November 2005.
As a result of the conversion of the preferred shares, the Company
recorded a dividend of $627,571, and as a result of the conversion of
the warrants, the Company recorded consulting expense of approximately
$118,800, as costs to induce both conversions.
Elan investment in the Company
------------------------------
On September 30, 1998, Elan International, invested $7,500,000 in the
Company to acquire 7,500 shares of redeemable, convertible preferred
stock (at a conversion ratio of one share of common stock for each
$1.20 of preferred stock investment), and warrants to acquire up to
1,000,000 shares of common stock of the Company at an exercise price
of $2.50 per share. The preferred stock accrues a mandatory dividend
of 10%, payable semi-annually, in cash or in-kind, at the Company's
option. Using the Black-Scholes option-pricing model, the warrants
were valued at $400,000 as of the date of issuance. Accordingly, in
1998 the Company recorded a value of $7,100,000 for the mandatorily
redeemable, convertible preferred stock, and $400,000 for the warrants,
which was recorded as additional paid-in capital. The $400,000 was
amortized over the term of the warrants (seven months) and increased
the value of the mandatorily redeemable, convertible preferred stock
as it was amortized. At December 31, 1999, $999,877 of mandatory
dividends not paid in cash or in-kind had been accrued.
F-16
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
3. CORPORATE REORGANIZATION (continued)
On September 30, 1998, Elan International committed to invest
$2,000,000 to acquire shares of the Company's common stock at the
20-day average closing price preceding each such investment, at a
maximum purchase price of $1.375 per share. On October 30, 1998,
Elan acquired 777,202 shares of common stock for $600,000. On
January 4, 1999, Elan International acquired an additional
2,057,143 shares of common stock for $900,000. On May 14, 1999,
Elan was issued warrants to acquire 1,520,821 shares of common
stock at a purchase price of $.75 per share. On May 15, 1999,
Elan acquired an additional 378,177 shares of common stock and
387 shares of mandatorily redeemable, convertible preferred stock
in return for $500,000 to complete its commitment to invest
$2,000,000.
Elan Pharma license agreement with the Company
----------------------------------------------
On September 30, 1998, the Company acquired a worldwide license
to certain drug discovery technology for non-cosmetic dermatology
and wound care applications from Elan Pharma. The Company made a
payment of $7,500,000 to Elan Pharma for licenses to utilize
pending patent applications, product design and know-how related to
the development and approval of products for transdermal drug
delivery, and certain in-process research and development. The
cost was allocated $6,000,000 to in-process research and
development and $1,500,000 to goodwill. The Company will also
pay royalties and license fees to Elan Pharma based on the
Company's future revenues relating to the technology. The
Company paid no royalties or license fees during the years ended
December 31, 1999 and 1998.
The Company's management determined the licensed technology had
various ascertainable long-term requirements for additional
substantial costs in order to realize economic benefits. As a
result of the long-term development requirements and
uncertainties related to the technological feasibility and
commercialization of the licensed technology, the Company
recorded a one-time charge of $6,000,000 to write off in-process
research and development.
Concurrently, in accordance with SFAS 121, management evaluated
the goodwill of $1,500,000 and determined that the asset was
permanently impaired due to the Company's current period
operating loss combined with a history of operating losses.
Therefore, an impairment loss for the $1,500,000 was recognized
in 1998.
F-17
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
4. MARKETABLE SECURITIES
As discussed in Note 3, the Company acquired 2,925,000 common
shares of ADMT as part of its sale of the SofPulse business on
August 24, 1998. The shares of ADMT were valued at approximately
$0.426 per share on the date of acquisition. As part of the
agreement, 1,525,000 of the common shares of ADMT were
transferred to a creditor in partial settlement of a note payable
due a law firm on August 24, 1998. The remaining 1,400,000 shares
were restricted as to sale both by ADMT and the law firm through
August 24, 1999. The Company carries the ADMT common stock as
available for sale. During 1999, the Company sold 699,530 shares
of the ADMT shares and realized a loss on the sales of $106,935.
Any unrealized gains and losses are recorded as comprehensive
income, a component of stockholders' deficit. At December 31,
1999, the number of unsold shares totaled 700,470 and the gross
unrealized loss recorded in stockholders' deficit was $88,399,
and the fair market value was $210,182 for these shares.
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 was as follows:
<TABLE>
<CAPTION>
Estimated
Useful life
-----------
<S> <C> <C>
Office equipment, computers
and software $ 77,125 3 to 7 years
Lab equipment 443,843 5 to 7 years
----------
520,968
Less: accumulated
depreciation (255,012)
----------
Total $ 265,956
==========
</TABLE>
Depreciation charged to income for the years ended December 31,
1999 and 1998 was $90,236 and $161,559, respectively.
F-18
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
6. ACCRUED EXPENSES
At December 31, 1999, accrued expenses consisted of the
following:
Interest expense $124,070
Litigation settlements 125,000
Board of director fees 42,500
Commissions 18,912
Property and sales tax 13,383
Vacation and sick leave 12,541
Other 18,200
---------
$354,606
=========
7. NOTES PAYABLE
Notes payable at December 31, 1999 consisted of the following:
Variable rate note payable to an insurance
company, due July 1, 2006 (in default) $1,163,090
Note payable to an accounting firm with interest
at 12%, due August 31, 1999 (in default) 98,430
Note payable for termination of operating leases,
with interest at 10%, due January 2002 32,279
Note payable to finance insurance premiums with
interest at 11%,due April 21, 2000 2,594
-------------
1,296,393
Less: current portion (1,280,890)
-------------
Long term portion of notes payable $15,503
=============
On June 27, 1997, Gemini entered into a loan agreement (the
"Loan") with an insurance company in the amount of $1,315,000.
The loan amortizes over 101 payments ending July 1, 2006.
Interest is two points over prime. At December 31, 1999, the
rate was 10.5%. Collateral for the Loan is Gemini's assets,
including accounts receivable, inventory, and property and
equipment owned now or acquired in the future by Gemini. On
December 22, 1998, the Loan was modified to add as additional
collateral the Company's corporate guarantee and 65 SofPulse
devices owned by the Company. The former President of Gemini,
and his wife, personally guaranteed the repayment of the
indebtedness. In addition, repayment of the Loan is guaranteed in
part by the Rural Biological Science Department of the U.S.
Department of Agriculture.
F-19
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
7. NOTES PAYABLE (continued)
The terms of the Loan include maintaining certain financial
covenants, principally relating to working capital liquidity and
net working capital ratios, and permitted purchases and expenses.
The covenants also include a limitation on compensation and
distributions. All of the amounts outstanding under the
agreement become due and payable if an event of default occurs.
As of December 31, 1999, Gemini was not in compliance with the
financial covenants of the loan principally relating to net worth
and working capital, and additionally, the Company had ceased
making the required payments as of April 1999. The Company also
abandoned some of Gemini's assets when it moved the Gemini
operations from Texas to Florida due to the lack of ability to
sell and the high cost of shipping these assets. Therefore, the
note is in default. The insurance company has not exercised its
rights under the loan agreement, including acceleration of the
amount due. Negotiations are underway to
reach a settlement on the payment of the loan. Accordingly, the
entire amount has been shown as a current liability at December
31, 1999.
On October 28, 1998, the Company executed a promissory note to
its former independent certified public accountants
("Accountants") for audit fees. The note was renegotiated on May
13, 1999 and totaled $98,430, with interest at 12 %. The note
was due on August 31, 1999, and is in default at December 31,
1999, but the accountants have not exercised any of their rights
and remedies as of that date.
On December 1, 1999, the Company entered into a note payable in
the amount of $35,000 with interest at 10% due in 26 equal
monthly installments. This note was in settlement of the
Company's lease obligations for the Gemini facility, which was
closed in the Woodlands, Texas.
8. NOTES PAYABLE AND ACCRUED EXPENSES DUE RELATED PARTIES
During October 1997, the Company issued three notes payable to
two officers and a member of the board of directors in exchange
for cash advances of $45,000, and non-payment of salaries of
$20,926. The notes bear interest at prime plus 1% (9.5% at
December 31, 1999) and are due on demand. The balances due at
December 31, 1999 were $65,926.
Effective as of August 24, 1998, as a result of the merger with
HTD and the acquisition of Gemini and in conjunction with certain
change of control provisions in the employment contract of the
Company's Chief Executive Officer, the Company recorded an
accrued expense due the Chief Executive Officer for $63,654 to be
used for his exercise of 244,823 options to purchase common stock
at $.26 per share. As of December 31, 1999, the amount had not
been paid, nor had the stock options been exercised (see Note 3).
F-20
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
9. CAPITAL LEASES
The Company is the lessee of office and laboratory equipment
under capital leases expiring in various years through 2001.
The assets and liabilities under capital leases are recorded at
the lower of the present value of the minimum lease payments, or
the fair value of the asset. The assets are depreciated over
their estimated useful lives. Depreciation of assets under
capital leases is included in depreciation expense for 1999 and
1998.
Depreciation on assets under capital leases charged to expense in
1999 and 1998 was $15,028 and $20,773, respectively.
Following is a summary of property held under capital leases at
December
31, 1999:
Lab equipment $72,852
Less: accumulated depreciation (18,247)
--------
$54,605
========
Interest rates on capitalized leases vary from 8% to 12%, and are
imputed based on the lessor's implicit rate of return.
Certain equipment used in Gemini's custom products business is
collateral on capital lease with a remaining balance of $40,622
at December 31, 1999. The lease is in default due to non-payment,
but the lessor has not exercised its rights and remedies in
default under the capital lease. Two pieces of equipment on two
different capital leases, totaling approximately $11,500, were
returned to the lessors when Gemini was closed. At December 31,
1999, the $11,500 is listed as a liability under current portion
of capital leases. Management is awaiting settlement of these
leases, but is unable to
estimate a settlement amount at this time.
Minimum future lease payments as of December 31, 1999, under
capital leases, including a lease in default which is carried as
all payments being due in the year 2000, for each of the next
four years and in the aggregate
are:
Year ended:
2000 $3,366
2001 3,366
2002 3,366
2003 2,859
Thereafter -
------
12,957
Less: amount representing interest (2,456)
--------
Present value of net minimum lease payments $10,501
========
F-21
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
10. EQUITY TRANSACTIONS
During 1998, the Company issued 40,823 shares of common stock and
expensed $17,217 for payment of outstanding employment-related
liabilities to officers of the Company.
Effective January 1, 1996, the Company established the
Electropharmacology, Inc. 1996 Non-Employee Directors' Equity
Compensation Plan (the "Compensation Plan"). The Compensation Plan
provides for the issuance of common stock as compensation for serving
as a director of the Company. During 1999 and 1998, the Company
issued 52,083 and 26,787 shares of common stock, respectively, under
the Compensation Plan and expensed approximately $22,500 and $7,500,
respectively, relative to the issued common stock.
As more fully described in Note 3, during August 1998, the Company
issued 1,872,000 shares of common stock in return for the conversion
of 242,950 preferred shares and 1,961,107 warrants. As a result of
these transactions, the Company recorded a dividend of $627,571 and
an expense of $118,800 in 1998, as inducement related charges.
On August 24, 1998, the Company issued 322,581 shares of common stock
in settlement of an accounts payable totaling $128,166. Further, as
more fully detailed in Note 3, the Company issued 6,172,100 shares of
common stock on August 24, 1998, to stockholders of HTD to complete
the merger of EPI Sub and HTD.
On September 30, 1998, the Company and Elan International entered
into a stock subscription agreement whereby Elan International
would invest $2,000,000 in the Company. On that same date, Elan
paid the Company $600,000 and was issued 777,702 shares of common
stock. At the same time the Company recorded the stock
subscription, par value and additional paid-in capital. On
January 4, 1999, Elan International paid the Company $900,000 and
received 2,057,143 shares of common stock. At December 31, 1998,
a receivable of $900,000 was recorded as an asset since the money
was received four days after the end of the year, and a subscription
receivable of $500,000 was recorded in the equity section of the
balance sheet. On May 15, 1999, Elan International completed its
obligation by paying $500,000 to the Company. However, instead of
receiving common stock for the full payment, Elan International was
issued 387 shares of additional mandatorily redeemable, convertible
preferred stock, 378,177 shares of common stock and a warrant to
purchase 1,520,821 shares of common stock at $.75 per share. In order
to record the transaction, $386,667 previously recorded as additional
paid-in capital in 1998, was reclassified as mandatorily redeemable,
convertible preferred stock.
During 1999, the Company issued 600,318 shares of common stock to
directors, financial consultants and a law firm and recorded $196,028
as compensation expense under SFAS 123. The compensation expense is
included as part of selling, general and administrative expense.
Additionally during 1999, the Company issued 25,000 stock options to
non-employees. Under SFAS 123, the stock options were valued at $8,365
on the date of grant and that amount was recorded as additional paid-in
capital.
On September 17, 1999, the Company issued 950,000 shares of common
stock valued at $209,000 as partial settlement of litigation with the
former President of Gemini (see Note 14).
F-22
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
11. WARRANTS
On September 30, 1998, the Company granted warrants to Elan
International to purchase 1,000,000 shares of common stock at
$2.50 per share. The warrants expire August 31, 2006. On May
14, 1999, the Company granted warrants to Elan International to
purchase 1,520,821 shares of common stock at $.75 per share.
These warrants expire on November 14, 2005.
The following table summarizes information relative to the
Company's warrants that are exercisable through August 31, 2006:
<TABLE>
<CAPTION>
Shares Price range
------ -----------
<S> <C> <C>
Outstanding January 1, 1998 3,052,707 $1.00 to $9.00
Exchanged (1,961,107) $5.42 to $9.00
Canceled (782,946) $5.03 to $6.00
Granted 1,000,000 $2.50
---------
Outstanding December 31, 1998 1,308,654 $1.00 to $5.50
Expired 76,654 $5.03 to $5.25
Canceled -
Granted 1,520,821 $ .75
----------
Outstanding December 31, 1999 2,752,821 $ .75 to $5.50
===========
</TABLE>
The Company's authorized but unissued common shares reserved for
issuance were as follows:
<TABLE>
<CAPTION>
Number of shares
------------------
December 31,
1999 1998
---- ----
<S> <C> <C>
Exercise of warrants 2,752,821 1,308,654
Stock option plans 1,266,988 975,488
Convertible preferred stock 6,572,223 6,250,000
---------- ---------
10,592,032 8,534,142
========== =========
</TABLE>
F-23
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
12. STOCK OPTIONS
In April 1993, the Company adopted a stock option plan (the
"Plan") that was amended on November 1, 1996, for directors,
employees and consultants. The options granted may be either
"incentive stock options" (for officers and employees only)
within the meaning of Section 422A of the Internal Revenue Code,
and/or nonqualified stock options (for officers, employees,
directors and consultants). The exercise price of incentive stock
options may not be less than 100% of the fair market value of the
Company's common stock as of the date of grant (110% of the fair
market value if the grant is to an employee who owns more than 10%
of the outstanding common stock of the Company). As of December 31,
1999, only the Chief Executive Officer of the Company owns more
than 10% of the Company's common stock. Nonqualified stock
options may be granted under the Plan at an exercise price less
than the fair market value of the common stock on the date of the
grant. If nonqualified stock options are granted for less than
the market value, the Company must record compensation expense
for the difference between fair market value and the option price
per SFAS 123.
As of December 31, 1997, the board of directors authorized the
granting of options for up to 1,500,000 shares of common stock.
Grants for options to purchase 1,308,988 common shares, (823,752
were considered incentive stock options), have been formalized
under the Plan. The options generally vest immediately or
ratably up to ten years on differing vesting schedules. The
options expire at dates ranging from two to ten years after date
of grant.
During 1997, the Company granted stock options to consultants for
the purchase of 72,500 shares of common stock at exercise prices
ranging from $3.38 to $5.75 per share. During 1998, these
options either fully vested due to the reorganization in August
1998, or were canceled. During 1998, the Company granted stock
options to a consultant for the purchase of 25,000 shares of
common stock at the exercise price of $.51. Compensation expense
relating to these stock options recorded for 1999 and 1998 was
$8,365 and $67,678, respectively. The following table summarizes
information about stock options at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding stock options Exercisable stock options
------------------------- -------------------------
Weighted Weighted
average Weighted average Weighted
Exercise remaining average remaining average
price contractual exercise contractual exercise
range Shares life price Shares life price
--------- ------ ---------- ----- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ .25- .35 583,752 6.56 $ .28 568,752 6.51 $ .29
.51- .85 365,000 8.84 .74 298,000 9.01 .79
1.81-3.06 69,500 4.37 2.53 69,500 4.37 2.53
4.75-5.50 290,736 6.27 5.30 290,736 6.27 5.30
--------- ------- ---- ---- -------- ---- ----
$ .25-5.50 1,308,988 7.02 $1.64 1,226,988 6.94 $ 1.72
========= ========= ==== ===== ========= ==== ====
</TABLE>
F-24
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
12. STOCK OPTIONS (continued)
The following table summarizes activity for the years ended December
31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
Weighted Weighted
average average
exercise exercise
Shares price Shares price
------ ----- ------ -------
<S> <C> <C> <C> <C>
Outstanding on January 1, 1,288,988 $ 1.71 590,778 $ 4.73
Exercised - - - -
Expired - - (22,424) 3.20
Forfeited - - - -
Canceled (250,000) 1.06 (205,618) 3.30
Granted 270,000 .78 926,252 .53
--------- ----- -------- ------
Outstanding on December 31, 1,308,988 $ 1.64 1,288,988 $ 1.71
========= ===== ========= ======
Exercisable on December 31, 1,266,988 $ 1.72 975,488 $ 1.98
Shares available on December ========= ===== ======== ======
31, for options that may
be granted 191,012 211,012
======= =======
Weighted average fair value
of options granted $ .15 $ .43
======= =======
</TABLE>
As required by SFAS 123, pro forma information regarding net
income and earnings per share was determined as if the Company
had accounted for its employee stock options under the fair value
method. The fair value for these options was estimated at the
date of grant using the Black-Scholes option-pricing model with
the following assumptions used for grants in 1999 and 1998:
<TABLE>
<CAPTION>
For the year ended December 31,
1999 1998
---- ----
<S> <C> <C>
Risk free interest rate 5.92% 4.58%
Expected lives (years) 10 2.9-10
Expected volatility 3.395 1.72
Expected dividend yield - -
</TABLE>
F-25
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
12. STOCK OPTIONS (continued)
The Company's pro forma information under SFAS 123 for the years ended
December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
As Pro As Pro
reported forma reported forma
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Net loss $ (631,569) $ (727,352) $(14,675,433) $(14,841,336)
Preferred stock dividends (812,377) (812,377) (815,071) (815,071)
--------- --------- --------- ---------
Net loss available
to common stockholders $(1,443,946) $(1,539,729) $(15,490,504) $(15,656,407)
=========== ========= ========== ==========
Net loss per share:
Basic and diluted $ (.09) $ (.09) $ (2.15) $ (2.17)
======= ===== ======= =======
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from traded options, and because changes
in the subjective input assumptions can materially affect the
fair value estimate, the existing models, in management's
opinion, do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
For the purposes of pro forma disclosures, the estimated fair
value of the options is amortized over the options' vesting
period. The effect of compensation expense from stock option
awards on pro forma net loss reflects only the vesting of 1995
through 1999 awards in 1999 and the vesting of 1995 through 1998
awards in 1998, in accordance with SFAS 123. Because
compensation expense associated with a stock option award is
recognized over the vesting period, the initial impact of
applying Statement 123 may not be indicative of compensation
expense in future years, when the effect of the amortization of
multiple awards will be reflected in pro forma net loss.
F-26
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
13. INCOME TAXES
As of December 31, 1999, the Company had net operating loss
carryforwards of approximately $4,288,000 available to offset
future taxable income. Such carryforwards, which may provide
future tax benefits, expire in the years 2008 through 2019.
Research tax credits of $187,000 expire in the years 2008 through
2018. During the years 1993, 1995 and 1998 changes in ownership
of greater than 50% occurred as a result of the Company issuing
equity securities. As a result, a substantial limitation may be
imposed upon the future utilization of its net operating loss
carryforwards.
For financial reporting purposes, a valuation allowance of
$4,288,000 has been recognized to offset the net deferred tax
asset related to these carryforwards because realization of the
benefit is considered unlikely. Significant components of the
Company's deferred income taxes are as follows at December 31:
1999 1998
---- ----
Net operating loss carryforwards $4,172,000 $3,751,000
Other 148,000 148,000
---------- ----------
Deferred tax assets 4,320,000 3,899,000
Deferred tax liabilities - equipment (32,000) (4,000)
--------- ---------
4,288,000 3,895,000
Less: valuation allowance (4,288,000 (3,895,000)
--------- ---------
Net deferred tax assets $ - $ -
========= =========
The net change in the valuation allowance for the years ended
December 31, 1999 and 1998 was an increase of approximately $421,000,
and a decrease of approximately $261,000, respectively.
The difference between the benefit for income taxes and the amount,
which results from applying the federal statutory tax rate of 34% to
the loss, is due primarily to the non-deductible items and increases
in the valuation allowance in 1999 and 1998, resulting in no tax benefit
reported in any of those years.
1999 1998
---- ----
Tax at statutory rate (34.00)% (34.00)%
State taxes, net of federal benefit (3.63)% (3.63)%
Non-deductible items (18.00)% 35.53 %
Change in valuation allowance 60.47 % .67 %
Other (4.80)% (2.77)%
-------- --------
- -
======== ========
F-27
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
14. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its office and lab facility and certain
equipment under operating leases or a license agreement with
remaining terms as of December 31, 1999, ranging from three to
eight months at an average monthly rate of $1,788. All leases
have remaining terms of less than one year.
Rent expense under operating leases was $120,868 and $66,319 for
the years ended December 31, 1999 and 1998, respectively.
Employment Agreements
On August 25, 1998, the board of directors issued a memorandum to
the Chief Executive Officer, President and Chief Financial
Officer of the Company ("CEO"), outlining, in general, the terms
of his employment effective as of September 1, 1998. The
memorandum provides for an initial base salary of $130,000, which
subsequently increased to $150,000, and may increase up to
$200,000 in a series of stepped increments upon the achievement
of specified milestones. In May 1999, the CEO voluntarily reduced
his base annual salary to $126,000 in order to reduce the Company's
expenses. The memorandum also provides for the grant to the CEO of
a ten-year option to purchase 500,000 shares of the Company's common
stock at the stock price at the close of trading on August 25, 1998,
which vested based on the achievement of specific milestones set by
the board of directors. The grant was subject to an increase in the
number of shares available for issuance under the Company's stock
option plan sufficient to cover the grant, which occurred in the year
ending December 31, 1999. In the event that the CEO's employment
is terminated without "cause" before three years, he is entitled to
severance of six months' salary, subject to his mitigation of such
payment by seeking other employment. All of his stock options will
vest immediately and will remain exercisable for the original term
of the option in the event his employment is terminated due to an
acquisition by merger with a third party that he has not recommended
and/or approved.
F-28
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
14. COMMITMENTS AND CONTINGENCIES (continued)
As part of the reorganization transactions, the Company entered
into an employment agreement with the former Chief Executive
Officer and President (the "President") of Gemini, in August of
1998, for a term expiring in August of 2001. This agreement was
canceled during the year ended December 31, 1999 (see below).
Contingencies and Litigation
In August 1994, a competitor of the Company filed a lawsuit
against the Company and certain of its present and former
directors and officers alleging the defendants had engaged in
deceptive acts and practices, false advertising, unfair
competition, breach of contracts of fiduciary duties between the
plaintiff and certain Company employees. They also alleged the
Company was involved in facilitating or participating in the
breach of contracts. The plaintiff was seeking an injunction to
rectify the effects of the misconduct, an unspecified amount of
compensatory damages, disengorgement of profits, treble damages,
punitive damages and attorney's fees. The plaintiff also seeks
unspecified injunctive relief prohibiting the Company from
engaging in the alleged acts and ordering the defendants to take
remedial action to rectify the effects on consumers and the
plaintiff caused by the alleged acts. The Company and its
competitor have negotiated a formal settlement. The Company has
recorded a liability of $50,000 in connection with this
litigation.
On July 14, 1998, a former employee of the Company filed a
complaint alleging failure by the Company to make payments of
$20,000 due to him under an agreement pursuant to which the
former employee and the Company had agreed to the terms of the
termination of their employer-employee relationship. In December
1998, the former employee and the Company entered into a
settlement agreement under which the Company is obligated to pay
$16,500 in monthly installments of $1,500 beginning on December
1, 1998. At December 31, 1999, the settlement agreement had been
paid in full.
On September 17, 1999, the Company settled pending litigation
instituted by the Company against the former President of Gemini
(the former "President"). As part of the settlement agreement,
950,000 shares were issued with a market value of $209,000 in
exchange for 6,000,000 partnership units in Gemini. As
settlement on the former President's employment agreement,
payments totaling $40,000 were to be made in monthly installments
of $5,000 each, commencing with the signing of
the settlement agreement and continuing through June 1, 2000.
Additionally, two issuance of stock are to be made on May 14,
2000 and May 16, 2001. The two issuance will have a total value
of $242,000. The number of shares issued will be based on the
higher of $.5022 per share (the average blended per share price
paid by Elan International for its common stock investment, or
the average bid market price at the close of business on the 20
consecutive trading days immediately preceding each issuance
date, minus any amounts earned by the former President from
other employment or third party consulting services performed
during the period from the date of the agreement until May 16,
2000 and from May 17, 2000 to May 16, 2001. The Company recorded
compensation expense to account for this transaction at December
31, 1999, and additionally reserved 481,879 shares for issuance.
F-29
<PAGE>
ELECTROPHARMACOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
14. COMMITMENTS AND CONTINGENCIES (continued)
In July 1999, Copelco Credit Corporation filed suit against the
Company alleging breach of lease agreement in connection with a
copier. The plaintiff is seeking to accelerate all sums due
under the lease agreement. Management estimates that the loss
that could result from an unfavorable outcome of this litigation
is approximately $50,000, and a liability in that amount was
accrued for the year ended December 31, 1999.
15. RELATED PARTIES TRANSACTIONS
On February 20, 2000, the Company, Dr. Sen and a third party
provider of Web-site design and marketing services entered into an
agreement. Due to the Company's lack of funds with which to pay the
third party provider, Dr. Sen agreed to assign the proceeds of the sale
of up to 128,520 shares of Company common stock held by Dr. Sen to the
third party provider. Dr. Sen agreed to sell 18,360 shares per month
in order to pay the monthly obligations of the Company to the third
party provider under the agreement for services rendered by the
provider over the seven-month period from January 2000 to July 2000.
As consideration for this advance of funds to the Company by Dr. Sen,
the Company agreed to issue to Dr. Sen on a monthly basis shares of
Company common stock equal to the current value of (i) that number of
shares required to be sold by Dr. Sen under the agreement, and (ii) any
adverse tax consequences resulting to Dr. Sen as a result of the sale
of such shares, subject to the discretion of the Company's board of
directors to modify such timing or formula for repayment. As of March
31, 2000, the Company recorded a related party accrued expense of
$22,032 as a result of this agreement.
F-30
<PAGE>
================================================================================
A prospective investor should rely only on the information contained in
this prospectus or in our registration statement filed with the SEC. EPI
has not authorized any other person to provide you with any other information.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities by any person in any jurisdiction in which such
offer or solicitation is unlawful. Neither the delivery of this prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information contained herein is correct as of any date after the date
of this prospectus.
-----------------------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary ................................................ 2
Our Business ................................................... 2
The Offering and Our Securities ................................ 2
Market for Our Securities ...................................... 3
Summary Financial Data ......................................... 3
High Risk Factors ................................................. 5
Forward Looking Statements ........................................ 12
Use of Proceeds ................................................... 13
Dividend Policy ................................................... 14
Capitalization .................................................... 14
Selected Financial Data ........................................... 15
Management's Discussion and Analysis .............................. 16
Our Business ...................................................... 21
Legal Proceedings ................................................. 43
Certain Market Information ........................................ 43
Management ........................................................ 44
Executive Compensation ............................................ 47
Principal Shareholders ............................................ 50
Certain Transactions .............................................. 52
Description of Common Stock ....................................... 54
Plan of Distribution .............................................. 56
Legal Matters ..................................................... 56
Experts ........................................................... 56
Additional Information about our Company .......................... 56
Index to Consolidated Financial Statements ........................ F-1
-----------------------------------
Until , 2000 (25 days after the date of this prospectus), all dealers
effecting transactions in the common stock, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the of dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
================================================================================
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimates of fees and expenses incurred or to be incurred in connection
with the issuance and distribution of securities being registered, all of which
are being paid exclusively by us, other than underwriting discounts
and commissions are as follows:
Securities and Exchange Commission filing fee ............... $ 379
State Securities Laws (Blue Sky) fees and expenses .......... 2,000
Printing and mailing costs and fees ......................... 10,000
Legal fees and costs ........................................ 10,000
Accounting fees and costs ................................... 10,000
Transfer Agent fees ......................................... 2,000
Miscellaneous................................................ 5,621
--------
TOTAL ....................................................... $ 40,000
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the period from June 20, 1997 through June 20, 2000, the Company
issued the following securities in transactions not involving any public
offering. An exemption from registration under Section 4(2) of the Securities
Act of 1933 is claimed by the Company with respect to each of these issuances,
unless another exemption is otherwise noted herein. In each issuance exempt
under Section 4(2), the Company relied upon the fact that no public offer was
made, the shares may not be transferred in the absence of registration under
the Act, and the purchasers were knowledgeable in issues regarding restricted
securities and sophisticated in financial affairs generally.
(1) Shares of common stock were issued to Arup Sen, Chief Executive Officer
and President, as payment for services rendered in lieu of cash
compensation:
(a) In the last six months of 1997, the Company issued 68,239 shares
of common stock to Dr. Arup Sen, President and Chief Executive
Officer, as payment for services rendered in lieu of cash
compensation in the amount of $121,305.
(b) In 1998, the Company issued 40,823 shares of common stock to
Dr. Sen as payment for services rendered in lieu of cash
compensation of $17,217.
(2) Shares of common stock were issued to outside directors as compensation
under the Electropharmacology, Inc. 1996 Non-Employee Directors' Equity
Compensation Plan (the "Compensation Plan"). The Compensation Plan
provides for the issuance of common stock to outside directors as
consideration for serving as a director of the Company.
(a) During 1998 and in the last half of 1997, the Company issued 26,787
and 17,083 shares of common stock, respectively, under the
Compensation Plan to the Company's outside directors as
consideration for their service as a director for which the Company
expensed approximately $20,000 and $25,000, respectively, relative
to the issued common stock.
(b) On December 31, 1997, the Company issued options to purchase 2,500
shares of common stock of the Company to each of three outside
directors as additional compensation for serving as a director of
the Company in 1997. These options were exercisable at the price of
$0.28 per share.
(c) In 1999, the Company issued 52,083 shares of common stock to its
four outside directors as payment for services rendered as a
director under the Compensation Plan in the aggregate amount of
$22,500.
(3) Shares of common stock were issued under the Company's Employee Stock
Purchase Plan to employees for cash or for services rendered. The
Company's Employee Stock Purchase Plan ("ESPP") covered all employees
who met certain service period requirements.
(a) On September 15, 1997, the Company issued 707 shares of common
stock to two employees, Se Yong Oh and Jay Ovalle, under the ESPP
for cash payments of $1,140.
(b) In the last six months of 1997, the Company issued 13,296 shares
of common stock to Dr. Sen under the ESPP as payment of
compensation in the amount of $15,691 for services rendered.
II-2
<PAGE>
(4) Demand notes were issued to related parties. On October 10, 1997, the
Company issued three notes payable to David Saloff, its Chief Financial
Officer, Dr. Arup Sen, its President and Chief Executive Officer and
Murray Feldman, an outside director totaling $65,926, in exchange for
cash advances of $45,000 and deferral of the two officers' salaries of
$20,926. These notes bear interest at the prime rate plus 1% and are
due on demand.
(5) Stock options were granted to consultants, officers and employees under
the Company's 1993 Stock Option Plan, which was approved by the
stockholders.
(a) On June 24, 1997, the Company issued to Dr. Arup Sen an option to
purchase 25,000 shares of the Company common stock at an exercise
price of $1.813 per share, as consideration for services rendered
by Dr. Sen in his capacity as President and Chief Executive Officer.
(b) In 1998, the Company issued options exercisable for a total of
926,252 shares of common stock to twelve people. The options were
exercisable at prices which ranged from $.26 to $1.06 per share.
Three issuances totaling 45,000 shares, to outside directors Bernard
Carrico, Richard Kneipper, and Stephen Seiler, were received under
the Compensation Plan, as consideration for these individuals
joining the board of directors. Issuances to David Saloff, Arup
Sen and to Krishna Jayaraman totaling 646,252 shares were made in
consideration for their services as executive officers of the
Company. The remaining option issuances in 1998 were exempt from
registration pursuant to Rule 701. The Company relied on Rule 701
as (i) all of these options were issued pursuant to the Company's
1993 Stock Option Plan, a written compensatory benefit plan within
the meaning of Rule 701, (ii) four of these individuals were
employees of the Company, and two individuals were consultants not
engaged in the offer or sale of securities in connection with
capital raising and (iii) the aggregate value of the shares
issuable under these options did not exceed $500,000.
(c) In 1999, the Company issued options exercisable for 270,000 shares
of common stock to four people. Issuances of options to purchase
270,000 shares at $.85 per shares to Arup Sen and David Saloff were
made in consideration for their services as executive officers of
the Company. The remaining options were issued to two employees of
the Company at an exercise price of $.25 per share, for which the
Company relied on Rule 701.
(d) In the first quarter of 2000, the Company issued options exercisable
for 37,000 common shares to five employees at an exercise price of
$.21 per share. The Company relied on Rule 701 for an exemption
from registration.
(6) Shares were issued in connection with the Company's reorganization on
August 24, 1998, as follows:
(a) The Company issued 297,000 common shares, valued at $118,800, in
exchange for warrants to purchase 1,961,107 shares of common stock
to the following individuals and/or entities: Norton Herrick,
1,300,000, Murray Feldman, 373,607, Paragon Capital Corporation at
Spear, Leeds, Kellogg, LLC, 187,500, Mesa, 100,000. These warrants
were exercisable at prices between $5.42 and $9.00 per warrant and
expired on various dates between August 1998 and November 2005.
II-3
<PAGE>
(b) The Company issued to Norton Herrick 1,575,000 common shares valued
at $627,571 for the conversion of 242,950 shares of preferred stock
held by Mr. Herrick. The preferred stock was convertible at a price
of $4.74 per share, at the option of the holder, into one share of
common stock, subject to adjustment in certain circumstances, at
any time until November 13, 2000 at which time the preferred stock
would have automatically converted to common stock.
(c) The Company issued 322,581 common shares to Jones, Day, Reavis and
Pogue, in repayment of a $709,378 secured note payable and a $68,788
liability to the Jones, Day law firm, for accrued legal fees.
(d) The Company issued to the seven shareholders of HealthTech
Development Inc. ("HTD"), a privately held company which was merged
into a subsidiary of the Company on August 24, 1998, 6,172,095
shares of the Company's common stock in consideration of which the
Company acquired the net assets of HealthTech Development with a
fair value of $3,315,297, of which $3,358,783 consisted of
intangibles which were simultaneously determined to be permanently
impaired and charged off.
(e) The Company issued to Krishna and Shashikala Jayaraman, 6,000,000
limited partnership units of Gemini Health Technologies, L.P., a
newly formed Delaware limited partnership (the "Partnership") owned
by the Company in consideration of all of the Jayaramans' limited
partnership interests in Gemini Biotech, Ltd., a privately held
Texas limited partnership and all the stock of Gemini Biotech's
general partner, Gemini Biotech, Inc. ("GBI"), These partnership
units were exchangeable, subject to certain restrictions, for common
shares, on the basis of one common share for each partnership unit.
The consideration received was the net assets acquired of Gemini
Biotech with a fair value of $4,071,429, of $3,952,331 consisted of
intangibles which were simultaneously determined to be permanently
impaired and charged off.
(7) Securities were issued to Elan International Services, Ltd. for cash:
(a) On September 30, 1998, the Company issued to Elan International
Services, Ltd. ("Elan International") 7,500 shares of mandatorily
redeemable, convertible preferred stock convertible into 6,250,000
common shares, and an eight- year warrant to acquire up to 1,000,000
shares of common stock at an exercise price of $2.50 per share in
consideration of a total cash payment of $7.5 million. The preferred
stock accrues a mandatory dividend of 10% per annum, payable semi-
annually, in cash or in-kind, at the Company's option. 1,197
additional preferred shares have been issued or are currently
issuable to Elan International as semi-annual in-kind dividends.
(b) On October 30, 1998, the Company issued to Elan International 777,202
common shares for a cash payment of $600,000.
(c) On January 4, 1999, the Company issued to Elan International
2,057,143 common shares for a cash payment of $900,000.
(d) On May 14, 1999, the Company issued to Elan International 386.667
shares of mandatorily redeemable, convertible preferred stock
convertible into 322,223 common shares, a six and one-half year
warrant to purchase 1,520,821 common shares at an exercise price
of $.75, and 378,177 common shares, for an aggregate cash payment
of $500,000.
II-4
<PAGE>
(8) Other issuances of securities were made as follows:
(a) On April 6, 1999, the Company issued to Cornell & Associates 106,322
common shares as payment for accounting and consulting service fees
in the amount of $32,960.
(b) On April 12, 1999, the Company issued to Goodman, Phillips &
Vineberg, 266,913 common shares, as payment for legal services and
fees in the amount of $84,626.
(c) On July 13, 1999, the Company issued to CAP Partners LLC, as
assignee of Cornell & Associates, 175,000 common shares as payment
for accounting and consulting service fees in the amount of $55,943.
(d) On November 4, 1999, the Company issued to Krishna and Shashikala
Jayaraman and five other individuals designated by the Jayaramans as
assignees, a total of 950,000 common shares. Consideration received
by the Company included the surrender by the Jayaramans of their
6,000,000 partnership units in Gemini Health Technologies, L.P. which
were convertible into 6,000,000 common shares valued at $1,320,000.
II-5
<PAGE>
ITEM 27. EXHIBITS.
EXHIBIT NO. DESCRIPTION
-----------------------------------------------------------------------
2.1 Asset Purchase Agreement among Electropharmacology, Inc. ("EPI")
and ADM Tronics Unlimited, Inc. ("ADM") and AA Northvale Medical
Associates, Inc. dated May 27, 1998 ("ADM Agreement") (1)
2.1.1 Letter Amendment to ADM Agreement dated August 18, 1998 (2)
2.1.2 Warrant to EPI to purchase up to 1,500,000 shares of ADM
Our company dated August 18, 1998 (2)
2.1.3 Voting Trust Agreement between Jones, Day, Reavis & Pogue,
Andre DeMino and EPI dated August 18, 1998 (2)
2.1.4 Letter Agreement between Jones, Day, Reavis & Pogue and EPI
dated June 2, 1998 (2)
2.2 Agreement of Merger and Plan of Reorganization among EPI, EPI Sub.,
Inc. and HealthTech Development, Inc. ("HealthTech") dated June
11, 1998 ("HealthTech Agreement") (3)
2.3 Capital Contribution Agreement between EPI HealthTech, Inc.
("EPI Sub"), Gemini Biotech, Ltd. ("Gemini"), Krishna and
Shashikala Jayaraman and Gemini Biotech, Inc., dated June 18,\
1998 (4)
2.4 Master Agreement dated as of June 28, 1998 among HealthTech,
Gemini, EPI, EPI Sub, and each of David Saloff, George Levine,
Paragon Capital at Spear, Leeds & Kellogg, Norton Herrick,
Murray Feldman and 20th Century Associates ("the Pre-Closing
EPI Stockholders"); Arup Sen, Richard Kneipper, James Kaput
("the HealthTech Stockholders"); Krishna Jayaraman, Shaskikala
Jayaraman, and Gemini Biotech, Inc.("the Gemini Partners") and
other EPI stockholders (4)
2.4.2 First Amendment to Master Agreement dated August 3, 1998
between EPI, EPI Sub, Gemini and the Gemini Partners (2)
2.4.3 Letter Agreement dated as of July 27, 1998 by and between
Messrs. Herrick and Feldman (2)
2.4.4 Form of Amendment to Master Agreement between Pre-Closing EPI
Stockholders and the HealthTech Stockholders (14)
2.4.5 Letter Amendment to Master Agreement between EPI and Norton Herrick
dated March 29, 2000
2.5 Registration Rights Agreement dated as of June 28, 1998 among
EPI, certain of the Pre-Closing EPI Stockholders, the HealthTech
Stockholders and the Gemini Partners (4)
2.6 Agreement of Limited Partnership of Gemini Health Technologies
L.P.dated June 18, 1998 by and between Krishna and Shaskikala
Jayaraman and EPI HealthTech Inc.(2)
II-6
<PAGE>
2.7 Unit Exchange Agreement by and between EPI, Krishna and
Shaskikala Jayaraman, and Gemini Health Technologies L.P. dated
June 18, 1998 (4)
2.8 Contribution Agreement between EPI Sub and EPI dated August
18, 1998 (2)
2.9 Settlement Agreement between Electropharmacology, Inc. and
Krishna and Shashikala Jayaraman dated September 23, 1999 (6)
3.1 Certificate of Incorporation, as amended (7)
3.2 Amendment to Bylaws dated June 24, 1997 (2)
3.2.1 Revised and Restated Bylaws of EPI (2)
3.3 Letter Agreement dated August 27, 1998 between Elan
International Services, Ltd., Elan Pharma International Limited
("EPIL") and Electropharmacology, Inc. (8)
3.4 Securities Purchase Agreement between EPI and Elan
International Services, Ltd. dated September 30, 1998 (9)
3.5 License Agreement between EPI and EPIL dated September 30,
1998 (10)
4.2 Certificate of Designations, Preferences and Rights of Series
A Convertible Preferred Stock (2)
4.3 Warrant to Elan International Services, Ltd. to purchase up to
1,000,000 shares of EPI Our company (2)
4.4 Registration Rights Agreement between EPI and EPIL dated
September 30, 1998 (2)
4.5 Form of Warrant to Elan International Services, Ltd. to
purchase up to 1,520,821 shares of our company dated May 14,
1999 (14)
5.0* Opinion of Wendy Mitchler, Esq.
10.1 Employment Agreement between EPI and Krishna Jayaraman dated
August 18,1998 (2)
10.2 Memorandum to Arup Sen from EPI Board of Directors regarding
terms of employment dated August 25, 1998 (10)
10.2.1 Employment Agreement, dated November 11, 1996 between EPI and
Arup Sen ("Sen Employment Agreement") (11)
10.2.2 First Amendment, dated June 15, 1997 to Sen Employment
Agreement (12)
10.2.3 Revised and Restated Second Amendment, dated April 21, 1998,
to Sen Employment Agreement (2)
10.3 Memorandum to David Saloff from EPI Board of Directors, dated
August 25, 1998 regarding terms of employment (10)
10.4 Employee Nondisclosure, Confidentiality and Noncompetition
Agreement dated August 24, 1998 between EPI and Arup Sen (2)
II-7
<PAGE>
10.5 Form of Consulting Advisory and Non-Competition Agreement
between EPI and each of James Kaput and Richard Kneipper (2)
10.5.1 Form of Consulting Advisor Confidentiality Agreement between
EPI and each of James Kaput and Richard Kneipper (2)
10.6 Benefit Life Insurance Loan Agreement between Delargen
Corp.dba Gemini Biotech, Ltd. and Benefit Life Insurance Company
dated June 25, 1997 (2)
10.6.1 Modification of Benefit Life Insurance Company Loan
Agreement, Note (Adjustable Rate Note) and Other Loan
Documents dated January 6, 1999 (2)
10.7 Promissory Note to Dr. Arup Sen from EPI dated October
10, 1997. (11)
10.8 Promissory Note to Murray Feldman from EPI dated
October 10, 1997. (11)
10.9 Promissory Note to David Saloff from EPI dated October
10, 1997. (11)
10.10 Form of Non-Employee Directors' Equity Compensation Plan,
effective as of January 1, 1996. (7)
10.11 EPI's 1993 Stock Option Plan, as amended November 1, 1996. (11)
10.12 Agreement between EPI, Arup Sen and Conceptua, Inc.
dated February 29, 2000 (14)
10.13.1 Incubator License Agreement between the University of Florida
Research Foundation, Inc. and EPI dated October 29, 1998
(the "License Agreement") (14)
10.13.2 Amendment No. 1 to the License Agreement dated July 23, 1999 (14)
10.13.3 Amendment No. 2 to the License Agreement dated October 13,
1999 (14)
10.14 Promissory Note to EPI from Dr. Arup Sen dated February 1, 1999 (13)
16.2 Letter from Ernst & Young, LLP regarding response to Change in
Certifying Accountants, dated March 23, 1999 (12)
24.1 Consent of Sweeney, Gates & Co.
24.2* Consent of Wendy Mitchler, Esq. (contained in Exhibit 5)
24.3 Power of Attorney
27.1 Financial Data Schedule (5)
-----------
* to be filed by amendment
II-8
<PAGE>
(1) Previously filed as an exhibit to EPI's current Report
on Form 8-K dated June 15, 1998 and incorporated by reference
herein.
(2) Previously filed as an exhibit to Amendment No. 1 to EPI's
Quarterly Report on Form 10-QSB dated March 31, 1999 for
the quarter ended September 30, 1998 and incorporated
by reference herein.
(3) Previously filed as an exhibit to EPI's Current Report
on Form 8-K dated June 26, 1998 and incorporated by reference
herein.
(4) Previously filed as an exhibit to EPI's Current Report on Form
8-K dated July 8, 1998 and incorporated by reference herein.
(5) Filed herewith.
(6) Previously filed as an exhibit to EPI's Quarterly Report
on Form 10-QSB for the quarter ended September 30, 1999 and
incorporated by reference herein.
(7) Previously filed as an exhibit to EPI's Annual Report
on Form 10-KSB for the year ended December 31, 1996 and
incorporated by reference herein.
(8) Previously filed as an exhibit to EPI's Current Report
on Form 8-K dated September 4, 1998 and incorporated by
reference herein.
(9) Previously filed as an Exhibit to Amendment No. 6 to EPI's
Quarterly Report on Form 10-QSB dated March 29, 2000 for
the quarter ended September 30, 1998 and incorporated by
reference herein.
(10) Previously filed as an Exhibit to Amendment No. 5 to EPI's
Quarterly Report on Form 10-QSB dated January 26, 2000
for the quarter ended September 30, 1998 and incorporated
by reference herein.
(11) Previously filed as an Exhibit to EPI's Annual Report
on Form 10-KSB for the year ended December 31, 1997 and
incorporated by reference herein.
(12) Previously filed as an Exhibit to EPI's Current Report
on Form 8-K dated March 31, 1999 and incorporated by
reference herein.
(13) Previously filed as an Exhibit to EPI's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1999
and incorporated by reference herein.
(14) Previously filed as an Exhibit to EPI's Annual Report on
Form 10-KSB for the year ended December 31, 1999 and incorporated
by reference herein.
II-9
<PAGE>
ITEM 28. UNDERTAKINGS.
(a) The Registrant hereby undertakes the following:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or event which, individually or
together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by
a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(c) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona
fide offering of those securities.
II-10
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has authorized this
Registration Statement to be signed on its behalf by the undersigned, in
Alachua, Florida, on June 23, 2000.
ELECTROPHARMACOLOGY, INC.
By: /s/ Arup Sen
----------------------------------
Arup Sen
Chairman, President, Chief Executive
Officer and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on June 23, 2000.
Signatures Title
---------- -----
/s/ Arup Sen Chairman of the Board
______________________________ Chief Executive Officer, Chief
Arup Sen Financial Officer and President
_____________*________________ Director
Murray Feldman
_____________*________________ Vice Chairman of the Board
Richard Kneipper
______________________________ Director
Bernard Carrico
_____________*________________ Director
Stephen Seiler
*The undersigned, by signing his or her name hereto, does sign and execute this
Registration Statement pursuant to the Powers of Attorney executed on behalf of
the above-named officers and directors and contemporaneously filed with the
Securities and Exchange Commission
By: /s/ Arup Sen
------------------------
Arup Sen
Attorney-in-Fact
II-11
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
-------------------------------------------------------------------
2.4.5 Letter Amendment to Master Agreement between EPI and Norton Herrick
dated March 29, 2000
5.0* Opinion of Wendy Mitchler, Esq.
24.1 Consent of Sweeney, Gates & Co.
24.2 Consent of Wendy Mitchler, Esq. (contained in Exhibit 5)
24.3* Power of Attorney
* to be filed by amendment
II-12
<PAGE>
Exhibit 24.1
Consent of Independent Certified Public Accountants
Electropharmacology, Inc.
We consent to the reference to our firm under the captions "Experts",
"Selected Financial Data" and "Summary Financial Data" and to the use of our
report dated April 7, 2000 in the Registration Statement (Form SB-2) and
related Prospectus of Electropharmacology, Inc. filed with the Securities and
Exchange Commission on June 23, 2000.
/s/ Sweeney, Gates & Co.
Ft. Lauderdale, Florida
June 23, 2000
<PAGE>
Exhibit 24.3
POWER OF ATTORNEY
By signing below, I hereby constitute and appoint Arup Sen, my true and
lawful attorney-in-fact and agent to do any and all acts and things and
to execute any and all instruments in my name and behalf in my
capacities as director and/or officer of Electropharmacology, Inc., a
Delaware corporation (the "Company"), which said attorney-in-fact and
agent, may deem necessary or appropriate or which may be required to
enable the Company to comply with the Securities Act of 1933, as amended
(the "Securities Act"), and any rules, regulations or requirements of
the Securities and Exchange Commission in respect thereof, in connection
with a Registration Statement on Form SB-2 (and any abbreviated
registration statement relating thereto permitted pursuant to Rule
462(b) under the Securities Act) for the purpose of registering pursuant
to the Securities Act an aggregate of up to 5,000,000 shares of our
company, par value $.01 per share ("Common Stock"), of the Company to be
sold by the Company in a public offering, including specifically, but
without limiting the generality of the foregoing, the power and
authority to sign for me, in my name and behalf in my capacities as
director and/or officer of the Company (individually or on behalf of the
Company), such Registration Statement (and any such abbreviated
registration statement), and any and all amendments and supplements
thereto, and to file the same, with all exhibits thereto and other
instruments or documents in connection therewith, with the Securities
and Exchange Commission, and hereby ratify and confirm all that said
attorney-in-fact and agent, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney as of
June 12, 2000.
___/s/ Richard K. Kneipper_______ ___/s/ Stephen Seiler__________
Richard K. Kneipper Stephen Seiler
_________________________________ ___/s/ Murry Feldman___________
Bernard Carrico Murray Feldman
