Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
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x
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Annual
Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 for the fiscal year ended December 31,
2005
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Transition
Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934 for the transition period from
___to___
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Commission
File Number 0-16686
VIOQUEST
PHARMACEUTICALS, INC.
(Exact
name of issuer as specified in its charter)
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Delaware
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58-1486040
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification No.)
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180
Mt. Airy Road, Suite 203, Basking Ridge, NJ
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07920
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(Issuer’s
telephone number)
7
Deer
Park Drive, Suite E, Monmouth Junction, NJ, 08852
(former
name, former address and former fiscal year, if changed from last
report)
Securities
registered pursuant to Section 12(b) of the Exchange Act:
None
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Securities
registered pursuant to Section 12(g) of the Exchange Act:
Common
Stock, par value $0.001
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Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o
Check
whether the issuer: (1) filed all reports required to be filed by Section 13
or
15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for
such shorter period that the issuer was required to file such reports), and
(2)
has been subject to such filing requirements for the past 90 days. x
Yes
o
No
Check
if
there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained herein, and no disclosure will be contained, to the best
of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form 10-KSB. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
The
issuer’s revenues for the fiscal year ended December 31, 2005 were $3,804,654.
The
aggregate market value of the common stock of the issuer held by non-affiliates
of the issuer on March 21, 2006 based on the closing price of the common stock
as reported on the OTC Bulletin Board on such date was $24,970,790.
As
of
March 21, 2006 there were 46,729,519 outstanding shares of common stock,
par value $0.001 per share.
Traditional
Small Business Disclosure Format: Yes o No
x
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the issuer’s definitive
Proxy
Statement for its Annual Meeting of Stockholders to be held on May 19, 2006
(the
“2006 Proxy
Statement”)
are incorporated by reference into Part III of this Form 10-KSB, to the extent
described in Part III. The 2006 Proxy Statement will be filed within 120 days
after the fiscal year ended December 31, 2005.
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F-1
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References
to the “Company,” the “Registrant,” “we,” “us,” “our” or in this Annual Report
on Form 10-KSB refer to VioQuest Pharmaceuticals, Inc., a Delaware corporation,
and our consolidated subsidiaries, together taken as a whole, unless the context
indicates otherwise.
Forward-Looking
Statements
This
Annual Report on Form 10-KSB contains statements that are not historical but
are
forward-looking in nature, including statements regarding our current
expectations, beliefs, intentions or strategies regarding the future. In
particular, the “Risk Factors” section following Item 1 and the “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
section in Item 6 of this annual report include forward-looking statements
that
reflect our current views with respect to future events and financial
performance. We use words such as we “expect,” “anticipate,” “believe,” and
“intend” and similar expressions to identify forward-looking statements.
Investors should be aware that actual results may differ materially from our
expressed expectations because of risks and uncertainties inherent in future
events, particularly those risks identified in the subsection entitled “Risk
Factors” following Item 1 in this Annual Report, and should not unduly rely on
these forward looking statements.
Overview
VioQuest
Pharmaceuticals, Inc. has two distinct business units -Drug Development and
Chiral Products and Services. Our drug development business focuses on
acquiring, developing and eventually commercializing human therapeutics in
the
areas of oncology, and antiviral diseases and disorders for which there are
current unmet medical needs. We currently have the exclusive rights to develop
and commercialize two oncology drug candidates. Our chiral business, which
we
operate through our wholly-owned subsidiary, Chiral Quest, Inc., provides
innovative chiral products, technology and custom synthesis development services
to pharmaceutical and fine chemical companies in all stages of a products’
lifecycle.
Corporate
History; Mergers and Reincorporation Transactions
We
were
originally formed in October 2000, as a Pennsylvania limited liability company
under the name Chiral Quest, LLC. In February 2003, we completed a reverse
acquisition of Surg II, Inc., a publicly-held Minnesota shell corporation and
were renamed Chiral Quest, Inc. In August 2004, we were renamed VioQuest
Pharmaceuticals, Inc. In October 2005, we reincorporated under Delaware law
by
merging into a wholly-owned subsidiary incorporated under Delaware law.
Immediately
following the reincorporation, we acquired Greenwich Therapeutics, Inc., a
privately-held, New York City based drug development company, in a merger
transaction in which we merged our wholly-owned subsidiary VioQuest Delaware,
Inc., with and into Greenwich Therapeutics, with VioQuest Delaware, Inc.,
remaining as the surviving corporation and our wholly-owned subsidiary. As
a
result of the acquisition of Greenwich Therapeutics, we acquired the rights
to
develop and commercialize two oncology drug candidates - VQD-001, Sodium
Stibogluconate, also called “SSG” and VQD-002, Triciribine-Phosphate, or
“TCN-P”.
Cancer
Overview
Cancer
develops when abnormal cells in the body begin to grow out of control. These
cancer cells will outlive normal cells and go on to form additional cancerous
cells. The danger is that these cells will often travel to other parts of the
body and replace normal tissue, a process called metastasis. Frequently, these
metastases ultimately lead to a patient’s death. Although the exact cause of
cancer is still uncertain, it is believed that genetics and environmental toxins
play a role.
The
American Cancer Society estimates that 1,372,910 new cases of cancer will be
diagnosed in 2005 alone. The National Institute of Health estimated an overall
cost of cancer to be $189.8 billion in 2004. This cost includes $69.4 billion
in
direct medical expenses, $16.9 billion in indirect morbidity costs, and $103.5
billion in indirect mortality costs. This year, 570,280 deaths are expected
to
be due to cancer or one in four deaths in the United States (“U.S.”). For all
types of cancer diagnosed between 1995 and 2000 combined, the 5-year relative
survival rate is 64%.
Cancer
is
the second leading cause of death in America. In the U.S., half of all men
and
one third of all women will develop cancer at some point in their lives. Since
1990, over 17 million new cancer cases have been diagnosed. A number of drugs
are used in the treatment of cancer. These drugs are used to reduce pain,
prolong the life of the patient, send the cancer into remission or eliminate
the
cancer completely. There is great opportunity for improvement in all types
of
cancer treatment. Recognizing this vast health and commercial opportunity,
we
acquire, develop, and commercialize innovative products for the treatment of
important unmet medical needs in cancer and immunological diseases.
Drug
Development
Through
our drug development business, we acquire, develop, and commercialize innovative
products for the treatment of important unmet medical needs in cancer and
immunological diseases. Through our acquisition of Greenwich Therapeutics,
Inc.
in October 2005, we obtained the rights to develop and commercialize two
oncology drug candidates - VQD-001 and VQD-002. The rights to our two oncology
drug candidates, VQD-001 and VQD-002, were granted by license agreements
with The Cleveland Clinic Foundation and the University of South Florida
Research Foundation, respectively. These licenses give us the right to develop,
manufacture, use, commercialize, lease, sell and/or sublicense VQD-001 and
VQD-002.
VQD-001
- Sodium Stibogluconate (SSG)
VQD-001
is a pentavalent antimonial drug that has been used for over 50 years in parts
of Africa and Asia for the treatment of leishmaniasis, a protozoan disease.
Recent research at the Cleveland Clinic suggests that VQD-001 may also become
a
new treatment for some types of cancer.
Interferon
and other cytokines are important in controlling malignancy; their mechanism
of
action depends on their ability to signal via the Janus kinase, Jak/Stat,
pathways. The Jak/Stat pathway is regulated, in part, by the SRC homology
phosphatases, SHP-1 and SHP-2. Experiments with VQD-001 have shown that it
inhibits recombinant SHP-1. Since SHP-1 downregulates Jak/Stat, VQD001 promotes
the Jak/Stat pathway and augments interferon and other cytokine
activity. Thus,
it
is hypothesized that treating cancer patients with VQD-001 will potentiate
the
intrinsic cytokine/interferon signaling through the Jak/Stat pathway, resulting
in greater cancer cell death (apoptosis).
This
effect on cancer cells, along with its apparent ability to enhance the body’s
immune system make it an attractive drug candidate for
oncology. Furthermore, its historically acceptable toxicity profile as an
anti-leishmaniasis drug, indicates to us that VQD-001 is an attractive drug
candidate to evaluate as an anti-cancer agent. To date, we have not submitted
any application to the U.S. Food and Drug Administration (“FDA”), although the
Cleveland Clinic has filed an investigator, investigational new drug (“IND”)
application, which has been accepted by the FDA, and pursuant to which it is
conducting a clinical trial with VQD-001.
Preclinical
Data
Scientists
have shown that VQD-001, alone, inhibits prostate, bladder, colon, melanoma
and
renal cancer cell lines as well as multiple myeloma and lymphoma cell
lines (in vitro). Interferon also inhibits some of these cell lines, but
cells often develop resistance to interferon. When VQD-001 is combined with
interferon, the growth-inhibitory effect of interferon is augmented, and
in
vitro resistance to interferon is overcome. Experiments in
nude
mice with cancer xenografts has shown that VQD-001 can control malignancies
in vivo as well.
Potential
Lead Indication of VQD-001
The
standard of care for solid tumors, lymphoma, myeloma and certain other
hematological malignancies, includes either chemotherapy and/or biologic
therapy. Biologic treatment with Interferon alpha-2b, or “IFN a-2b,”
has
been moderately successful in controlling some of these malignancies. However,
some tumors become refractory to treatment with IFN a-2b
and
the cancer continues to grow despite continued treatment. In addition, the
toxicity profile of IFN a-2b
often
limits its clinical efficacy. We believe that the effectiveness of this existing
treatment may be improved by using VQD-001 in combination with IFN a-2b.
Specifically, we believe that VQD-001, due to its demonstrated ability to
inhibit PTPases, will augment the anti-proliferative activity and improve the
efficacy of IFN a-2b.
Therefore, we believe that the efficacy of VQD-001 in combination with IFN
a-2b
as
shown in preclinical studies together with its historically acceptable safety
profile, may position it well as an effective combination therapy to treat
solid
tumors and certain other hematological malignancies.
Clinical
Development
The
safety profile of interferon alone and of VQD-001 alone is well known.
Interferon has been used for decades as an anti-neoplastic agent and VQD-001
has
been used for the treatment of leishmaniasis for years. VQD-001 is currently
being used as the treatment of choice by the U.S. military for leishmaniasis
which soldiers have contracted in Iraq. We believe that these two drugs can
be
safely combined.
VQD-001
is currently being studied in combination with IFN a-2b
in a
24-patient Phase I clinical trial at the Cleveland Clinic Taussig Cancer Center
in the treatment of refractory solid tumors, lymphoma and melanoma. The primary
objective of this clinical trial is to confirm the tolerance, safety and
determine the maximum tolerated dose, of VQD-001 in combination with IFN
a-2b.
In
addition, the trial will also provide pharmacokinetic data, and a better
understanding of how VQD-001 affects important biological and genetic pathways.
This clinical trial is expected to be completed by the first half of 2007.
Although it has no obligation to us to do so, the Cleveland Clinic intends
to
fund all costs associated with this clinical trial. In order to ensure this
trial is completed, however, we may in the future agree to fund portions of
this
study. Further, if the Cleveland Clinic determines to discontinue the trials,
we
intend to continue product testing at an alternative facility such as a medical
center or university to run our clinical trials. In order for us to sponsor
clinical trials, however, it will be necessary for us to submit our own IND
to
the FDA. Pending a successful completion of this Phase I clinical trial, we
anticipate initiating a Phase II trial in the second half of 2007. The Phase
II
trial will be designed to provide information concerning efficacy, among other
information. Prior to a initiating the Phase II trial, we will need to apply
for
approval with the local IRB (“Institutional Review Board”) and identify the
Principal Investigator to run the study. There may potentially be delays in
receiving this approval, such as unforeseen safety issues and dosing issues.
In
addition, we intend to conduct an additional Phase I clinical trial with VQD-001
under a corporate-sponsored IND. This 12-patient clinical trial with both
VQD-001 and IFN a-2b
is
designed to determine the tolerance, safety and maximum tolerated dose of
VQD-001. A corporate-sponsored IND will be filed with the FDA within the first
half of 2006. Our Phase I clinical trial is expected to be completed in the
first half of 2007. A Phase II clinical trial will be initiated immediately
after the successful completion of our Phase I clinical trial.
Advantages
Over Existing Developmental Therapeutics
Potential
advantages of VQD-001 over existing therapies include VQD-001’s long history of
use, favorable toxicity, side effect profiles, and efficacy in preclinical
cancer models. As previously discussed, VQD-001 has been utilized in the
treatment of leishmaniasis for over fifty years in parts of Africa and Asia.
As
published by the World Health Organization, leishmaniasis currently threatens
350 million men, women and children in 88 countries around the world.
Leishmaniases are parasitic diseases with a wide range of clinical symptoms:
cutaneous,
(cutaneous
forms of the disease normally produce skin ulcers on the exposed parts of the
body such as the face, arms and legs). The disease can produce a large number
of
lesions - sometimes up to 200 - causing serious disability, and invariably
leaving the patient permanently scarred, a stigma which can cause serious social
prejudice;
mucocutaneous (in mucocutaneous
forms of leishmaniasis, lesions can lead to partial or total destruction of
the
mucous membranes of the nose, mouth and throat cavities and surrounding
tissues). These disabling and degrading forms of leishmaniasis can result in
victims being humiliated and cast out from society. And
visceral leishmaniasis
- also known as kala azar - is characterized by irregular bouts of fever,
substantial weight loss, swelling of the spleen and liver, and anaemia
(occasionally serious). If left untreated, the fatality rate in developing
countries can be as high as 100% within 2 years.
VQD-001
has demonstrated favorable toxicity and side effect profiles, at dosages well
in
excess of the dosages we intend to utilize in our clinical trials in the
treatment of cancer. Also, based on preclinical in
vivo
cancer
models, we believe that VQD-001 may have better efficacy in treating refractory
cancer than existing standards of care.
Competition
To
our
knowledge, no inhibitors of such PTPases have previously been demonstrated
to be
effective to treat cancer. CombinatoRx, Incorporated, a privately held
biotechnology company, is developing a clinical drug candidate containing
Pentamidine + Thorazine for the potential treatment of cancer. Pentamidine
may
also be a PTPase inhibitor and has also previously been used for the treatment
of leishmaniasis. Hoffman-La Roche Inc. and Wyeth are investigating PTPase
inhibitors for the potential treatment of non-insulin dependent
diabetes.
Additional
Potential Indication of VQD-001
As
the
Company continues to develop VQD-001, for indications primarily used for an
oncology therapeutic, we are also in the process of possibly developing a
treatment for leishmaniasis which is a parasitic disease as described above.
During this process, we are exploring the possibility of obtaining Orphan Drug
status for the treatment of leishmaniasis in the U.S. If accepted, we would
anticipate filing a New Drug Application (“NDA”) with the FDA.
VQD-002
- Triciribine-Phosphate (TCN-P)
VQD-002
is a nucleoside analog that had been under development for many years as
an
anti-cancer therapy. It was chosen for clinical trials after preclinical
work
showed that it was more active than 1,991 other compounds in a NCI Diversity
Set
in terms of its ability to inhibit AKT-transformed cells. Since Akt has been
shown to play a critical role in malignancy by inducing cell survival, growth,
migration, and angiogenesis, researchers at The National Cancer Institute,
or
“NCI”, advanced VQD-002 into clinical trials in oncology in the 1980s and 1990s.
While an anti-cancer signal was seen in those clinical trials in various
tumor
types, including sarcoma, colorectal, hepatic and breast cancers, the drug
was
discontinued due to side-effects (specifically, hyperglycemia and
hepatotoxicity). The side effects were dose-related. In these trials, patients
were not selected according to how strongly their tumors expressed AKT.
Scientists now believe that lower doses of VQD-002 may be effective in treating
patients whose tumors overexpress AKT because their tumors may be more sensitive
to lower doses of VQD-002. Tumors with high levels of AKT expression, including
some as breast, ovarian, colorectal and pancreatic cancers, are particularly
difficult to treat with conventional therapies. Therefore, it is logical
both
from an efficacy and safety/tolerability perspective to test VQD-002 in patients
with tumors that overexpress AKT.
Preclinical
Data
Recent
research performed at the Moffitt Cancer Center at the University of South
Florida confirmed activity in tumor cell lines that overexpress AKT.
Furthermore, in vivo studies showed that low doses of VQD-002 inhibited tumor
growth in a murine human xenograft model only if the xenograft overexpressed
AKT
and not if AKT was not overexpressed. In both human tumor cell lines and
in
murine xenograft models VQD-002 inhibited tumor cell growth and promoted
tumor
cell death, a process known as apoptosis.
Potential
Lead Indication of VQD-002
The
efficacy of VQD-002 as an anti-cancer drug in previous clinical trials was
limited by the side effects associated with its usage. We believe, however,
that
these side effects were closely related to the high dosage levels used in these
trials. In addition, we believe that the hyperglycemia seen as a side effect
may
have resulted from VQD-002’s mechanism of action on Akt, as recent preclinical
studies have shown that a deficiency of Akt impairs the ability of insulin
to
lower blood glucose, which could lead to a hyperglycemic condition. The previous
NCI-sponsored clinical trials used dosages that ranged up to 256mg/m2, and
these
trials targeted tumors without regard to whether such tumors overexpressed
Akt,
since, at the time of such trials, the mechanism of action for VQD-002 was
not
fully understood. We believe, that based on the preclinical studies conducted
to
date, VQD-002 effectively and selectively induces apoptosis and inhibits growth
in tumor cells with elevated levels of phosphorylated Akt at doses lower
than those used in the previous clinical trials. Therefore, we believe that
by
selectively screening and treating only those patients with tumors that exhibit
abnormal levels of phosphorylated Akt, VQD-002 in low doses may achieve tumor
inhibition and regression without the significant side effects previously
associated with its usage at higher dose levels. Our initial potential lead
indication for VQD-002 will be for the treatment of solid tumors known to have
abnormal levels of phosphorylated Akt, which constitute a significant percentage
of all colorectal, ovarian, pancreatic and breast cancers.
Additional
Potential Indications for VQD-002
While
VQD-002 continues in clinical development for solid tumors that overexpress
abnormal levels of phosphorylated Akt, we intend to explore, in consultation
with our Scientific Advisory Board, management team and other consultants,
VQD-002’s potential in the treatment for hematological and other liquid tumors,
including leukemia. We intend to continue the preclinical and clinical
development of VQD-002 in those indications in which we believe it shows
potential.
Clinical
Development
The
FDA
recently accepted an IND that we filed for the clinical development of VQD-002.
We expect to begin our clinical trials in the first half of 2006 at the Moffitt
Cancer Center at the University of South Florida in the treatment of metastatic
colorectal, pancreatic, breast and ovarian tumors, in addition to initiating
clinical trials for liquid tumors, elsewhere in the area of leukemia. We expect
that each patient enrolled in the clinical trials will have either refractory
solid or liquid tumors that have demonstrated abnormal levels of phosphorylated
Akt on biopsied tumor samples. The primary objective of this clinical trial
will
be to confirm the tolerance, safety and determine maximum tolerated dose, of
VQD-002. In addition, the trial will also provide pharmacokinetic data, and
a
better understanding of how VQD-002 impacts on levels of AKT in previously
overexpressing tumors. It is expected these clinical trials will take
approximately 12 months to complete. Pending the successful completion of
these Phase I clinical trials, we anticipate initiating a Phase II clinical
trial in the second half of 2007. Prior to initiating the Phase II clinical
trial, we will need to apply for approval with the Institutional Review Board
and the principal investigator to conduct the study. There may potentially
be
delays in receiving this approval, such as unforeseen safety issues and dosing
issues.
Advantages
over Existing Developmental Therapeutics
The
planned clinical trials utilizing VQD-002 in patients that have tumors that
exhibit abnormal levels of phosphorylated Akt is a strategy that we believe
offers significant advantages over classic anticancer therapies. Our research
indicates to us that low dose treatment with VQD-002 targets Akt. This “targeted
therapy” takes advantage of the biologic differences between cancer cells and
healthy cells. Since patients with tumors are pre-selected for these trials
that overexpress Akt, this therapy is likely to be effective in a high
percentage of patients treated at the appropriate dose and
schedule. We expect that this will decrease both the clinical trial
regulatory time period, and also the costs associated with such clinical trials,
as compared to traditional anticancer products currently in clinical
development.
Competition
There
is
currently no approved Akt inhibitor on the market. Keryx Biopharmaceuticals,
Inc. is developing perifosine. Perifosine is an alkylphospholipid that has
been
shown to inhibit the PI3K/Akt pathway, but research to date has not demonstrated
that it directly binds the Akt molecule. Multiple pharmaceutical companies
have
Akt inhibitors in the early discovery stage of development, including Abbott
Laboratories, Astrazeneca, Bristol-Meyers Squibb, Merck & Co., Inc. and Eli
Lilly.
Government
Regulation
The
research, development, testing, manufacturing, labeling, promotion, advertising,
distribution, and marketing, among other things, of our products are extensively
regulated by governmental authorities in the U.S. and other countries. In the
U.S., the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act,
or
the “FDCA,” and its implementing regulations. Failure to comply with the
applicable U.S. requirements may subject us to administrative or judicial
sanctions, such as FDA refusal to approve pending NDAs, warning letters, product
recalls, product seizures, total or partial suspension of production or
distribution, injunctions, and/or criminal prosecution.
Drug
Approval Process
None
of
our drug candidates may be marketed in the U.S. until the drug has received
FDA
approval. The steps required before a drug may be marketed in the U.S. include:
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preclinical
laboratory tests, animal studies, and formulation
studies,
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submission
to the FDA of an IND for human clinical testing, which must become
effective before human clinical trials may
begin,
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adequate
and well-controlled human clinical trials to establish the safety
and
efficacy of the drug for each
indication,
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submission
to the FDA of an NDA,
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satisfactory
completion of an FDA inspection of the manufacturing facility or
facilities at which the drug is produced to assess compliance with
current
good manufacturing practices, or “cGMPs,”
and
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FDA
review and approval of the NDA.
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Preclinical
tests include laboratory evaluation of product chemistry, toxicity, and
formulation, as well as animal studies. The conduct of the preclinical tests
and
formulation of the compounds for testing must comply with federal regulations
and requirements. The results of the preclinical tests, together with
manufacturing information and analytical data, are submitted to the FDA as
part
of an IND, which must become effective before human clinical trials may begin.
An IND will automatically become effective 30 days after receipt by the FDA,
unless before that time the FDA raises concerns or questions about issues such
as the conduct of the trials as outlined in the IND. In such a case, the IND
sponsor and the FDA must resolve any outstanding FDA concerns or questions
before clinical trials can proceed. We cannot be sure that submission of an
IND
will result in the FDA allowing clinical trials to begin.
Clinical
trials involve the administration of the investigational drug to human subjects
under the supervision of qualified investigators. Clinical trials are conducted
under protocols detailing the objectives of the study, the parameters to be
used
in monitoring safety, and the effectiveness criteria to be evaluated. Each
protocol must be submitted to the FDA as part of the IND.
Clinical
trials typically are conducted in three sequential phases, but the phases may
overlap. The study protocol and informed consent information for study subjects
in clinical trials must also be approved by an Institutional Review Board for
each institution where the trials will be conducted. Study subjects must sign
an
informed consent form before participating in a clinical trial. Phase I usually
involves the initial introduction of the investigational drug into people to
evaluate its short-term safety, dosage tolerance, metabolism, pharmacokinetics
and pharmacologic actions, and, if possible, to gain an early indication of
its
effectiveness. Phase II usually involves trials in a limited patient population
to (i) evaluate dosage tolerance and appropriate dosage; (ii) identify possible
adverse effects and safety risks; and (iii) evaluate preliminarily the efficacy
of the drug for specific indications. Phase III trials usually further evaluate
clinical efficacy and test further for safety by using the drug in its final
form in an expanded patient population. There can be no assurance that Phase
I,
Phase II, or Phase III testing will be completed successfully within any
specified period of time, if at all. Furthermore, the Company or the FDA may
suspend clinical trials at any time on various grounds, including a finding
that
the subjects or patients are being exposed to an unacceptable health risk.
The
FDCA
permits FDA and the IND sponsor to agree in writing on the design and size
of
clinical studies intended to form the primary basis of an effectiveness claim
in
an NDA application. This process is known as Special Protocol Assessment, or
SPA. These agreements may not be changed after the clinical studies begin,
except in limited circumstances.
Assuming
successful completion of the required clinical testing, the results of the
preclinical studies and of the clinical studies, together with other detailed
information, including information on the manufacture and composition of the
drug, are submitted to the FDA in the form of an NDA requesting approval to
market the product for one or more indications. The testing and approval process
requires substantial time, effort, and financial resources. The agencies review
the application and may deem it to be inadequate to support the registration
and
we cannot be sure that any approval will be granted on a timely basis, if at
all. The FDA may also refer the application to the appropriate advisory
committee, typically a panel of clinicians, for review, evaluation and a
recommendation as to whether the application should be approved. The FDA is
not
bound by the recommendations of the advisory committee.
The
FDA
has various programs, including fast track, priority review, and accelerated
approval, that are intended to expedite or simplify the process for reviewing
drugs, and/or provide for approval on the basis surrogate endpoints. Generally,
drugs that may be eligible for one or more of these programs are those for
serious or life-threatening conditions, those with the potential to address
unmet medical needs, and those that provide meaningful benefit over existing
treatments. We cannot be sure that any of our drug candidates will qualify
for
any of these programs, or that, if a drug candidate does qualify, that the
review time will be reduced.
Section
505b2 of the FDCA allows the FDA to approve a follow-on drug on the basis of
data in the scientific literature or data used by FDA in the approval of other
drugs. This procedure potentially makes it easier for generic drug manufacturers
to obtain rapid approval of new forms of drugs based on proprietary data of
the
original drug manufacturer.
Before
approving an NDA, the FDA usually will inspect the facility or the facilities
at
which the drug is manufactured, and will not approve the product unless cGMP
compliance is satisfactory. If the FDA evaluates the NDA and the manufacturing
facilities as acceptable, the FDA may issue an approval letter, or in some
cases, an approvable letter followed by an approval letter. Both letters usually
contain a number of conditions that must be met in order to secure final
approval of the NDA. When and if those conditions have been met to the FDA’s
satisfaction, the FDA will issue an approval letter. The approval letter
authorizes commercial marketing of the drug for specific indications. As a
condition of NDA approval, the FDA may require post marketing testing and
surveillance to monitor the drug’s safety or efficacy, or impose other
conditions.
After
approval, certain changes to the approved product, such as adding new
indications, making certain manufacturing changes, or making certain additional
labeling claims, are subject to further FDA review and approval. Before we
can
market our product candidates for additional indications, we must obtain
additional approvals from FDA. Obtaining approval for a new indication generally
requires that additional clinical studies be conducted. We cannot be sure that
any additional approval for new indications for any product candidate will
be
approved on a timely basis, or at all.
Post-Approval
Requirements
Often
times, even after a drug has been approved by the FDA for sale, the FDA may
require that certain post-approval requirements be satisfied, including the
conduct of additional clinical studies. If such post-approval conditions are
not
satisfied, the FDA may withdraw its approval of the drug. In addition, holders
of an approved NDA are required to: (i) report certain adverse reactions to
the
FDA, (ii) comply with certain requirements concerning advertising and
promotional labeling for their products, and (iii) continue to have quality
control and manufacturing procedures conform to cGMP after approval. The FDA
periodically inspects the sponsor’s records related to safety reporting and/or
manufacturing facilities; this latter effort includes assessment of compliance
with cGMP. Accordingly, manufacturers must continue to expend time, money,
and
effort in the area of production and quality control to maintain cGMP
compliance. We intend to use third party manufacturers to produce our products
in clinical and commercial quantities, and future FDA inspections may identify
compliance issues at the facilities of our contract manufacturers that may
disrupt production or distribution, or require substantial resources to correct.
In addition, discovery of problems with a product after approval may result
in
restrictions on a product, manufacturer, or holder of an approved NDA, including
withdrawal of the product from the market.
Orphan
Drug
The
FDA
may grant orphan drug designation to drugs intended to treat a “rare disease or
condition,” which generally is a disease or condition that affects fewer than
200,000 individuals in the U.S., Orphan drug designation must be requested
before submitting an NDA. If the FDA grants orphan drug designation, which
it
may not, the identity of the therapeutic agent and its potential orphan use
are
publicly disclosed by the FDA. Orphan drug designation does not convey an
advantage in, or shorten the duration of, the review and approval process.
If a
product which has an orphan drug designation subsequently receives the first
FDA
approval for the indication for which it has such designation, the product
is
entitled to orphan exclusivity, meaning that the FDA may not approve any other
applications to market the same drug for the same indication, except in certain
very limited circumstances, for a period of seven years. Orphan drug designation
does not prevent competitors from developing or marketing different drugs for
that indication.
Non-United
States Regulation
Before
our products can be marketed outside of the U.S., they are subject to regulatory
approval similar to that required in the U.S., although the requirements
governing the conduct of clinical trials, including additional clinical trials
that may be required, product licensing, pricing and reimbursement vary widely
from country to country. No action can be taken to market any product in a
country until an appropriate application has been approved by the regulatory
authorities in that country. The current approval process varies from country
to
country, and the time spent in gaining approval varies from that required for
FDA approval. In certain countries, the sales price of a product must also
be
approved. The pricing review period often begins after market approval is
granted. Even if a product is approved by a regulatory authority, satisfactory
prices may not be approved for such product.
In
Europe, marketing authorizations may be submitted at a centralized, a
decentralized or national level. The centralized procedure is mandatory for
the
approval of biotechnology products and provides for the grant of a single
marketing authorization that is valid in all EU members’ states.
As of January 1995, a mutual recognition procedure is available at the request
of the applicant for all medicinal products that are not subject to the
centralized procedure. There can be no assurance that the chosen regulatory
strategy will secure regulatory approvals on a timely basis or at
all.
Chiral
Business
Over
50
percent of the 500 top-selling pharmaceutical drugs on the market are comprised
of chiral molecules, including drugs used to treat anxiety, depression,
indigestion, heartburn, cancer, arthritis, AIDS and allergies. In 2004, chiral
drug sales were over $175 billion, based on a report in SRI
Consulting, which
represents over one third of the complete drug market of over $470 billion.
The
majority of new drug candidates under development by pharmaceutical companies
consist of chiral chemicals.
A
molecule is considered “chiral” because it exists in two “enantiomers,” or
non-superimposable mirror-like images analogous to one’s left and right hands.
Most drugs interact with biological targets in a specific manner, requiring
the
drug to be of a specific shape and orientation. Contaminating “wrong-handed”
enantiomers of the active drug molecule will probably not interact with the
biological drug target, or worse, interact with a different biological molecule
in an unintended and often toxic manner. Thalidomide, the morning sickness
drug
used by pregnant women in the 1960’s, is a notorious example of an impure chiral
drug. One enantiomer of the drug’s chiral molecules treated morning sickness,
while its undesired enantiomer impurity caused birth defects. Pharmaceutical
companies are typically required, at great expense, to purify the active
mirror-image form of the drug molecule away from its contaminating or inactive
counterpart.
Products
and Services
We
offer
two business lines through our Chiral Quest subsidiary, one in products and
one
in services in order to provide clients with critical solutions for the
efficient manufacturing of chiral products or therapeutic drugs. Its products
include bulk chiral catalysts, proprietary building blocks / client-defined
targets and a proprietary “Chiral ToolKit”, comprised of a diverse set of chiral
ligands that are combined with transition metals to catalyze reactions leading
to chiral molecules. Chiral Quest also offers a variety of services covering
specialized chiral transformation screening, chiral synthetic or process
development support and manufacturing solutions to be delivered on a
partnership/contract basis with client firms. Chiral Quest products and services
are applicable throughout the full life cycle of a chiral drug, from early
lead
discovery, through development and in commercialization.
Chiral
ToolKit.
We
currently sell products which represent several of the proprietary families
of
our chiral ligands to which the Company has exclusive rights. These ligands
are
sold in research quantities packaged in convenient Chiral ToolKit sets for
exclusive use in research applications by client companies. These innovative,
patent protected ligands are screened by clients for applications in the
manufacture of their chiral molecules. Clients use this screening process to
determine which ligands may prove optimal for their chiral commercial
manufacturing needs. The sale of research quantities of ligands allows clients
to gain initial access to our technology and to independently validate the
advantages provided by that technology.
Bulk
Ligands and Catalysts.
We also
sell larger quantities of proprietary chiral ligands and catalysts to which
we
have exclusive rights, including some that are not included in our Chiral
ToolKit. These ligands and catalysts are sold individually to clients in
amounts specified by the client according to its research, development or
commercial needs. One of our objectives is to provide clients with their
required ligands and catalysts, either from our own laboratories or through
third parties, for research, clinical and commercial purposes. The use
of Chiral Quest’s bulk
ligands and catalysts in commercial drug applications will generally
require license fees and/or other related payments to us, subject to
negotiation.
Customized
Synthesis and Process Development Services. We
also
provide commercial quantity chiral intermediates to pharmaceutical and biotech
companies, through our synthesis and product development services. Rapid
delivery of the first few kilograms of a developmental product is the often
the
highest priority of the pharmaceutical process development chemist. The
challenge lies in meeting the delivery timelines, while developing a practical
process for larger scale manufacture. Chiral Quest chemists have many years
of
pharmaceutical process development experience and recognize the importance
of
this dual goal. Our Research and Development (“R&D”) group
located near Princeton, NJ has successfully delivered on many multi-step,
complex process development projects. In
parallel to our process development service, Chiral Quest offers support
services for medicinal chemistry and chemical development. These include
scaffold and analogue synthesis, analytical method development, impurity and
metabolite identification and synthesis. Our goal is to provide a comprehensive
chemistry service from early clinical trials, through to full commercial
manufacturing.
Screening
Services.
We also
provide focused screening of client supplied target compounds using our
proprietary ligands. In addition to the select ligands included in the Chiral
ToolKit, we have several families of chiral ligands that are used to screen
target compounds. We identify and prepare individual ligands optimized for
particular client needs.
Proprietary
Building Blocks / Client-Defined Targets.
We work
with our clients to help optimize the conditions under which our ligands are
used and also produce certain molecules of customer interest. This may involve
the development of novel manufacturing processes, for which we will derive
additional compensation. We may also structure our client agreements to assure
the use of our ligands within the manufacturing process, thereby requiring
our
customers to buy the ligands from us in commercial quantities in order for
the
client to successfully manufacture its compound. We may also produce and sell
certain selected chiral products defined by our clients such as chiral building
blocks or intermediates.
Contract
Manufacturing / Supply Chain Management. The
product of our process development and kilo-lab service is a technical package
ready to tech-transfer to a manufacturing facility. In seamless harmony with
R&D and kilo-lab facilities in the U.S., Chiral Quest operates an R&D
and kilo-lab facility near Shanghai, China. Our management team includes senior
technology leaders from China, who have also had successful professional careers
in the U.S. Our physical assets combined with our people, who understand and
manage the diversity of cultural issues in China makes Chiral Quest the ideal
partner for companies seeking to take advantage of the technical capabilities
and low-cost of operating in China. Chiral Quest has managed the tech-transfer
of many complex multi-step syntheses to manufacturing partners in China. Our
customers benefit from the lower cost, while having full confidence that every
detail of the tech-transfer is closely managed by Chiral Quest.
Global
Resources. Advanced
resources and an experienced team in both New Jersey, U.S. and Jiashan, China
enable Chiral Quest to serve a broad range of customers, from virtual bio-tech
to the world’s leading multi-national pharmaceutical companies. Chiral Quest’s
laboratory in Monmouth Junction, New Jersey provides access to a staff of
experienced chemists, enabling rapid solutions to complex chemistry problems
and
supply of a broad range of products in grams-to-kilo scale. Commercial
manufacturing facilities in China, combined with a diverse management team
featuring Chinese technology leaders, enable us to offer seamless scalability
and technology transfer.
Strategy
Our
business strategy is focused on exploiting our asymmetric catalysis technology
by:
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Our
goal is to help our customers implement the most cost-effective,
efficient
and environmentally friendly manufacturing processes using the most
advanced catalyst technology.
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Our
business model provides rapid implementation of confidentiality
agreements, project reviews and proposal submission, followed by
project
implementation and delivery.
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Our
intellectual
property strategy is flexible and allows the customer access to our
technology while avoiding protracted licensing negotiations.
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Providing
screening services necessary to test the selectivity and activity
of a
broad portfolio of proprietary technologies for client
substrates;
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Granting
access to a selection of our ligands through non-exclusive licenses
for
commercial and research and development
purposes;
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Granting
compound-specific exclusive rights to clients whose businesses require
commercial use of one or more of our
ligands;
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Developing
proprietary process methods for producing chirally pure pharmaceutical
ingredients, intermediates and building blocks in exchange for fees,
milestone payments and royalties;
and
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Assisting
clients in the development of chiral drugs, the development of which
has
been slowed or halted due to manufacturing inefficiencies, which
are
amenable to improvements through our
technology.
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Sales
and Marketing
We
sell
our products and services directly to clients both in the pharmaceutical and
fine chemical industries. In September 2004, January 2005 and February 2006,
we
hired our Director of Global Operations, General Manager, and a Director of
Business Development, respectively, who are focused on sales and marketing
activities. We intend to hire additional business development and marketing
personnel in the near future.
Dependence
on Certain Customers
In
fiscal
2005, we sold our proprietary products and services to a total of approximately
35 customers. During 2005, we had one customer, a major biopharmaceutical
company, which accounted for approximately 64 percent of our total revenues.
In
2004, we had two customers, one a major pharmaceuticals company and the other
a
biotechnology company, that accounted for approximately 34 percent and 26
percent of our revenue, respectively. The loss of these accounts would have
a
material adverse effect on our business; however, we believe our relationships
with these customers are strong.
Competition
Competition
in the traditional area of separation manufacture of chiral molecules comes
from
a few distinct sources, including Chiral Technologies Inc., ChromTech Ltd.,
NovaSep, Inc. and Advance Separation Technologies Inc. Traditional methods
of
manufacturing chiral molecules involve the production of a mixture of both
chiral forms of molecules of interest, followed by a process which separates
the
desired enantiomer from the undesired enantiomer. This methodology, though
still
commonly used, is extremely cost-ineffective, as it results in the loss of
greater than 50 percent of the intermediate product at each chiral purification
step. We believe we have a competitive advantage over companies using
traditional methods of separation because our technology drives the preferential
manufacture of chiral enantiomers of interest, which can result in 95 to 99
percent yields. This can result in significant cost savings in the manufacturing
process, particularly for chiral molecules that may require several chiral
separation steps by traditional methods.
In
the
area of chemical catalysts for chiral drug manufacture, we compete with
pharmaceutical and fine chemical companies, including our current and potential
clients and collaborators, academic and research institutions. Some of these
companies include the Dow Chemical Company, Degussa AG, Rhodia ChiRex Inc.
and
Solvias AG. Many of these companies are developing or marketing technologies
and
services similar to the ones developed or offered by us. We anticipate continued
competition from other manufacturers of chiral catalysts in the
future.
Some
of
our competitors, such as Codexis, a wholly owned subsidiary of Maxygen, or
Diversa Corporation, attempt to genetically modify biological enzymes for the
purpose of serving as biological catalysts for asymmetric chiral manufacturing.
While this approach works in certain circumstances, it is extremely
time-consuming to develop for each individual manufacturing process. We believe
our technology has the competitive advantage of being more broadly applicable
to
a number of common asymmetric transformations.
Intellectual
Property and License Agreements
License
with the Penn State Research Foundation (“PSRF”).
We have
an exclusive, worldwide license from the PSRF to certain chiral technologies
developed by Dr. Zhang. The license agreement has been amended on five
occasions, four of which provide us with additional rights, including the rights
to new patent applications. The PSRF license agreement grants us rights to
any
conversions, re-issues, extensions, divisional applications, continuations,
continuations in part, and any patents issuing thereon, and any improvements
to
the licensed patents. Under the license agreement, the PSRF received an equity
stake in our Company as partial consideration for the license. The license
agreement also obligates us to reimburse the PSRF for its patent expenses
relating to the licensed technology.
The
PSRF
license agreement requires us to use our reasonable best efforts to achieve
gross revenue of at least $500,000 in calendar year 2006. Should we fail to
obtain this milestone, the PSRF has the right, but not the obligation, to
terminate the license agreement on the grounds that we failed to use our best
efforts to achieve those milestones.
Additionally,
in accordance with the license agreement, the PSRF’S obligation to license to
us, at no additional cost, any new technology subsequently discovered by Dr.
Zhang and the other researchers at Penn State University (“PSU”) expired on
November 8, 2002. Accordingly, if Dr. Zhang develops a new invention that does
not constitute an “improvement” on the existing patent rights, then we will have
to license the right to such invention from the PSRF.
Our
license agreement with PSRF provides us with an exclusive license to
22 United States patent applications filed by the PSRF covering many
classes of ligands. The U.S. Patent and Trademark Office ("PTO") has
issued twelve (12) letters of patents in connection with these
applications (i.e., U.S. Pat. Nos. 6,380,392, 6,525,210, 6,521,769, 6,337,406,
6,576,772, 6,534,657, 6,653,485, 6,727,377,
6,828,271, 6,855,657, 6,946,569 and 6,969,694). In addition, the
PTO has issued notices of allowance on one (1) other application
(10/291,232) for which we anticipate a patent being issued in 2006. The
remaining nine(9) U.S. patent applications are still pending. Chiral
Quest also has rights to international patent applications based on many of
the
US application filings. National Phase Applications have been filed
for twelve (12) international applications (PCT) corresponding to the
originally filed U.S. applications.
License
with The Cleveland Clinic Foundation (“CCF”). We
have
an exclusive, worldwide license agreement with CCF for the rights to develop,
manufacture, use, commercialize, lease, sell and/or sublicense VQD-001. We
are
obligated to make an annual license maintenance payment of $35,000 until the
first commercial sale of VQD-001, at which time we are no longer obligated
to
pay this maintenance fee. In addition, the license agreement requires us to
make
payments in an aggregate amount of up to $4.5 million to CCF upon the
achievement of certain clinical and regulatory milestones. Should VQD-001 become
commercialized, we will be obligated to pay CCF an annual royalty based on
net
sales of the product. In the event that we sublicense VQD-001 to a third party,
we will be obligated to pay CCF a portion of fees and royalties received from
the sublicense. We hold the exclusive right to negotiate for a license on any
improvements to VQD-001 and have the obligation to use all commercially
reasonable efforts to bring SSG to market. We have agreed to prosecute and
maintain the patents associated with VQD-001 or provide notice to CCF so that
it
may so elect. The license agreement shall automatically terminate upon
Greenwhich’s bankruptcy and upon the date of the last to expire claim contained
in the patents subject to the license agreement. The license agreement may
be
terminated by CCF, upon notice with an opportunity for cure, for our failure
to
make required payments or its material breach, or by us, upon thirty day’s
written notice.
License
with the University of South Florida Research Foundation,
Inc.(“USF”)
We have
an exclusive, worldwide license agreement with USF for the rights to develop,
manufacture, use, commercialize, lease, sell and/or sublicense VQD-002. Under
the terms of the license agreement, we have agreed to sponsor a research project
involving VQD-002 in the amount of $25,000 annually for the term of the license
agreement. In addition, the license agreement requires us to make payments
in an aggregate amount of up to $5.8 million to USF upon the achievement of
certain clinical and regulatory milestones. Should a product incorporating
VQD-002 be commercialized, we are obligated to pay to USF an annual royalty
based on net sales of the product. In the event that we sublicense VQD-002
to a
third party, we are obligated to pay USF a portion of fees and royalties
received from the sublicense. We hold a right of first refusal to obtain an
exclusive license on any improvements to VQD-002 and have the obligation to
use
all commercially reasonable efforts to bring VQD-002 to market. We have agreed
to prosecute and maintain the patents associated with VQD-002 or provide notice
to USF so that it may so elect. The license agreement shall automatically
terminate upon Greenwich’s bankruptcy or upon the date of the last to expire
claim contained in the patents subject to the license agreement. The license
agreement may be terminated by USF, upon notice with an opportunity for cure,
for our failure to make required payments or its material breach, or by us,
upon
six month’s written notice.
Employees
and Consultants
We
currently employ 38 people: Daniel Greenleaf, our President, and Chief Executive
Officer, Brian Lenz our Chief Financial Officer, Secretary and Treasurer, Pamela
Harris, our Chief Medical Officer, Richard Welter, our Vice President of
Corporate Business Development, Michael Cannarsa our General Manager of Chiral
Quest, Yaping Hong our Senior Vice President of Global Research and Development,
Bing Yu, our Director of Global Operations, 25 full-time chemists, and 6
administrative personnel. We also engage Dr. Xumu Zhang, who serves as our
Chief
Technology Officer, on a consultancy basis. Additionally, we fund two
post-doctoral fellows, under the supervision of Dr. Zhang, pursuant to an
agreement with PSU. Of the 39 persons providing services to our Company, either
as employees or consultants, 15 hold Ph.D. degrees. As we develop our technology
and business, we anticipate the need to hire additional employees, especially
employees with expertise in the areas of clinical operations, business
development, chemistry, sales and marketing.
RISK
FACTORS
Risks
Related to Our Securities
Trading
of our common stock is limited, which may make it difficult for you to sell
your
shares at times and prices that you feel are appropriate.
Trading
of our common stock, which is conducted on the Over-the-Counter Bulletin Board
(or “OTC Bulletin Board”), has been limited. This adversely effects the
liquidity of our common stock, not only in terms of the number of shares that
can be bought and sold at a given price, but also through delays in the timing
of transactions and reduction in security analysts’ and the media’s coverage of
us. This may result in lower prices for our common stock than might otherwise
be
obtained and could also result in a larger spread between the bid and asked
prices for our common stock.
Because
it is a “penny stock,” it will be more difficult for you to sell shares of our
common stock.
In
addition, our common stock is considered a “penny stock” under SEC rules because
it has been trading on the OTC Bulletin Board at a price lower than $5.00.
Broker-dealers who sell penny stocks must provide purchasers of these stocks
with a standardized risk-disclosure document prepared by the SEC. This document
provides information about penny stocks and the nature and level of risks
involved in investing in the penny-stock market. A broker must also give a
purchaser, orally or in writing, bid and offer quotations and information
regarding broker and salesperson compensation, make a written determination
that
the penny stock is a suitable investment for the purchaser, and obtain the
purchaser’s written agreement to the purchase. Broker-dealers also must provide
customers that hold penny stocks in their accounts with such broker-dealer
a
monthly statement containing price and market information relating to the penny
stock. If a penny stock is sold to you in violation of the penny stock rules,
you may be able to cancel your purchase and get your money back. The penny
stock
rules may make it difficult for you to sell your shares of our stock, however,
and because of the rules, there is less trading in penny stocks. Also, many
brokers simply choose not to participate in penny-stock transactions.
Accordingly, you may not always be able to resell shares of our common stock
publicly at times and prices that you feel are appropriate.
Our
stock price is, and we expect it to remain, volatile, which could limit
investors’ ability to sell stock at a profit.
The
volatile price of our stock makes it difficult for investors to predict the
value of their investment, to sell shares at a profit at any given time, or
to
plan purchases and sales in advance. A variety of factors may affect the market
price of our common stock. These include, but are not limited to:
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announcements
of technological innovations or new commercial products by our competitors
or us;
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developments
concerning proprietary rights, including patents;
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regulatory
developments in the United States and foreign countries;
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economic
or other crises and other external factors;
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period-to-period
fluctuations in our revenues and other results of operations;
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changes
in financial estimates by securities analysts; and
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sales
of our common stock.
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We
will
not be able to control many of these factors, and we believe that
period-to-period comparisons of our financial results will not necessarily
be
indicative of our future performance.
In
addition, the stock market in general, and the market for biotechnology
companies in particular, has experienced extreme price and volume fluctuations
that may have been unrelated or disproportionate to the operating performance
of
individual companies. These broad market and industry factors may seriously
harm
the market price of our common stock, regardless of our operating performance.
Because
we do not expect to pay dividends, you will not realize any income from an
investment in our common stock unless and until you sell your shares at profit.
We
have
never paid dividends on our common stock and do not anticipate paying any
dividends for the foreseeable future. You should not rely on an investment
in
our stock if you require dividend income. Further, you will only realize income
on an investment in our shares in the event you sell or otherwise dispose of
your shares at a price higher than the price you paid for your shares. Such
a
gain would result only from an increase in the market price of our common stock,
which is uncertain and unpredictable.
Risks
Related to Our Company
We
have no meaningful operating history on which to evaluate our business or
prospects.
We
commenced operations in October 2000 and, therefore, have only a limited
operating history on which you can base an evaluation of our business and
prospects. Accordingly, our business prospects must be considered in light
of
the risks, uncertainties, expenses and difficulties frequently encountered
by
companies in their early stages of development, particularly companies in new
and rapidly evolving markets, such as drug development, fine chemical,
pharmaceutical and biotechnology markets.
Our
management anticipates incurring losses for the foreseeable future.
For
the
year ended December 31, 2005, we had a net loss of $12,834,629 and since our
inception in October 2000 through December 31, 2005; we have incurred an
aggregate net loss of $20,269,392. As of December 31, 2005, we had total assets
of $8,379,303, of which $6,021,399 was cash or cash equivalents. We expect
operating losses to continue for the foreseeable future and there can be no
assurance that we will ever be able to operate profitably.
We
will require additional financing in order to complete the development of our
products and services and otherwise develop our business operations. Such
financing may not be available on acceptable terms, if at all.
Following
the completion of our October 2005 private placement, we anticipate that our
current capital will be adequate to fund our operations through at least
December 31, 2006. However, changes may occur that would consume available
capital resources before that time. Our combined capital requirements will
depend on numerous factors, including: costs associated with our drug
development process, and costs of clinical programs in addition to costs
associated to our Chiral Quest’s business which include competing technological
and market developments, changes in our existing collaborative relationships,
the cost of filing, prosecuting, defending and enforcing patent claims and
other
intellectual property rights and the outcome of any potentially related
litigation or other dispute, the purchase of additional capital equipment,
acquisition of technologies, and the development and regulatory approval
progress of our customers’ product candidates into which our technology will be
incorporated. Unless we are able to significantly increase our revenues, we
will
most likely require additional financing by as early as the first quarter 2007
in order to continue operations. The most likely source of such financing
includes private placements of our equity or debt securities or bridge loans
to
us from third party lenders.
Additional
capital that may be needed by us in the future may not be available on
reasonable terms, or at all. If adequate financing is not available, we may
be
required to terminate or significantly curtail our operations, or enter into
arrangements with collaborative partners or others that may require us to
relinquish rights to certain of our technologies, or potential markets that
we
would not otherwise relinquish.
Our
operating results will fluctuate, making it difficult to predict our results
of
operations in any future period.
As
we
develop our business, we expect our revenues and operating results to vary
significantly from quarter-to-quarter. As a result, quarter-to-quarter
comparisons of our revenues and operating results may not be meaningful. In
addition, due to the fact that we have little or no significant operating
history with our new technology, we cannot predict our future revenues or
results of operations accurately. Our current and future expense levels are
based largely on our planned expenditures and estimates of future revenues.
Accordingly, we may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall, and any significant shortfall
in revenues relative to our planned expenditures could have an immediate adverse
effect on our business and results of operations.
A
small group of persons is able to exert significant control over us.
Our
current officers and directors beneficially own or control approximately 20%
of
our common stock. Individually and in the aggregate, these persons will have
significant influence over the management of our business, the election of
directors and all matters requiring shareholder approval. In particular, this
concentration of ownership may have the effect of facilitating, delaying,
deferring or preventing a potential acquisition of our company and may adversely
affect the market price of our common stock. Additionally, two members of
our Board of Directors are employees of Paramount BioCapital, Inc., or one
of
its affiliates. Dr. Lindsay A. Rosenwald is the chairman and sole owner of
Paramount BioCapital, Inc. and such affiliates. Dr. Rosenwald beneficially
owns
approximately 7% of our outstanding common stock, and several trusts for the
benefit of Dr. Rosenwald and his family beneficially owns approximately 30%
of
our outstanding common stock. Although Dr. Rosenwald does not have the legal
authority to exercise voting power or investment discretion over the shares
held
by those trusts, he nevertheless may have the ability to exert significant
influence over the Company.
Risks
Related to Our Drug Development Business
From
the rights to we have obtained to develop and commercialize our drug candidates,
we will require significant additional financing, which may not be available
on
acceptable terms and will significantly dilute your ownership of our common
stock.
We
will
not only require additional financing to develop and bring the drug to market.
Our future capital requirements will depend on numerous factors, including:
| • |
the
terms of our license agreements pursuant to which we obtain the right
to
develop and commercialize drug candidates, including the amount of
license
fees and milestone payments required under such agreements;
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the
results of any clinical trials;
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the
scope and results of our research and development programs;
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the
time required to obtain regulatory approvals;
|
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our
ability to establish and maintain marketing alliances and collaborative
agreements; and
|
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the
cost of our internal marketing activities.
|
We
will
likely look to obtain the necessary additional financing by selling shares
of
our capital stock. If adequate funds are not available, we will be required
to
delay, scale back or eliminate a future drug development program or obtain
funds
through arrangements with collaborative partners or others that may require
us
to relinquish rights to technologies or products that we would not otherwise
relinquish.
Our
drug development subsidiary will experience significant negative cash flow
for
the foreseeable future and may never become profitable.
Because
drug development takes several years and is extremely expensive, we expect
that
our drug development subsidiary will incur substantial losses and negative
operating cash flow for the foreseeable future, and may never achieve or
maintain profitability, even if we succeed in acquiring, developing and
commercializing one or more drug candidates. In connection with our proposed
drug development business, we also expect to continue to incur significant
operating and capital expenditures and anticipate that our expenses will
increase substantially in the foreseeable future as we:
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acquire
the rights to develop and commercialize a drug candidate;
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undertake
pre-clinical development and clinical trials for drug candidates
that we
acquire;
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seek
regulatory approvals for drug candidates;
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implement
additional internal systems and infrastructure;
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lease
additional or alternative office facilities; and
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hire
additional personnel.
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Our
drug
development business may not be able to generate revenue or achieve
profitability. Our failure to achieve or maintain profitability could negatively
impact the value of our common stock.
If
we are not able to obtain the necessary U.S. or worldwide regulatory approvals
to commercialize any product candidates that we acquire, we will not be able
to
sell those products.
We
will
need FDA approval to commercialize drug candidates in the U.S. and approvals
from the FDA equivalent regulatory authorities in foreign jurisdictions to
commercialize our product candidates in those jurisdictions. In order to obtain
FDA approval of a drug candidate, we will be required to first submit to the
FDA
for approval an Investigational New Drug Application, or an “IND,” which will
set forth our plans for clinical testing of a particular drug candidate.
When
the
clinical testing for our product candidates is complete, we will then be
required to submit to the FDA a New Drug Application, or “NDA,” demonstrating
that the product candidate is safe for humans and effective for its intended
use. This demonstration will require significant research and animal tests,
which are referred to as pre-clinical studies, as well as human tests, which
are
referred to as clinical trials. Satisfaction of the FDA’s regulatory
requirements typically takes many years, depends upon the type, complexity
and
novelty of the product candidate and requires substantial resources for
research, development and testing. The FDA has substantial discretion in the
drug approval process and may require us to conduct additional pre-clinical
and
clinical testing or to perform post-marketing studies. The approval process
may
also be delayed by changes in government regulation, future legislation or
administrative action or changes in FDA policy that occur prior to or during
our
regulatory review. Delays in obtaining regulatory approvals may:
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delay
commercialization of, and our ability to derive product revenues
from, a
drug candidate;
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impose
costly procedures on us; and
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diminish
any competitive advantages that we may otherwise enjoy.
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Even
if
we comply with all FDA requests, the FDA may still ultimately reject an NDA.
Failure to obtain FDA approval of a drug candidate will severely undermine
our
business development by reducing our ability to recover the development costs
expended in connection with a drug candidate and realize any profit from
commercializing a drug candidate.
In
foreign jurisdictions, we will be required to obtain approval from the
appropriate regulatory authorities before we can commercialize our drugs.
Foreign regulatory approval processes generally include all of the risks
associated with the FDA approval procedures described above.
Clinical
trials are very expensive, time-consuming and difficult to design and implement.
Assuming
we are able to acquire the rights to develop and commercialize a product
candidate, we will be required to expend significant time, effort and money
to
conduct human clinical trials necessary to obtain regulatory approval of any
product candidate. Human clinical trials are very expensive and difficult to
design and implement, in part because they are subject to rigorous regulatory
requirements. The clinical trial process is also time consuming. We estimate
that clinical trials of any product candidate will take at least several years
to complete. Furthermore, failure can occur at any stage of the trials, and
we
could encounter problems that cause us to abandon or repeat clinical trials.
The
commencement and completion of clinical trials may be delayed by several
factors, including:
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unforeseen
safety issues;
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determination
of dosing issues;
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lack
of effectiveness during clinical trials;
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slower
than expected rates of patient recruitment;
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inability
to monitor patients adequately during or after treatment; and
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inability
or unwillingness of medical investigators to follow our clinical
protocols.
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In
addition, we or the FDA may suspend our clinical trials at any time if it
appears that we are exposing participants to unacceptable health risks or if
the
FDA finds deficiencies in our IND submissions or the conduct of these trials.
The
results of any clinical trial may not support the results of pre-clinical
studies relating to our product candidate, which may delay development of any
product candidate or cause us to abandon development altogether.
Even
if
any clinical trials we undertake with respect to a future product candidate
that
we acquire are completed as planned, we cannot be certain that their results
will support the findings of pre-clinical studies upon which a development
plan
would be based. Success in pre-clinical testing and early clinical trials does
not ensure that later clinical trials will be successful, and we cannot be
sure
that the results of later clinical trials will replicate the results of prior
clinical trials and pre-clinical testing. The clinical trial process may fail
to
demonstrate that our product candidates are safe for humans and effective for
indicated uses. This failure may cause us to delay the development of a product
candidate or even to abandon development altogether. Such failure may also
cause
delay in other product candidates. Any delay in, or termination of, our clinical
trials will delay the filing of our NDAs with the FDA and, ultimately, our
ability to commercialize our product candidates and generate product
revenues.
If
physicians and patients do not accept and use our drugs after regulatory
approvals are obtained, we will not realize sufficient revenue from such product
to cover our development costs.
Even
if
the FDA approved any product candidate that we acquired and subsequently
developed, physicians and patients may not accept and use them. Acceptance
and
use of the product candidates we acquire (if any) will depend upon a number
of
factors including:
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perceptions
by members of the health care community, including physicians, about
the
safety and effectiveness of our drugs;
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cost-effectiveness
of our product relative to competing products;
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availability
of reimbursement for our products from government or other healthcare
payers; and
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effectiveness
of marketing and distribution efforts by us and our licensees and
distributors, if any.
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Because
our drug development business plan contemplates that substantially all of any
future revenues we will realize will result from sales of product candidates
that we develop, the failure of any of drugs we acquire and develop to find
market acceptance would significantly and adversely affect our ability to
generate cash flow and become profitable.
We
intend to rely upon third-party researchers and other collaborators who will
be
outside our control and may not devote sufficient resources to our projects.
We
intend
to collaborate with third parties, such as drug investigators, researchers
and
manufacturers, in the development of any product candidate that we acquire.
Such
third parties, which might include universities and medical institutions, will
likely conduct the necessary pre-clinical and clinical trials for a product
candidate that we develop. Accordingly, our successful development of any
product candidate will likely depend on the performance of these third parties.
These collaborators will not be our employees, however, and we may be unable
to
control the amount or timing of resources that they will devote to our programs.
For example, such collaborators may not assign as great a priority to our
programs or pursue them as diligently as we would if we were undertaking such
programs ourselves. If outside collaborators fail to devote sufficient time
and
resources to our drug-development programs, or if their performance is
substandard, the approval of our FDA applications, if any, and our introduction
of new drugs, if any, will be delayed. These collaborators may also have
relationships with other commercial entities, some of whom may compete with
us
in the future. If our collaborators were to assist our competitors at our
expense, the resulting adverse impact on our competitive position could delay
the development of our drug candidates or expedite the development of a
competitor’s candidate.
We
will rely exclusively on third parties to formulate and manufacture our product
candidates.
We
do not
currently have, and have no current plans to develop, the capability to
formulate or manufacture drugs. Rather, we intend to contract with one or more
manufacturers to manufacture, supply, store and distribute drug supplies that
will be needed for any clinical trials we undertake. If we received FDA approval
for any product candidate, we would rely on one or more third-party contractors
to manufacture our drugs. Our anticipated future reliance on a limited number
of
third-party manufacturers will expose us to the following risks:
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We
may be unable to identify manufacturers on commercially reasonable
terms
or at all because the number of potential manufacturers is limited
and the
FDA must approve any replacement contractor. This approval would
require
new testing and compliance inspections. In addition, a new manufacturer
would have to be educated in, or develop substantially equivalent
processes for, production of our products after receipt of FDA approval,
if any.
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Our
third-party manufacturers might be unable to formulate and manufacture
our
drugs in the volume and of the quality required to meet our clinical
needs
and commercial needs, if any.
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Our
future contract manufacturers may not perform as agreed or may not
remain
in the contract manufacturing business for the time required to supply
our
clinical trials or to successfully produce, store and distribute
our
products.
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Drug
manufacturers are subject to ongoing periodic unannounced inspection
by
the FDA, the DEA, and corresponding state agencies to ensure strict
compliance with good manufacturing practice and other government
regulations and corresponding foreign standards. We do not have control
over third-party manufacturers’ compliance with these regulations and
standards.
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If
any third-party manufacturer makes improvements in the manufacturing
process for our products, we may not own, or may have to share, the
intellectual property rights to the innovation.
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We
may be
unable to identify manufacturers on acceptable terms or at all because the
number of potential manufacturers is limited and the FDA must approve any
replacement contractor. This approval would require new testing and compliance
inspections. In addition, a new manufacturer would have to be educated in,
or
develop substantially equivalent processes for, production of our products
after
receipt of FDA approval, if any.
If
we are not able to successfully compete against other drug companies, our
business will fail.
The
market for new drugs is characterized by intense competition and rapid
technological advances. If any drug candidate that we develop receives FDA
approval, we will likely compete with a number of existing and future drugs
and
therapies developed, manufactured and marketed by others. Existing or future
competing products may provide greater therapeutic convenience or clinical
or
other benefits for a specific indication than our products, or may offer
comparable performance at a lower cost or with fewer side-effects. If our
products fail to capture and maintain market share, we may not achieve
sufficient product revenues and our business will suffer.
We
will
be competing against fully integrated pharmaceutical companies and smaller
companies that are collaborating with larger pharmaceutical companies, academic
institutions, government agencies and other public and private research
organizations. Many of these competitors have drug candidates already approved
or in development. In addition, many of these competitors, either alone or
together with their collaborative partners, operate larger research and
development programs and have substantially greater financial resources than
we
do, as well as significantly greater experience in:
| · |
developing
drugs; |
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undertaking
pre-clinical testing and human clinical trials;
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obtaining
FDA and other regulatory approvals of drugs;
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formulating
and manufacturing drugs; and
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launching,
marketing and selling drugs.
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Risks
Related to Our Chiral Quest Business
Our
future success is highly dependent on the continued availability of Dr. Xumu
Zhang and other key employees and consultants.
In
connection with the continued development of our products and services, we
are
substantially dependent upon on the continued service of our existing research
personnel, including in particular, Xumu Zhang, Ph.D. Dr. Zhang, a professor
at
PSU, who serves as our Chief Technology Officer and provides essential services
to us pursuant to a consulting agreement. Although we maintain a $5 million
key-man insurance policy with respect to Dr. Zhang and he has entered into
a
non-compete agreement with us, the loss of his services would have a material
adverse effect on our business. In addition to Dr. Zhang, we employ other
research scientists who are also critical to our success. Although these
research scientists have entered into confidentiality agreements, most have
not
entered into noncompete agreements with us. The loss of one or more of our
research personnel could prevent or delay the ongoing development of our
products and services, which would materially and adversely affect our business.
We
may be unable to develop successful customer relationships.
We
intend
to establish relationships with various types of customers and partners, such
as
pharmaceutical and fine chemical manufacturers. Each of these relationships
will
involve negotiation of terms and fees. We cannot be certain that we will be
able
to negotiate profitable relationships or that we can successfully fulfill our
obligations under development agreements that will allow us to continue these
relationships.
We
will need to create and grow our scientific, sales and support operations.
We
will
need to create and substantially grow our direct and indirect sales operations,
both domestically and internationally, in order to create and increase market
awareness and sales of our products and services. The sale of our products
and
services will require the engagement of sophisticated and highly knowledgeable
sales personnel. Similarly, the anticipated complexity of our products and
services and the difficulty of customizing them will require us to hire research
and development personnel and customer service and support personnel, highly
trained in chiral chemistry and chemical engineering. Competition among our
company and others to retain qualified sales personnel, chemists and chemical
engineers is intense due to the limited number of available qualified candidates
for such positions. Many of our competitors are in a financial position to
offer
potential employees greater compensation and benefits than those which may
be
offered by us. Failure to recruit and retain such persons will have a material
adverse effect on our business operations.
We
are dependent on a few customers.
In
fiscal
2005, we sold our proprietary products and services to a total of approximately
35 customers. During 2005, we had one customer, a major biopharmaceutical
company, which accounted for approximately 64 percent of our total revenues.
In
2004, we had two customers, one a major pharmaceuticals company and the other
a
biotechnology company, that accounted for approximately 34 percent and 26
percent of our revenue, respectively. The loss of these accounts would have
a
material adverse effect on our business.
We
are dependent on a few vendors.
The
Company had one vendor who accounted for approximately 45% of the total cost
of
sales and inventory purchases for the year ended December 31, 2005.
Our
future success is dependent on the management of our potential growth.
Our
future success depends upon our ability to grow our business. Such growth,
if it
occurs, will require us to establish management and operating systems, hire
additional technical support and sales personnel, and establish and maintain
our
own independent office, research and production facilities. Failure to manage
that growth efficiently could have a material adverse affect on our
business.
Risks
Relating to Our Chiral Industry
We
face intense competition.
We
compete directly with the in-house research departments of fine chemical,
pharmaceutical and biotechnology companies, as well as contract research
companies, and research and academic institutions. Many of our competitors
have
greater financial and other resources than us. As new companies enter the market
and as more advanced technologies become available, we expect to face increased
competition. In the future, any one of our competitors may develop technological
advances that render obsolete the products or services that we provide or may
provide in the future. While we plan to develop new and better technologies,
which will give us competitive advantages, our competitors plan to do the same.
We may not be able to develop the technologies we need to successfully compete
in the future, and our competitors may be able to develop such technologies
before we do. Consequently, we may not be able to successfully compete in the
future.
The
fine chemical, pharmaceutical and biotechnology industries involve rapidly
changing technologies.
Rapid
technological change and uncertainty due to new and emerging technologies
characterize the drug and fine chemical development industries. We may not
be
able to develop, integrate and market, on a timely basis, the new and enhanced
products and services necessary to keep pace with competitors. Failure to
anticipate or to respond to changing technologies, or significant delays in
product development or introduction, could cause our customers to delay or
decide against purchases of our products or services.
Since
many of or customers and potential customers are pharmaceutical and
biotechnology companies, we are and will be subject to risks, uncertainties
and
trends that affect companies in these industries.
For
the
foreseeable future, we will derive a substantial portion of our revenue from
pharmaceutical and biotechnology companies. As a result, we will be subject
to
risks and uncertainties that affect the pharmaceutical and biotechnology
industries and possible reduction and delays in research and development
expenditures by companies in these industries. Our future revenues may also
be
adversely affected by mergers and consolidation in the pharmaceutical and
biotechnology industries, which will reduce the number of potential customers.
In
particular, pharmaceutical and biotechnology companies face significant
regulation by governmental entities in the United States and other countries.
The nature and the extent to which such regulation may apply to our customers
will vary depending on the nature of any such customers’ products. Most of the
pharmaceutical products developed by our customers will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human pharmaceutical therapeutic products are subject to rigorous preclinical
and clinical testing and other approval procedures by the FDA and by foreign
regulatory authorities. Various federal and, in some cases, state laws also
govern or influence the manufacturing, safety, labeling, storage, record keeping
and marketing of such pharmaceutical products. The process of obtaining these
approvals and the subsequent compliance with appropriate federal and foreign
statutes and regulations are time consuming, can cause significant delays in
the
commercialization of a drug, and often require the expenditure of substantial
resources. To the extent our customers experience significant delays in
obtaining the necessary regulatory approvals to market their pharmaceutical
products, or are unable to obtain such approvals at all, these customers will
not purchase our proprietary ligands and other services used in the manufacture
of the ultimate pharmaceutical product.
We
may be held liable for harm caused by drugs that our customers develop and
test.
Often
times, our ligands will be used by our customers to produce drugs for human
use.
If any of the drugs cause injuries or illness to people, we may be required
to
incur substantial costs in defending against claims and may be required to
pay
damages arising therefrom. Although we have liability insurance and will use
commercially reasonable efforts to obtain indemnification covenants from our
customers for their use of our products, such protections may not be sufficient
to protect us from the cost of such claims. Damages awarded in a product
liability action could be substantial and could have a material adverse effect
on our financial condition.
We
may be held liable for contamination or other harm caused by hazardous materials
that we use.
Some
of
our research and development processes involve the use of hazardous materials
and, therefore, we are subject to federal, state and local regulation governing
the use, manufacture, handling, storage and disposal of hazardous materials.
We
cannot completely eliminate the risk of contamination or injury resulting from
hazardous materials and we may incur liability as a result of any contamination
or injury. We may also incur expenses relating to compliance with environmental
laws. Such expenses or liability may have a material adverse effect on our
financial condition.
Risks
Relating to Our Chiral Technology
We
may not be able to license technologies that we need to conduct our business.
In
addition to the technologies that we develop, we will rely heavily on
technologies that we license from other companies or institutions. We may not
be
able to license technologies that we need in the future or we may be unable
to
license such technologies on a commercially reasonable basis. Although our
license agreement with the PSRF provides that we are entitled to use any
“improvements” subsequently made to the technologies we currently license, the
PSRF has no obligation to license any “new” technologies discovered by Dr. Zhang
and researchers at PSU. If we are unable to license the technologies we need
in
the future, or to license or otherwise acquire such technologies on commercially
reasonable terms, we may experience increased costs (and, therefore, reduced
profits) or be unable to engage in certain activities that require those
technologies. Accordingly, failure to license the technologies we need in the
future or otherwise acquire such technologies on commercially reasonable terms
could have a material adverse effect on our business operations.
Our
success will depend on our ability to protect our proprietary technology.
Our
rights to a substantial portion of our technology are as the exclusive licensee
to several United States patents and a number of United States and foreign
pending patent applications held by the PSRF, including the ligands that
comprise our Chiral ToolKit. These patents and patent applications are based
primarily upon the work of Dr. Zhang, our CTO, who is also an associate
professor at the PSU. Our success will depend largely on our ability, and the
ability of our licensors and licensees, to obtain patents for their technologies
and products, if any, resulting from the application of such technologies,
defend patents once obtained, and maintain trade secrets.
If
we are unable to protect our intellectual property, or incur significant expense
in doing so, our business, operating results and financial condition may be
materially adversely affected. Any steps we take to protect our intellectual
property may be inadequate, time consuming and expensive.
Our
success and ability to compete are substantially dependent upon our internally
developed products and services, which we currently protect through the use
of
United States and foreign patents. To the extent such products and services
are
not patentable; we will rely on trade secret protection. As with other
knowledge-based products, however, our patent positions rest on complex factual
and legal issues that are not entirely resolved and there can be no assurance
that the patents utilized by us will adequately protect our proprietary products
and services. Although we have taken steps to protect our unpatented trade
secrets and know-how, in part through the control of access to such information
and through the use of confidentiality agreements with our employees,
consultants and certain of our contractors, customers and potential customers,
there can be no assurance that these agreements will not be breached, that
we
would have adequate remedies for any breach, or that our trade secrets will
not
otherwise become known or be independently developed or discovered by
competitors. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology. We anticipate that policing unauthorized use of our products will
be
difficult, and we cannot be certain that the steps we intend to take to prevent
misappropriation of our technology, particularly in foreign countries where
the
laws may not protect our proprietary rights as fully as in the United States,
will be successful. Other companies may also independently develop substantially
equivalent information.
Foreign
laws may not afford us sufficient protection for our intellectual property
rights and, in certain cases; we may not seek patent protection outside the
United States.
We
believe that our success will depend, in part, upon our ability to obtain
international protection for our intellectual property. We have existing foreign
customers and believe we will have access to large markets oversees. The laws
of
some foreign countries may, however, not be as comprehensive as those of the
United States and may not be sufficient to protect our proprietary rights
abroad. In addition, in certain cases, we may decide not to pursue patent
protection outside the United States, because of cost and confidentiality
concerns. Accordingly, our international competitors could obtain foreign patent
protection for, and market overseas, technology for which we are seeking United
States patent protection, though such competitors’ patent protection generally
requires such competitors to make their patent filings prior to information
on
our relevant inventions becoming sufficiently available under local law as
to
block the availability of such competitors’ patent protection.
Our
technology may infringe on the proprietary rights of others.
We
anticipate that other patents that we license or may license in the future
will
be increasingly subject to infringement claims due to the rapid development
of
chiral chemistry and competitors in our industry. In fact, one potential
competitor, Solvias, AG, based in Basel, Switzerland, notified us in July 23,
2002, of its claim that one of the patented ligands we license from the PSRF
infringes on a patent that Solvias licenses from BASF Group, AG. Some of our
other competitors or our potential competitors may have filed or intend to
file
patent applications that may make claims that conflict with the claims of the
patents that we license. We cannot be certain that these competitors or other
third parties will not assert infringement claims against us with respect to
our
products and technology. Any infringement claim, including Solvias’ claim,
regardless of its merit, could be time-consuming and expensive to defend. Such
claims may also require us to enter into royalty or licensing agreements in
order to continue using the disputed technology. In the event we could not
afford to defend our company against an infringement claim or are not able
to
enter into a license or royalty agreement on commercially favorable terms,
or at
all, we may be required to abandon the technology that is subject to such
claims.
We
are
not a party to any material litigation and are not aware of any threatened
litigation that would have a material adverse effect on our
business.
We
lease
office and laboratory space in Basking Ridge, New Jersey; Monmouth Junction,
New
Jersey; and in the People’s Republic of China, as summarized below:
Basking
Ridge, New Jersey.
We
entered into a lease agreement effective June 15, 2005 for our principal
executive offices located in Basking Ridge, New Jersey. This facility consists
of approximately 2,000 square feet of office space. Pursuant to the lease
agreement, we pay approximately $4,000 per month for rent. Our total lease
commitment of approximately $152,000 for rent, utilities and maintenance fees
expires in September 30, 2008.
Monmouth
Junction, New Jersey.
We
occupy approximately 9,000 square feet of mostly laboratory space, and office
space, for our principal Chiral Quest business located in Monmouth Junction,
New
Jersey. We currently occupy this facility pursuant to a May 2003 lease
agreement, to which we pay approximately $17,000 per month for rent, and
approximately $6,000 for utilities and maintenance fees. The May 2003 lease
provided for a 3-year term, which initially expired in May 2006. In January
2006, we amended the lease agreement to extend our lease term to May 31, 2009.
Pursuant to this amendment, effective June 1, 2006, our base rent will be
$19,439 per month. Upon six months prior written notice to the landlord, we
will
have a one time option, without penalty, to terminate this lease effective
as of
May 31, 2008.
The
People’s Republic of China.
Pursuant
to an agreement effective December 15, 2004, with the Science and Technology
Bureau of Jiashan County (“Jiashan”) in Zhejiang Province of the People’s
Republic of China, we have agreed to lease a total of 4,000 square meters of
laboratory space in an industrial park near Shanghai, 50 percent of which we
began occupying in 2005. Pursuant to our agreement with Jiashan, although we
are
not required to pay rent during the initial 3-years of the lease, we will pay
a
maintenance fee of up to $4,500 per month, which is comprised of maintenance
and
management fees. Following the initial 3-year term, we may, at our sole
discretion, either continue leasing the space for annual rent of no more than
$60,000 (at approximate conversion rate as of December 31, 2004) or to purchase
the facility on commercially reasonable terms. We have no financial obligation
pursuant to the lease agreement after the end of the three year term. We were
also granted the option to purchase in the next three years approximately 33
acres of land adjacent to the industrial park. For purposes of entering into
the
lease, we established a wholly owned subsidiary organized under the laws of
Hong
Kong, known as Chiral Quest Ltd., which in turn will be the sole shareholder
of
a subsidiary in the People’s Republic of China, Chiral Quest (Jiashan)
Ltd.
We
believe our existing facilities, as described above, are adequate to meet our
needs through the year ending December 31, 2006.
We
held a
Special Meeting of Stockholders on October 6, 2005 at the Hyatt Regency, 102
Carnegie Center, Princeton, New Jersey. The stockholders took the following
actions:
(1)
The
stockholders adopted and approved a proposal to reincorporate the Company under
the laws of the State of Delaware. A total of 10,634,726 votes were cast for
the
proposal; 23,755 votes were cast against the proposal; 580 votes abstained;
and
there were no broker non-votes.
(2)
The
stockholders adopted and approved an amendment to our charter increasing the
number of shares of authorized common stock to 100 million and to fix a number
of authorized shares of preferred stock at 10 million. A total of 10,555,739
votes were cast for the proposal; 95,669 votes were cast against the proposal;
7,653 votes abstained; and there were no broker non-votes.
Market
for Common Stock
Since
August 27, 2004 our common stock has traded on the OTC Bulletin Board under
the
symbol “VQPH.OB.” Prior to that, our common stock traded on the OTC Bulletin
Board under the symbol “CQST.OB.” The following table lists the high and low bid
price for our common stock as quoted, in U.S. dollars, by the OTC Bulletin
Board
during each quarter within the last fiscal year. These quotations reflect
inter-dealer prices, without retail mark-up, markdown, or commission and may
not
represent actual transactions.
|
Quarter
Ended
|
|
High
|
|
Low
|
|
|
March
31, 2004
|
|
$
|
2.48
|
|
$
|
1.50
|
|
|
June
30, 2004
|
|
$
|
1.76
|
|
$
|
0.80
|
|
|
September
30, 2004
|
|
$
|
1.25
|
|
$
|
0.77
|
|
|
December
31, 2004
|
|
$
|
1.35
|
|
$
|
0.77
|
|
|
March
31, 2005
|
|
$
|
0.99
|
|
$
|
0.60
|
|
|
June
30, 2005
|
|
$
|
0.70
|
|
$
|
0.70
|
|
|
September
30, 2005
|
|
$
|
1.15
|
|
$
|
1.05
|
|
|
December
31, 2005
|
|
$
|
0.76
|
|
$
|
0.70
|
|
Record
Holders
The
number of registered holders of record of our common stock as of March 20,
2006
was 1,620.
Dividends
We
have
not paid or declared any dividends on our common stock and we do not anticipate
paying dividends on our common stock in the foreseeable future.
Stock
Re-Purchases
We
did
not make any re-purchases of shares of our common stock during the fourth
quarter of fiscal 2005 and we do not currently have any publicly-announced
repurchase plans in effect.
Overview
We
operate two distinct business units - drug development and chiral products
and
services. Since our inception in October 2000, we have focused our efforts
and
resources primarily on our chiral products and services, especially the
development of asymmetric catalysis technology. Through our chiral products
and
services business, we develop chemical catalysts and other products used in
the
synthesis of desired isomers of chiral molecules. Our primary intellectual
property relating to our chiral business consist of a series of patents and
related items to which we hold an exclusive, worldwide license from the
Pennsylvania State Research Foundation (“PSRF”), the technology development arm
of the Pennsylvania State University (“PSU”). Our license from PSRF covers
certain inventions discovered by our Chief Technology Officer (“CTO”) prior to
November 8, 2002.
In
August
2004, we determined to expand our business model to also include the
acquisition, development and commercialization of therapeutic drug compounds.
Accordingly, we restructured our operations by contributing all of our operating
assets relating to our chiral products and services business, which has been
our
historical business since inception, to a wholly-owned subsidiary that was
subsequently renamed Chiral Quest, Inc. In addition, we changed our name to
VioQuest Pharmaceuticals, Inc. and formed a new subsidiary to focus on drug
development. In October 2005, to further our drug development business, we
acquired Greenwich Therapeutics, Inc., a privately-held New York biotechnology
company with exclusive license rights to development and commercialize two
oncology drug candidates known as sodium stibogluconate, or “SSG” (“VQD-001”)
and triciribine-phosphate, or “TCN-P” (“VQD-002”). Both of these drug candidates
are in early stages of development and cannot be sold until we have obtained
the
approval of the U.S. Food and Drug Administration, or a comparable regulatory
body in foreign countries.
Since
inception, we have incurred a cumulative deficit of $20,269,392, and cash used
in operating activities totaled $3,741,854 for the year ended December 31,
2005.
We expect our operating losses to increase over the next several years,
primarily related to our drug development and costs associated with clinical
programs, milestone payments to both the Cleveland Clinic Foundation and the
University of South Florida for the development of VQD-001 and VQD-002,
respectively, in addition to providing capital to our Chiral Quest subsidiary
in
efforts to expand our sales and marketing resources, manufacturing capabilities,
research and development programs, and the hiring of additional chemists.
Our
ability to achieve profitability depends upon, among other things, our ability
to discover and develop products (specifically new “ligands”), and to develop
our products on a commercial scale through a cost effective and efficient
process. To the extent that we are unable to produce, directly or indirectly,
ligands in quantities required for commercial use, we will not realize any
significant revenues from our technology. Moreover, there can be no assurance
that we will ever achieve significant revenues or profitable operations from
the
sale of any of our products or technologies. Risks associated with our business
are more thoroughly addressed in the section entitled “Risk Factors.”
Since
our
inception, we have generated sales but not yet generated any net profits. Our
management believes that our sales and marketing capabilities, manufacturing
expansions, progress of our research and development (“R&D”) programs’
technological advances, the status of competitors, and our ability to establish
sales arrangements with new customers will need to grow in order for us to
be
able to obtain significant licensing and manufacturing agreements with large
fine chemical and pharmaceutical companies. We believe that our manufacturing
capacity will be enhanced with our laboratory space located in Monmouth
Junction, New Jersey that was leased in June 2003, in addition to the laboratory
space that was leased in December 2004, located in Jiashan, China.
Results
of Operations - Years Ended December 31, 2005 vs. 2004
Our
revenues for the year ended December 31, 2005 were $3,804,654 as compared to
$1,485,148 for the year ended December 31, 2004. For the year ended December
31,
2005, approximately 85% of total revenue was derived from customized process
development services, 11% of total revenues were derived from the sales of
our
proprietary technology consisting of ligands, catalysts, building blocks, and
approximately 4% of total revenues were derived from option fee income,
feasibility screening sales, and other services sales provided to pharmaceutical
and fine chemical companies worldwide. The overall increase in 2005 revenue
is
attributable primarily from a four fold increase from 2004 revenue from
customized process development services. We continue to anticipate that sales
of
our proprietary ligands, catalysts, building blocks, and customized process
development services will contribute to a greater percentage of revenues as
we
have expanded our manufacturing capacity to commercial scale during
2005.
Our
gross
profit of 36% for the year ended December 31, 2005, decreased from 44% for
the
year ended December 31, 2004, as a result of a greater percentage of 2005
revenues being attributed to customized process development services, as
compared to 2004 revenues consisting of a greater percentage of our proprietary
ligands, and catalysts yielding higher margins for the year ended December
31,
2004.
Cost
of
goods sold for the year ended December 31, 2005 were $2,427,456 as compared
to
$837,653 for the year ended December 31, 2004. The increase in cost of goods
sold is attributed to increased sales, raw material costs, outsourcing materials
and labor costs, in addition to the allocation of direct labor and overhead
expenses to finished goods. Direct labor costs and overhead expenses were
allocated from compensation and rent expenses as part of the overall general
operating expenses.
Management
and consulting expenses for the year ended December 31, 2005 were $631,128
as
compared to $626,709 for the year ended December 31, 2004. Management and
consulting expenses consist of scientific advisory board fees, consulting fees
related to the consultant agreement with our CTO, effective May 15, 2003, which
required us to make payments of $10,000 per month. Management and consulting
fees also consists of approximately $73,000 of stock option charges for the
year
ended December 31, 2005, resulting from the fair value of options issued to
consultants, and scientific advisory board members granted during the second,
third and fourth quarters of 2003 accounted for under variable accounting.
Management and consulting fees also consists of a one-time charge of $190,000
during the third quarter of 2005, from the Company awarding 200,000 restricted
shares of its common stock to a consultant.
In-process
research and development costs of $7,975,218 are attributed to the acquisition
of Greenwich Therapeutics, Inc. in October 2005. The acquisition costs are
comprised of: $5,995,077 related to the calculated value of 8,564,395 shares
of
the Company’s common stock issued to Greenwich Therapeutics’ shareholders valued
at $.70 per share ($.70 per share value was based upon the average stock price
of the Company’s common stock a few days before and a few days subsequent to the
July 7, 2005 definitive merger agreement announcement), $986,039 related to
the
calculated value of 2,000,000 warrants issued to Greenwich Therapeutics’
shareholders using the Black-Scholes stock option pricing model, $823,869
of debt the Company assumed as part of the merger of Greenwich Therapeutics
which is comprised of license fees and legal fees incurred by Greenwich
Therapeutics, in addition to $170,234 of legal, audit, and consultant’s fees
charged for a fairness opinion as part of the valuation analysis of the merger
with Greenwich Therapeutics.
Our
Research and Development (“R&D”) expenses for the year ended December 31,
2005 were $1,418,668 as compared to $1,526,561 during the year ended December
31, 2004. The decrease is primarily attributed to the Company transitioning
its
focus from an R&D facility to large scale kilogram production of its
proprietary technology for sale in commercial size kilogram quantities during
2005. R&D costs also decreased as a result of the Company reducing the
number of post doctorates it sponsors at PSU, from four to two during the fourth
quarter of 2005. The post doctorates develop reports on our technological
feasibility of our proprietary technology in addition to preparing sample
batches for analysis in the Monmouth Junction, New Jersey office. Also included
in R&D are the purchases of additional laboratory materials and supplies
such as chemicals, solvents, and glassware utilized as part of the
facility’s test pilot programs used for the formulation and analyzing our
proprietary products during 2005 and 2004, to determine their technological
feasibility and to further develop and enhance our R&D processes to
determine the Company’s manufacturing capabilities. The agreement with PSU
required us to fund services of two post-doctorate fellows who, under the
supervision of the CTO, conduct research and provide research quantities of
chiral ligands to us. This agreement has been extended to April 14, 2006. The
approximate obligation payable by us for the remaining period from January
1,
2006 through the end of the agreement dated April 14, 2006 is approximately
$31,000. From October 2002 through December 31, 2005, the Company has paid
and
incurred expenses of approximately $872,000 pursuant to the agreement. This
amount consists principally of four post-doctorate salaries, fringe benefits,
materials and supplies for the stated period. In addition, during 2005, we
expanded our China laboratory facility, which also enabled us to determine
the technological feasibility of our proprietary ligands and catalysts for
use
in various applications. In connection with the facility’s expansion, numerous
lab supplies and chemicals were purchased. Following our acquisition of VQD-001
and VQD-002 in October 2005, we expect our R&D expenditures to significantly
increase during the Company’s fiscal year 2006, as a result of development of
our drug compounds, including manufacturing costs and expenditures related
to
our clinical trials.
Selling,
general and administrative (“SG&A”) expenses for the year ended December 31,
2005 were $4,199,271 as compared to $2,377,021 for the year ended December
31,
2004. This increase in SG&A expenses was due in part by the increased number
of senior executive employees, and associated recruiting costs, during 2005
for
our drug development subsidiary. In addition, SG&A increased due to the
hiring of several laboratory chemists to work at the newly expanded laboratory
facility in China, and at our facility in Monmouth Junction, New Jersey.
SG&A also increased as a result of higher rent expense for the Monmouth
Junction, New Jersey facility due to laboratory expansions, in addition to
costs
associated to opening the Basking Ridge, New Jersey facility and increased
rent expense, additional spending on advertising and promotion expenses,
increased travel expenses for new business development opportunities and higher
administrative expenses associated with having more employees such as insurance
and employer payroll taxes.
Depreciation
and amortization expenses for the year ended December 31, 2005 were $266,510
as
compared to $179,034 for the year ended December 31, 2004. This increase is
attributed to depreciation and amortization expenses related to fixed asset
purchases for office equipment, computer equipment, laboratory equipment and
leasehold improvements for the newly expanded leased facility in China and
the leased facility in New Jersey.
Interest
income for the year ended December 31, 2005 was $42,552 as compared to $38,272
for the year ended December 31, 2004. The increase in interest income was caused
by higher cash reserves resulting from the private placement of our common
stock during October 2005.
Income
tax benefit for the year ended December 31, 2005 was attributed to the sale
of
the Company’s New Jersey net operating loss carryforwards for the years ended
December 31, 2004 and 2003.
Our
net
loss for the year ended December 31, 2005 was $12,834,629 as compared to
$4,023,558 for the year ended December 31, 2004. The increased net loss in
2005
was principally a result of the in-process research and development
costs of $7,975,218 resulting from our acquisition of Greenwich Therapeutics,
Inc., in October 2005. Additionally, the increased net loss in 2005 from 2004
also resulted from higher SG&A expenses from the hiring of senior executives
for our drug development business and associated recruiting costs, marketing
and
advertising expenses, travel expenses for new business development
opportunities, costs associated with the expansion of our China facility, as
well as increased legal and accounting expenses associated in reporting as
a
public company. We expect losses to continue and increase in the next year
as we
expand our drug development program, which include clinical program costs,
milestone payments to both the Cleveland Clinic Foundation and the University
of
South Florida for the development of VQD-001 and VQD-002 respectively, in
addition to providing sales and marketing, and R&D resources to our Chiral
Quest subsidiary. Our net loss was offset by $236,416 which pertains to the
sale
of our New Jersey net operating losses from 2004 and 2003.
Results
of Operations - Years Ended December 31, 2004 vs. 2003
Our
revenues for the year ended December 31, 2004 were $1,485,148 as compared to
$669,036 for the year ended December 31, 2003. For the year ended December
31,
2004, approximately 8% of total revenue was derived from the amortization of
option fee income pertaining to the licensing of our intellectual property
and
92% of total revenue was derived from customized
process development services sold to third parties (accounting
for 47% of total 2004 revenue), sales of our catalysts and ligands (34% of
total
2004 revenue), and feasibility screening reports provided to clients (11% of
total 2004 revenue). The overall increase in 2004 revenue is attributable
primarily from a 75% increase from 2003 revenue from contracts for customized
process development services. In addition, the increase in 2004 revenues is
also
attributable to our selling and production capabilities transitioning from
an
academic Research and Development sales volume level, to a commercial sales
volume quantity level for its ligands, catalysts, and customized process
development services. As a result, revenue from sales of catalysts and ligands
increased five fold from 2003 because we were able to sell greater quantities
and a wider variety of our proprietary ligands and catalysts to an expanded
customer base that more than doubled in 2004 compared to 2003. Revenue from
feasibility screening in 2004 also increased three fold from 2003 levels. We
anticipate that sales of our proprietary ligands and catalysts and customized
process development
services
will continue to comprise a greater percentage of our revenues in the future
as
we expand our manufacturing capabilities.
Our
gross
profit decreased for the year ended December 31, 2004, as compared to December
31, 2003, as a result of our 2004 revenues being significantly derived from
the
sale of ligands and catalysts products and services versus a greater percentage
of revenues derived from option fee income pertaining to a license agreement
for
the fiscal year ended 2003. For
the year ended December 31, 2003, approximately 20% of total revenue was derived
from the amortization of option fee income and 80% of total revenue was
comprised of sales or our ligands.
Cost
of
goods sold for the year ended December 31, 2004 was $837,653 as compared to
$196,045 during the year ended December 31, 2003. The increase of cost of goods
sold is attributed to increased sales, associated manufacturing costs of scaling
operations to a commercialized level, in addition to the allocation of direct
labor and overhead expenses to finished goods. These expenses were allocated
from compensation and rent expenses as part of the overall general operating
expenses.
Management
and consulting expenses for the year ended December 31, 2004 were $626,709
as
compared to $361,622 during the year ended December 31, 2003. The overall
increase in 2004 from 2003 was primarily caused by an increase in consulting
expense. Consulting expense increased due to the consultant agreement entered
with our CTO, which required us to make payments to our CTO of $10,000 per
month
effective May 15, 2003. Management and consulting expense also increased as
a
result of consulting fees paid to our Scientific Advisory Board members for
services provided during 2004. In addition, consulting expense increased from
the amortization of stock options issued to consultants, Scientific Advisory
Board members, during the second, third and fourth quarters of 2003.
Our
Research and Development (“R&D”) expenses for the year ended December 31,
2004 were $1,526,561 as compared to $639,426 during the year ended December
31,
2003. This increase resulted primarily from the R&D costs associated to
preparing and analyzing several test pilot programs of our proprietary
technology related to the Company’s developmental manufacturing processes and
commercial scale up capabilities to satisfy manufacturing requirements. The
R&D costs include the sponsoring of four post doctorates at PSU to develop
reports on our technological feasibility of our proprietary technology in
addition to preparing sample batches for analysis in the Monmouth Junction,
NJ
office. Also included in R&D are the purchases of additional laboratory
materials and supplies such as chemicals, solvents, glassware used as part
of
the facility’s test pilot programs used for the formulation and analyzing of our
proprietary products during 2004 to determine their technological feasibility
and to further develop and enhance our research and development processes to
determine the Company’s manufacturing capabilities. The agreement with PSU
required us to fund services of four post-doctorate fellows who, under the
supervision of the CTO, conduct research and provide research quantities of
chiral ligands to us. This agreement has been extended to April 14, 2005. The
approximate obligation payable by us for the remaining period from January
1,
2005 through the end of the agreement dated April 14, 2005 is approximately
$98,000. From October 2002 through December 31, 2004, the Company has paid
and
incurred expenses of approximately $596,000 pursuant to the agreement. This
amount consists principally of four post-doctorate salaries, fringe benefits,
materials and supplies for the stated period. In addition, during the first
and
second quarters of 2004, we expanded our laboratory facility in New Jersey,
which enabled us to commercialize our proprietary ligands and catalysts. In
connection with the facility’s expansion, numerous lab supplies and chemicals
were purchased. Accordingly, we incurred significant R&D expenses in the
first and second quarters due to the laboratory expansions of the New Jersey
facility, along with the increased costs of using the facility and chemists
at
PSU.
Selling,
general and administrative (“SG&A”) expenses for the year ended December 31,
2004 were $2,377,021 as compared to $1,415,182 during the year ended December
31, 2003. This increase in SG&A expenses was due in part by the resignation
of our CEO in April 2004, of which we incurred $375,000 in severance costs
in
2004. In addition, SG&A increased due to the hiring of several laboratory
chemists to work at the newly expanded laboratory facility in New Jersey.
SG&A also increased as a result of the reporting obligations as a public
company, increased rent expense for the Monmouth Junction, New Jersey facility
due to laboratory expansions, additional spending on advertising and promotion
expenses, increased travel expenses for new business development opportunities
and higher administrative expenses associated with having more employees such
as
insurance and employer payroll taxes.
Depreciation
and amortization expenses for the year ended December 31, 2004 were $179,034
as
compared to $86,325 during the year ended December 31, 2003. This increase
is
attributed to depreciation and amortization expenses related to fixed asset
purchases for office equipment, computer equipment, laboratory equipment and
leasehold improvements for the newly expanded leased facility in New Jersey.
Interest
expense for the year ended December 31, 2004 was $0 as compared to $2,809 during
the year ended December 31, 2003. Interest expense for the year ended December
31, 2003 is attributed to the promissory notes issued between July 2002 through
February 2003 owed to Paramount BioCapital (See Note 13 of the Company’s
accompanying notes to the consolidated financial statements), which were fully
paid and discharged in February 2003.
Interest
income for the year ended December 31, 2004 was $38,272 as compared to $13,973
during the year ended December 31, 2003. The increase in interest income was
caused by significantly higher cash reserves obtained after private placement
of
our common stock during February 2004.
Our
net
loss for the year ended December 31, 2004 was $4,023,558 as compared to
$2,018,400 for the year ended December 31, 2003. The increased net loss in
2004
from 2003 was primarily due to increased SG&A expense from severance
compensation to our former CEO and the hiring of additional personnel, together
with increased R&D expense incurred as a result of the commercial scale up
of our proprietary catalysts and ligands, as well as increased legal and
accounting expenses associated with the private placement of our common stock,
and expenses in reporting as a public company. We expect losses to continue
and
increase in the next year as we expand our laboratory space in China, purchase
more chemicals and raw material compounds, and hire additional employees.
Liquidity
and Capital Resources
As
of
December 31, 2005, we had working capital of $4,883,142 and cash and cash
equivalents of $6,021,399.
Our
net
cash used in operating activities for the year ended 2005 was $3,741,854 and
our
net loss of $12,834,629 was offset by $7,975,218, a non-cash charge of
in-process research and development costs related to the merger of Greenwich
Therapeutics, an increase in accounts payable and accrued expenses of $832,289
and $380,270, respectively, as a result of the Company conserving cash at year
end, offset by a decrease in deferred revenue of $523,842, resulting from
prepayments provided by customers in 2004, and the Company subsequently shipping
products and providing services to those customers during 2005, stock-based
compensation to scientific advisory board members of $170,077 and $190,000
pertaining to restricted shares of the Company’s common stock issued to a
consultant during the third quarter of 2005, depreciation and amortization
of
fixed assets and intellectual property of $266,510. Operating activities also
included a decrease in accounts receivable of $90,890, increases in inventory
of
$265,011 and security deposits of $38,819. Net cash used in the Company’s
operating activities as a result of the Company’s net loss, also include
additional employees hired during 2005, primarily senior executives for our
drug
development subsidiary, chemists for our Chiral Quest subsidiary, in addition
to
costs associated with the expansion of our China facility’s purchases for
laboratory and office supplies.
Our
net
cash used in investing activities for the year ended 2005 was $785,703.
Investing activities expenditures consisted principally of legal, audit and
consultant fees of $170,234 related to the Greenwich Therapeutic’s merger,
purchases of property, equipment, and leasehold improvements of $506,377, which
was principally attributed to the China laboratory and office expansion, in
addition to the Basking Ridge, New Jersey office opening, and payments for
increased patent filings, and defense costs pertaining to our chiral proprietary
intellectual property rights of $109,092.
Our
net
cash provided by financing activities for the year ended 2005 was $7,483,409.
Financing activities consisted of $7,748,032 received as a result of our October
2005 private placement of approximately 8.4 million shares of our common stock
at a price per share of $.75, net of $636,949 of costs associated to the
agreement with Paramount BioCapital our placement agent. As a result of
completing this financing, the Company was obligated to repay to Paramount
BioCapital from costs incurred through Greenwich Therapeutics of $264,623,
or
approximately one-third of the debt incurred as part of the merger with
Greenwich Therapeutics.
Financings.
On
February 25, 2004, we completed a private placement of our securities to
accredited investors that resulted in gross proceeds of approximately $7.2
million. Investors in the private placement purchased an aggregate of
approximately 4.8 million shares of our common stock at a price per share of
$1.50 and received 5-year warrants to purchase one share of common stock at
$1.65 per share for every two common shares purchased in the offering (a total
of 2.4 million warrants). In connection with this offering, we paid an aggregate
of $500,000 in selling agent commissions, of which Paramount BioCapital, Inc.
(See Note 13 of the Company’s accompanying notes to the consolidated financial
statements), received $300,000. Net proceeds to the Company, after deducting
commissions and other expenses relating to the private placement, were
approximately $6.7 million.
On
October 18, 2005, we sold 11,179,975 shares of our common stock at a price
of
$0.75 per share resulting in gross proceeds of approximately $8.38 million.
In
addition to the shares of common stock, the investors also received 5-year
warrants to purchase an aggregate of 4,471,975 shares at an exercise price
of
$1.00 per share. In connection with the private placement, we paid an aggregate
of approximately $587,000 in commissions to Paramount BioCapital, Inc. (See
Note
13 of the Company’s accompanying notes to the consolidated financial
statements), which served as the placement agent in connection with the
offering, together with an accountable expense allowance of $50,000, and issued
5-year warrants to purchase an aggregate of 1,117,997 shares of common stock
at
a price of $1.00 per share. Net proceeds to us after deducting placement agent
fees and other expenses relating to the private placement were approximately
$7.5 million.
Current
and Future Financing Needs. We
have
incurred negative cash flow from operations since we started business. We have
spent, and expect to continue to spend, substantial amount in connection with
executing our business strategy, including our planned development efforts
relating to our drug candidates, our clinical trials, and our research and
development efforts. Given the current and desired timelines of the clinical
development of our two drug candidates, over the next 12 months we estimate
that
we will need approximately $2.5 million in order to fund our drug development
activities. This amount includes $135,000 relating to milestone payments that
we
expect to provide to the Cleveland Clinic Foundation and the University of
South
Florida, in addition to costs associated to three Phase I clinical trials,
(solid tumor trial for VQD-001 and solid and liquid tumor trials for VQD-002),
such as manufacturing costs for our drug candidates, patient costs and Clinical
Research Organization costs pertaining to our drug development
programs.
Management
anticipates that the Company’s capital resources will be adequate to fund its
operations through the fourth quarter of 2006, assuming the Company achieves
expected increases in revenue. If the Company is unable to increase revenues
as
expected, however, additional financing will be required during 2006 in order
to
fund operations. The most likely source of financing includes the private sale
of our equity or debt securities or bridge loans to the Company from third
party
lenders. However, changes may occur that would consume available capital
resources before that time. Our working capital requirements will depend upon
numerous factors, including without limitation to the progress of our drug
development and clinical programs, and milestone payments to both the Cleveland
Clinic Foundation and the University of South Florida for the development of
VQD-001 and VQD-002, respectively, and manufacturing costs, regulatory
approvals, in addition to the resources we devote to our chiral subsidiary’s
sales and marketing capabilities, manufacturing expansions, progress of our
R&D programs technological advances, the status of competitors, and our
ability to establish sales arrangements with new customers. Working capital
will
also be affected by the China facility expansion of office and laboratory space
lease agreements that were entered into during 2004, along with the hiring
of
additional employees. Our management believes that by opening a facility in
China to produce non-proprietary chemical building blocks and related compounds,
we will be able to significantly decrease our manufacturing costs and expenses,
which will enable us to cost-effectively produce our ligands and end products
and make our products substantially more competitive and even more attractive
to
current and potential customers.
Contractual
Obligations
License
with The Cleveland Clinic Foundation (“CCF”). We
have
an exclusive, worldwide license agreement with CCF for the rights to develop,
manufacture, use, commercialize, lease, sell and/or sublicense VQD-001. We
are
obligated to make an annual license maintenance payment of $35,000 until the
first commercial sale of VQD-001, at which time we are no longer obligated
to
pay this maintenance fee. In addition, the license agreement requires us to
make
payments in an aggregate amount of up to $4.5 million to CCF upon the
achievement of certain clinical and regulatory milestones. Should VQD-001 become
commercialized, we will be obligated to pay CCF an annual royalty based on
net
sales of the product. In the event that we sublicense VQD-001 to a third party,
we will be obligated to pay CCF a portion of fees and royalties received from
the sublicense. We hold the exclusive right to negotiate for a license on any
improvements to VQD-001 and have the obligation to use all commercially
reasonable efforts to bring SSG to market. We have agreed to prosecute and
maintain the patents associated with VQD-001 or provide notice to CCF so that
it
may so elect. The license agreement shall automatically terminate upon
Greenwich’s bankruptcy and upon the date of the last to expire claim contained
in the patents subject to the license agreement. The license agreement may
be
terminated by CCF, upon notice with an opportunity for cure, for our failure
to
make required payments or its material breach, or by us, upon thirty day’s
written notice.
License
with the University of South Florida Research Foundation,
Inc.(“USF”)
We have
an exclusive, worldwide license agreement with USF for the rights to develop,
manufacture, use, commercialize, lease, sell and/or sublicense VQD-002. Under
the terms of the license agreement, we have agreed to sponsor a research project
involving VQD-002 in the amount of $25,000 annually for the term of the license
agreement. In addition, the license agreement requires us to make payments
in an aggregate amount of up to $5.8 million to USF upon the achievement of
certain clinical and regulatory milestones. Should a product incorporating
VQD-002 be commercialized, we are obligated to pay to USF an annual royalty
based on net sales of the product. In the event that we sublicense VQD-002
to a
third party, we are obligated to pay USF a portion of fees and royalties
received from the sublicense. We hold a right of first refusal to obtain an
exclusive license on any improvements to VQD-002 and have the obligation to
use
all commercially reasonable efforts to bring VQD-002 to market. We have agreed
to prosecute and maintain the patents associated with VQD-002 or provide notice
to USF so that it may so elect. The license agreement shall automatically
terminate upon Greenwhich’s bankruptcy or upon the date of the last to expire
claim contained in the patents subject to the license agreement. The license
agreement may be terminated by USF, upon notice with an opportunity for cure,
for our failure to make required payments or its material breach, or by us,
upon
six month’s written notice.
Critical
Accounting Policies and Estimates
Impairment
of Long Lived Assets
The
Company evaluates the recoverability of its long-lived assets, property and
equipment and amortizable intangible assets, where indicators of impairment
are
present, by reviewing current and projected profitability or undiscounted cash
flows of such assets. Property and equipment and intangible assets that are
subject to depreciation and amortization are reviewed for potential impairment
whenever events or circumstances indicate that carrying amounts may not be
recoverable. For the years ended December 31, 2005 and 2004, the Company
determined that impairment to its long-lived assets did not occur. Accordingly,
no material impairment loss was recorded for the years ended December 31, 2005
and 2004. Management has determined based upon the useful lives of its
intellectual property rights the future economic benefits exceed their carrying
costs.
Revenue
Recognition
Revenues
are comprised principally of four main components: (1) the licensing of PSRF’s
technology, (2) the sale of proprietary ligands and catalysts, (3) feasibility
screening, and (4) custom contract synthesis development services. In
determining net revenues, the Company recognizes revenues based upon shipments
and the invoicing of its products and services. For the year ended December
31,
2005, the majority of our revenue was derived from customized process synthesis
development services accounting for 85% of sales, sales of our catalysts and
ligands and building blocks accounting for 11% of sales, and feasibility
screening reports and license fee income accounting for 4% in total, provided
to
our customers. For the year ended December 31, 2004, approximately 8% of total
revenue was derived from the amortization of option fee income pertaining to
the
licensing of our intellectual property and 92% of total revenue was derived
from
customized process synthesis development services, sales of our catalysts and
ligands, and feasibility screening reports provided to our customers. For the
year ended December 31, 2003, approximately 80% of total revenue was derived
from sales of our ligands, feasibility screening and customized process
development services sold to our customers and 20% of total revenue was derived
from the amortization of option fee income pertaining to the licensing of our
intellectual property. For the year ended December 31, 2002, approximately
85%
of total revenue was derived from the amortization of option fee income and
15%
of total revenue was comprised of sales or our ligands. Revenues as they relate
to the licensing of the Company's rights to PSRF's intellectual property are
recognized over the applicable license periods. The Company assumes the
financial risks related to these revenues by financing the research and
development of PSRF's technology as well as the defense of PSRF's patents.
Deferred revenue in the accompanying consolidated balance sheets represents
amounts prepaid by customers to the Company for services to be performed and
products to be delivered at a subsequent date. These deferred amounts will
be
recognized as revenue when earned. Revenues as they relate to the sale of
manufactured proprietary ligands and catalysts are recognized upon the shipment
of the ligands to the customer. Revenues as they relate to feasibility screening
are recognized upon the completion of project reports and investigational
studies. Revenues as they relate to custom contract synthesis development
services are recognized upon the shipment of finished products.
Accounting
for Stock-Based Compensation
The
Company accounts for its employee and director stock option plans in accordance
with APB 25, “Accounting For Stock Issued To Employees,” and related
interpretations. The Company measures compensation expense for employee and
director stock options as the aggregate difference between the market value
of
its common stock and exercise prices of the options on the date that both the
number of shares the grantee is entitled to receive and the exercise prices
are
known. Compensation expense associated with restricted stock grants is equal
to
the market value of the shares on the date of grant and is recorded pro rata
over vesting period. Management has determined the estimates used for the
volatility, and criteria in the Black-Scholes calculation for accounting for
stock-based compensation are deemed to be reasonably accurate and the approach
to estimating stock-based compensation will not materially change in the future.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements, as that term is defined by applicable
SEC regulation.
Recently
Issued Accounting Standards
In
December 2004, the FASB issued SFAS No. 123R “Accounting for Stock-Based
Compensation.” SFAS 123R establishes standards for the accounting for
transactions in which; an entity exchanges its equity instruments for goods
or services. SFAS 123R focuses primarily on accounting for transactions in
which
an entity obtains employee services in share-based payment transactions. SFAS
123R requires that the fair value of such equity instruments, including employee
stock options, be recognized as an expense in the historical financial
statements as services are performed. Prior to SFAS 123R, only certain pro
forma
disclosures of fair value were required. SFAS 123R shall be effective for the
Company as of the beginning of the first quarter 2006 The Company is evaluating
the impact of this pronouncement and its affects on our financial statements.
We
believe the adoption of SFAS 123R will increase compensation expense as compared
to amounts disclosed in our prior historical financial statements.
For
a
list of the consolidated financial statements filed as part of this report,
see
the Index to Consolidated Financial Statements beginning at Page F-1 of this
annual report.
None.
Evaluation
of Internal Controls
As
of
December 31, 2005, we carried out an evaluation, under the supervision and
with
the participation of our chief executive and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended). Based upon that evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective in alerting them on a timely basis to
material information required to be disclosed in our periodic reports to the
Securities and Exchange Commission.
Changes
in Internal Controls
During
the second and third quarters of 2005, J.H. Cohn LLP, our independent registered
public accounting firm reported to management and the Audit Committee a material
weakness in our process for the financial statement recording and disclosures
of
stock options that we have granted to non-employee consultants in accordance
with Emerging Issues Task Force (“EITF”) 96-18. As defined by the Public Company
Accounting Oversight Board Auditing Standard No. 2, a material weakness is
a
significant control deficiency or a combination of significant control
deficiencies that results in there being more than a remote likelihood that
a
material misstatement of the annual or interim financial statements will not
be
prevented or detected. This material weakness did not result in the restatement
of any previously reported financial statements or any other related financial
disclosure. Stock options that we have granted to non-employee consultants
should have been accounted for under variable accounting and we have corrected
the accounting for these stock options as of the third quarter of 2005. The
changes that would have resulted in the financial statements for all prior
periods through June 30, 2005 were deemed immaterial. Subsequent to the second
quarter 2005, we have valued the options issued to non-employee consultants
under variable accounting. We disclosed the existence of this material weakness
in our Quarterly Report for the quarter ended September 30, 2005.
As
a
result of the material weakness discussed above, we implemented a change in
our
internal controls over financial reporting during the fourth quarter of the
year
ended December 31, 2005. Specifically, we have instituted additional procedures
in the review process for the financial statement recording and disclosures
of
options in order to remediate this issue. Additionally, we engaged a public
accounting firm separate and unrelated to our independent registered public
accounting firm, to consult with from time to time concerning the appropriate
accounting treatment of such stock options, as well as other accounting matters.
We have also increased our emphasis on continuing education for our accounting
personnel and increase our emphasis on reviewing applicable accounting
literature, all relating to the selection and application of accounting
principles pertaining to stock options. We believe these enhancements to our
system of internal control and our disclosure controls and procedures are
adequate to provide reasonable assurance that our internal controls are
effective in alerting management on a timely basis to material information
required to be disclosed in our periodic reports to the Securities and Exchange
Commission.
None.
|
|
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION
16(a) OF THE EXCHANGE ACT
|
Information
in response to this Item is incorporated herein by reference to our 2006 Proxy
Statement to be filed pursuant to Regulation 14A within 120 days after
the end of the fiscal year covered by this Form 10-KSB.
Information
in response to this Item is incorporated herein by reference to our 2006 Proxy
Statement to be filed pursuant to Regulation 14A within 120 days after
the end of the fiscal year covered by this Form 10-KSB.
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Information
in response to this Item is incorporated herein by reference to our 2006 Proxy
Statement to be filed pursuant to Regulation 14A within 120 days after
the end of the fiscal year covered by this Form 10-KSB.
|
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
Information
in response to this Item is incorporated herein by reference to our 2006 Proxy
Statement to be filed pursuant to Regulation 14A within 120 days after
the end of the fiscal year covered by this Form 10-KSB.
|
Exhibit
No.
|
Description
|
|
2.1
|
Agreement
and Plan of Merger dated July 1, 2005 by and among the Company, VQ
Acquisition Corp. and Greenwich Therapeutics, Inc. (incorporated
by
reference to Exhibit 2.1 to the Company’s Form 10-QSB filed November 14,
2005).
|
|
2.2
|
First
Amendment to Agreement and Plan of Merger dated August 19, 2005 by
and
among the Company, VQ Acquisition Corp. and Greenwich Therapeutics,
Inc.
(incorporated by reference to Exhibit 2.2 to the Company’s Form 10-QSB
filed November 14, 2005).
|
|
2.3
|
Agreement
and Plan of Merger dated October 14, 2005 by and between VioQuest
Pharmaceuticals, Inc. and VioQuest Delaware, Inc. (incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K filed October 20,
2005).
|
|
3.1
|
Certificate
of Incorporation, as amended to date (incorporated by reference to
Exhibit
3.1 to the Company’s Form 8-K filed October 20, 2005).
|
|
3.2
|
Bylaws,
as amended to date (incorporated by reference to Exhibit 3.2 of
Registrant’s Annual Report on Form 10-KSB for the year ended December 31,
2003).
|
|
4.1
|
Common
Stock Purchase Warrant dated as of February 18, 2003 issued to Key
West
Associates, LLC (incorporated by reference to Exhibit 4.1 to the
Registrant’s Form 10-QSB for the period ended March 31, 2003).
|
|
4.2
|
Option
Agreement No. LL-1 dated May 6 ,
2003
issued to Princeton Corporate Plaza, LLC. (incorporated by reference
to
Exhibit 4.1 to the Registrant’s Form 10-QSB for the period ended June 30,
2003).
|
|
4.3
|
Form
of Option Agreement dated May 6,
2003
issued to Princeton Corporate Plaza, LLC (incorporated by reference
to
Exhibit 4.2 to the Registrant’s Form 10-QSB for the period ended June 30,
2003).
|
|
4.4
|
Schedule
of Options substantially identical to Exhibit 4.3 (incorporated by
reference to Exhibit 4.3 to the Registrant’s Form 10-QSB for the period
ended June 30, 2003).
|
|
4.5
|
Form
of Common Stock Purchase Warrant issued in connection with February
2004
private placement (incorporated by reference to the Registrant’s Form SB-2
filed March 26, 2004 (File No. 333-113980)).
|
|
4.6
|
Form
of Common Stock Purchase Warrant issued in connection with the October
2005 private placement (incorporated by reference to Exhibit 4.1
of the
Registrant’s Form SB-2 filed November 17, 2005 (File No.
333-129782)).
|
|
4.7
|
Form
of Common Stock Purchase Warrant issued to placement agents in connection
with the October 2005 private placement (incorporated by reference
to
Exhibit 4.2 of the Registrant’s Form SB-2 filed November 17, 2005 (File
No. 333-129782)).
|
|
4.8
|
Form
of Common Stock Purchase Warrant issued in connection with the October
2005 acquisition of Greenwich Therapeutics, Inc. (incorporated by
reference to Exhibit 4.3 of the Registrant’s Form SB-2 filed November 17,
2005 (File No. 333-129782)).
|
|
10.1
|
License
Agreement dated on or about October 27, 2000, as amended, between
Chiral
Quest, LLC and The Penn State Research Foundation (incorporated by
reference to Exhibit 10.2 to the Registrant’s Form 10-QSB for the period
ended March 31, 2003).
|
|
10.2
|
Consulting
Agreement dated May 15, 2003 between the Registrant and Xumu Zhang,
Ph.D.
(incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-QSB
for the period ended June 30, 2003).
|
|
10.3
|
2003
Stock Option Plan (incorporated by reference to Exhibit 10.4 to the
Registrant’s Form 10-KSB for the year ended December 31, 2003).
|
|
10.4
|
Employment
Agreement dated February 1, 2005 between the Company and Daniel Greenleaf
(incorporated by reference to Exhibit 10.16 to the Registrant’s Annual
Report on Form 10-KSB for the year ended December 31,
2004).
|
|
|
Separation
Agreement between the Registrant and Ronald Brandt dated April 4,
2005.
|
|
10.6
|
License
Agreement dated February 8, 2005 by and between Greenwich Therapeutics,
Inc. and The Cleveland Clinic Foundation (incorporated by reference
to
Exhibit 10.6 of the Registrant’s Form SB-2 filed November 17, 2005 (File
No. 333-129782)).++
|
|
10.7
|
License
Agreement dated April 19, 2005 by and between Greenwich Therapeutics,
Inc.
and the University of South Florida Research Foundation, Inc.
((incorporated by reference to Exhibit 10.7 of the Registrant’s Form SB-2
filed November 17, 2005 (File No. 333-129782)).++
|
|
10.8
|
Letter
Agreement between the Company and Pamela Harris dated February 15,
2006.
|
|
|
Form
of Subscription Agreement issued in connection with the October 2005
private placement.
|
|
23.1
|
Consent
of J.H. Cohn LLP.
|
|
|
Certification
of Chief Executive Officer.
|
|
|
Certification
of Chief Financial Officer.
|
|
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
| |
|
| ++ |
Confidential
treatment has been granted as to certain portions of this exhibit
pursuant
to Rule 24b-2 of the Securities Exchange Act of 1934, as
amended.
|
| ITEM
14. |
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
Information
in response to this Item is incorporated herein by reference to our 2006 Proxy
Statement to be filed pursuant to Regulation 14A within 120 days after
the end of the fiscal year covered by this form 10-KSB.
In
accordance with Section 13 or 15(d) of the Securities Exchange Act, VioQuest
Pharmaceuticals, Inc. has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized, on March 20, 2006.
| |
|
|
| |
VIOQUEST
PHARMACEUTICALS, INC. |
|
|
|
| |
By: |
/s/ Daniel
Greenleaf |
| |
|
| |
Name:
Daniel Greenleaf
Title:
President and Chief Executive
Officer
|
In
accordance with the Securities Exchange Act, this report has been signed below
by the following persons on behalf of VioQuest Pharmaceuticals, Inc. and in
the
capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
| |
|
|
|
|
|
/s/
Daniel Greenleaf
|
|
President
& Chief Executive Officer and Director
|
|
March
20, 2006
|
|
Daniel
Greenleaf
|
|
|
|
|
| |
|
|
|
|
|
/s/
Brian Lenz
|
|
Chief
Financial Officer, Secretary and Treasurer
|
|
March
20, 2006
|
|
Brian
Lenz
|
|
|
|
|
| |
|
|
|
|
|
/s/
Vincent M. Aita
|
|
Director
|
|
March
20, 2006
|
|
Vincent
M. Aita
|
|
|
|
|
| |
|
|
|
|
|
/s/
Johnson Y. N. Lau
|
|
Director
|
|
March
20, 2006
|
|
Johnson
Y. N. Lau
|
|
|
|
|
| |
|
|
|
|
|
/s/
Stephen C. Rocamboli
|
|
Director
|
|
March
20, 2006
|
|
Stephen
C. Rocamboli
|
|
|
|
|
| |
|
|
|
|
|
/s/
Stephen A. Roth
|
|
Director
|
|
March
21, 2006
|
|
Stephen
A. Roth
|
|
|
|
|
| |
|
|
|
|
|
/s/
Michael Weiser
|
|
Director
|
|
March
20, 2006
|
|
Michael
Weiser
|
|
|
|
|
| |
|
|
|
|
|
/s/
Xumu Zhang
|
|
Director
|
|
March
20, 2006
|
|
Xumu
Zhang
|
|
|
|
|
| |
|
|
| |
Page
|
|
|
|
F-2
|
|
|
|
F-3
|
|
|
|
F-4
|
|
|
|
F-5
|
|
|
|
F-6
|
|
|
|
F-7
to F-21
|
|
The
Board
of Directors and
Stockholders
VioQuest
Pharmaceuticals, Inc.
We
have
audited the accompanying consolidated balance sheets of VioQuest
Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2005 and 2004, and
the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of VioQuest
Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2005 and 2004, and
their results of operations and cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States
of
America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company incurred a net loss of
$12,834,629 and used $3,741,854 of cash in operating activities during the
year
ended December 31, 2005 and, as of that date, it had an accumulated deficit
of
$20,269,392. These matters raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans concerning these matters
are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/J.H.
Cohn LLP
Roseland,
New Jersey
March
11,
2006
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
AS
OF DECEMBER 31,
| |
|
|
|
|
|
| |
|
2005
|
|
2004
|
|
|
ASSETS
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,021,399
|
|
$
|
3,065,547
|
|
|
Accounts
receivable
|
|
|
227,695
|
|
|
318,585
|
|
|
Inventory
|
|
|
625,158
|
|
|
360,147
|
|
|
Other
current assets
|
|
|
49,184
|
|
|
64,377
|
|
|
Total
Current Assets
|
|
|
6,923,436
|
|
|
3,808,656
|
|
| |
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
757,151
|
|
|
493,632
|
|
|
SECURITY
DEPOSITS
|
|
|
69,819
|
|
|
31,000
|
|
|
INTELLECTUAL
PROPERTY RIGHTS, NET
|
|
|
628,897
|
|
|
543,453
|
|
|
TOTAL
ASSETS
|
|
$
|
8,379,303
|
|
$
|
4,876,741
|
|
| |
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,135,681
|
|
$
|
303,392
|
|
|
Accrued
compensation and related taxes
|
|
|
480,000
|
|
|
50,000
|
|
|
Accrued
expenses
|
|
|
119,990
|
|
|
169,715
|
|
|
Note
payable - Paramount BioCapital (See Note 13)
|
|
|
264,623
|
|
|
|
|
|
Deferred
revenue
|
|
|
40,000
|
|
|
563,842
|
|
|
TOTAL
LIABILITIES
|
|
|
2,040,294
|
|
|
1,086,949
|
|
| |
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock; $0.001 par value: 10,000,000 shares authorized, 0 shares issued
and
outstanding at December 31, 2005 and 2004
|
|
|
—
|
|
|
|
|
|
Common
stock; $0.001 and $0.01 par value: 100,000,000 and 50,000,000 shares
authorized at December 31, 2005 and 2004 respectively, 46,729,519
shares
issued and outstanding at December 31, 2005, and 17,827,924 shares
issued
and outstanding at December 31, 2004
|
|
|
46,729
|
|
|
178,279
|
|
|
Additional
paid-in capital
|
|
|
26,561,672
|
|
|
11,046,276
|
|
|
Accumulated
deficit
|
|
|
(20,269,392
|
)
|
|
(7,434,763
|
)
|
|
Total
Stockholders' Equity
|
|
|
6,339,009
|
|
|
3,789,792
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
8,379,303
|
|
$
|
4,876,741
|
|
See
accompanying notes to consolidated financial statements.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
FOR
THE YEARS ENDED DECEMBER 31,
| |
|
|
|
|
|
| |
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
REVENUE
|
|
$
|
3,804,654
|
|
$
|
1,485,148
|
|
|
COST
OF GOODS SOLD (Excluding Depreciation and Amortization)
|
|
|
2,427,456
|
|
|
837,653
|
|
|
GROSS
PROFIT
|
|
|
1,377,198
|
|
|
647,495
|
|
| |
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Management
and consulting expenses
|
|
|
631,128
|
|
|
626,709
|
|
|
In-process
research and development
|
|
|
7,975,218
|
|
|
|
|
|
Research
and development
|
|
|
1,418,668
|
|
|
1,526,561
|
|
|
Selling,
general and administrative
|
|
|
4,199,271
|
|
|
2,377,021
|
|
|
Depreciation
and amortization
|
|
|
266,510
|
|
|
179,034
|
|
|
Total
Operating Expenses
|
|
|
14,490,795
|
|
|
4,709,325
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(13,113,597
|
)
|
|
(4,061,830
|
)
|
|
INTEREST
INCOME
|
|
|
42,552
|
|
|
38,272
|
|
|
LOSS
BEFORE INCOME TAXES
|
|
|
(13,071,045
|
)
|
|
(4,023,558
|
)
|
|
State
income tax benefit
|
|
|
236,416
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(12,834,629
|
)
|
$
|
(4,023,558
|
)
|
|
NET
LOSS PER COMMON SHARE - BASIC AND DILUTED
|
|
$
|
(0.58
|
)
|
$
|
(0.24
|
)
|
| |
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED
|
|
|
22,034,198
|
|
|
17,100,582
|
|
See
accompanying notes to consolidated financial statements.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
FOR
THE YEARS ENDED DECEMBER 31, 2005 and 2004
| |
|
|
|
|
|
|
|
|
|
| |
|
Common
Stock
|
|
Additional
Paid-In
|
|
Accumulated
|
|
Total
Stockholders’
|
|
| |
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Equity
|
|
|
Balance,
January 1, 2004
|
|
|
13,001,018
|
|
$
|
130,010
|
|
$
|
4,106,529
|
|
$
|
(3,411,205
|
)
|
$
|
825,334
|
|
|
February
25, 2004 private placement, net of $548,728 in financing
costs
|
|
|
4,826,906
|
|
|
48,269
|
|
|
6,643,362
|
|
|
|
|
|
6,691,631
|
|
|
Stock-based
compensation to consultants
|
|
|
|
|
|
|
|
|
296,385
|
|
|
|
|
|
296,385
|
|
|
Net
loss for the year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
(4,023,558
|
)
|
|
(4,023,558
|
)
|
|
Balance,
December 31, 2004
|
|
|
17,827,924
|
|
|
178,279
|
|
|
11,046,276
|
|
|
(7,434,763
|
)
|
|
3,789,792
|
|
|
Common
stock issued to consultant
|
|
|
200,000
|
|
|
200
|
|
|
189,800
|
|
|
|
|
|
190,000
|
|
|
October
18, 2005 private placement, net of $636,949 in financing
costs
|
|
|
11,179,975
|
|
|
11,180
|
|
|
7,736,852
|
|
|
|
|
|
7,748,032
|
|
|
October
18, 2005 acquisition of Greenwich Therapeutics, Inc. (includes 8,564,395
shares held in escrow - see Note 3)
|
|
|
17,128,790
|
|
|
17,129
|
|
|
6,993,985
|
|
|
|
|
|
7,011,114
|
|
|
Shares
issued for repayment of debt to Paramount BioCapital, Inc.
|
|
|
392,830
|
|
|
392
|
|
|
264,231
|
|
|
|
|
|
264,623
|
|
|
Stock-based
compensation to consultants
|
|
|
|
|
|
|
|
|
170,077
|
|
|
|
|
|
170,077
|
|
|
Effect
of change in par value from change in state incorporation
|
|
|
|
|
|
(160,451
|
)
|
|
160,451
|
|
|
|
|
|
|
|
|
Net
loss for the year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
(12,834,629
|
)
|
|
(12,834,629
|
)
|
|
Balance,
December 31, 2005
|
|
|
46,729,519
|
|
|
46,729
|
|
$
|
26,561,672
|
|
$
|
(20,269,392
|
)
|
$
|
6,339,009
|
|
See
accompanying notes to consolidated financial statements.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
FOR
THE YEARS ENDED DECEMBER 31,
| |
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(12,834,629
|
)
|
$
|
(4,023,558
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
In-process
research and development
|
|
|
7,975,218
|
|
|
—
|
|
|
Depreciation
and amortization
|
|
|
266,510
|
|
|
179,034
|
|
|
Stock-based
compensation to consultants
|
|
|
170,077
|
|
|
296,385
|
|
|
Stock
issued for services
|
|
|
190,000
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable
|
|
|
90,890
|
|
|
(266,880
|
)
|
|
(Increase)
in inventory
|
|
|
(265,011
|
)
|
|
(283,255
|
)
|
|
(Increase)
decrease in other current assets
|
|
|
15,193
|
|
|
(14,325
|
)
|
|
(Increase)
in security deposits
|
|
|
(38,819
|
)
|
|
|
|
|
Increase
in accounts payable
|
|
|
832,289
|
|
|
29,978
|
|
|
Increase
(decrease) in accrued expenses
|
|
|
380,270
|
|
|
(7,686
|
)
|
|
(Increase)
decrease in deferred revenue
|
|
|
(523,842
|
)
|
|
304,134
|
|
|
Net
Cash Used In Operating Activities
|
|
|
(3,741,854
|
)
|
|
(3,786,173
|
)
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments
for Greenwich acquisition
|
|
|
(170,234
|
)
|
|
|
|
|
Payments
for purchased property and equipment
|
|
|
(506,377
|
)
|
|
(356,548
|
)
|
|
Payments
for intellectual property rights
|
|
|
(109,092
|
)
|
|
(192,481
|
)
|
|
Net
Cash Used In Investing Activities
|
|
|
(785,703
|
)
|
|
(549,029
|
)
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from private placement of common stock, net
|
|
|
7,748,032
|
|
|
6,741,632
|
|
|
Payment
of note payable to Paramount BioCapital
|
|
|
(264,623
|
)
|
|
|
|
|
Net
Cash Provided By Financing Activities
|
|
|
7,483,409
|
|
|
6,741,632
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
2,955,852
|
|
|
2,406,430
|
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF YEAR
|
|
|
3,065,547
|
|
|
659,117
|
|
|
CASH
AND CASH EQUIVALENTS - END OF YEAR
|
|
$
|
6,021,399
|
|
$
|
3,065,547
|
|
|
Supplemental
Schedule of Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Reclassification
of deferred financing costs to additional paid-in capital in connection
with private placement
|
|
$
|
|
|
$
|
50,000
|
|
Non-Cash
Transactions:
1.
See
Note 3 for discussion of the acquisition of Greenwich Therapeutics, Inc. and
consideration (principally, shares, warrants and the assumption of debt) issued
/ assumed.
2.
The
Company incurred $823,869 of debt from the acquisition of Greenwich
Therapeutics, Inc., in October 2005.
3.
Of the
total debt assumed by the Company, $264,623 was paid to Paramount
BioCapital, Inc. from proceeds of the October 2005 private
placement of the Company’s common stock, $294,623 was paid through the
issuance of 392,830 shares of its common stock to Paramount BioCapital Inc.,
and $264,623 of the debt is payable to Paramount BioCapital, Inc. upon the
Company’s successful completion of a combined financing, of at least $10
million, which includes the $8.4 million financing in October 2005, or by
October 31, 2006 whichever occurs sooner.
4.
The
Company reincorporated from Minnesota to Delaware in October 2005, resulting
in
an equity reclassification of $160,451 from the change in its par value from
$0.01 to $0.001.
See
accompanying notes to consolidated financial statements.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
NOTE
1
NATURE
OF OPERATIONS AND LIQUIDITY
(A)
Nature of Operations
Since
its
inception in October 2000, VioQuest Pharmaceuticals, Inc. (formerly Chiral
Quest, Inc.) has provided pharmaceutical and fine chemical companies in all
stages of the product lifecycles with innovative chiral products and services
(as used herein, the “Company” refers to VioQuest Pharmaceuticals, Inc. or
VioQuest Pharmaceuticals, Inc. together with its subsidiaries). Since August
2004, the Company has provided such products and services through its
wholly-owned subsidiary, Chiral Quest, Inc. Chiral Quest, Inc. develops chemical
catalysts used in the synthesis of desired isomers of chiral molecules using
asymmetrical catalysis technology (the “Technology”) owned by the
Pennsylvania State University Research Foundation (“PSRF”), the technology arm
of The Pennsylvania State University (“PSU”). Chiral Quest, Inc. has a
worldwide, exclusive license from PSRF for the inventions covered by the
license. The original license agreement was entered into on November 8, 2000
(See Note 7). In December 2004, the Company established its Chiral
Quest, Ltd. Jiashan, China facility, and has commenced research and development
and manufacturing operations during the second half of 2005.
In
August
2004, the Company expanded its business plan to also focus on acquiring
technologies for purposes of development and commercialization of pharmaceutical
drug candidates for the treatment in oncology and antiviral diseases and
disorders for which there are unmet medical needs. In accordance with this
expanded business plan, in October 2005, the Company acquired in a merger
transaction Greenwich Therapeutics, Inc., a privately-held New York-based
biotechnology company that held exclusive rights to develop and commercialize
two oncology drug candidates - Sodium Stibogluconate, also called “SSG”
(VQD-001), and, Triciribine-Phosphate, or “TCN-P” (VQD-002). The rights to these
two oncology drug candidates, VQD-001 and VQD-002, are governed by license
agreements with The Cleveland Clinic Foundation and the University of South
Florida Research Foundation, respectively. As a result of the Company’s
acquisition of Greenwich Therapeutics, the Company holds exclusive rights to
develop, manufacture, use, commercialize, lease, sell and/or sublicense VQD-001
and VQD-002.
From
the
Company’s inception through December 31, 2005, it has generated sales but not
any net profits. With respect to the Company’s Chiral Quest operations,
management believes that the Company’s sales, marketing, manufacturing
capacities will need to grow in order for the Company to be able to obtain
significant licensing and manufacturing agreements with large fine chemical
and
pharmaceutical companies. Management believes that the Company’s manufacturing
capacity will continue to be enhanced with its expanded office and laboratory
space located in Monmouth Junction, New Jersey that was leased in May 2003,
in
addition to the laboratory space leased in December 2004, located in Jiashan,
China.
(B)
Liquidity
Since
inception, the Company has incurred an accumulated deficit of $20,269,392
through December 31, 2005. For the year ended December 31, 2005 the Company
had
a net loss of $12,834,629 and used $3,741,854 of cash in operating activities.
Management expects the Company’s losses to increase over the next several years,
primarily due to expansion of its drug development business, costs associated
with clinical trial programs, resources allocated to our Chiral Quest subsidiary
for the hiring of business development sales people, the hiring of additional
chemists, marketing and advertising, and the expansion of its manufacturing
capabilities. There can be no assurance that the Company will ever be able
to
operate profitably.
As
of
December 31, 2005, we had working capital of $4,883,142 and cash and cash
equivalents of $6,021,399.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
The
Company has incurred
negative cash flow from operations since we started business. The Company has
spent, and expects to continue to spend, substantial amounts in connection
with
executing our business strategy, including our planned development efforts
relating to our drug candidates, our clinical trials, and our research and
development efforts.
Management
anticipates that the Company’s capital resources will be adequate to fund its
operations through the fourth quarter of 2006, assuming the Company achieves
expected increases in revenue. If the Company is unable to increase revenues
as
expected, however, additional financing will be required during 2006 in order
to
fund operations. The most likely source of financing includes the private sale
of our equity or debt securities or bridge loans to the Company from third
party
lenders. However, changes may occur that would consume available capital
resources before that time. The Company’s working capital requirements will
depend upon numerous factors, including, without limitation, the progress of
our
drug development and clinical programs, associated costs relating to milestone
payments, license fees and manufacturing costs, regulatory approvals, in
addition to the resources we devote to our chiral subsidiary’s sales and
marketing capabilities, manufacturing expansions, progress of our R&D
programs’ technological advances, the status of competitors, and our ability to
establish sales arrangements with new customers. Working capital will also
be
affected by the China facility expansion of office and laboratory space lease
agreements that were entered into during 2004, along with the hiring of
additional employees. Our management believes that by opening a facility in
China, we will be able to significantly decrease our manufacturing costs and
expenses, which will enable us to cost-effectively produce our ligands,
catalysts, contract synthesis development projects, and other end user products
more competitively and even more attractively to current and potential
customers.
Additional
capital that may be needed by the Company in the future may not be available
on
reasonable terms, or at all. If adequate financing is not available, the Company
may be required to terminate or significantly curtail its operations, or enter
into arrangements with collaborative partners or others that may require the
Company to relinquish rights to certain of its technologies, or potential
markets that the Company would not otherwise relinquish.
Our
ability to achieve profitability depends upon, among other things, our ability
to discover and develop products (specifically new “ligands”), and to develop
our products on a commercial scale through a cost effective and efficient
process. To the extent that we are unable to produce, directly or indirectly,
ligands in quantities required for commercial use, we will not realize any
significant revenues from our technology. Moreover, there can be no assurance
that we will ever achieve significant revenues or profitable operations from
the
sale of any of our products or technologies.
NOTE
2 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(A)
Principles of Consolidation
The
accompanying consolidated financial statements include the accounts of VioQuest
Pharmaceuticals, Inc. and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The Company
translates the financial statements of Chiral Quest, Ltd. In Jiashan, China
at
end of period rates with respect to its balance sheet and at the average
exchange rates with respect to the results of its operations and cash
flows.
(B)
Cash and Cash Equivalents
The
Company considers all highly-liquid investments with a maturity at the date
of
purchase of three months or less to be cash equivalents.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
Cash
held
in foreign bank accounts was $108,140 and $209,578 at December 31, 2005 and
2004, respectively.
(C)
Fair Value of Financial Instruments
The
carrying value of financial instruments including cash and cash equivalents,
accounts receivable, note payable to Paramount BioCapital, Inc., and accounts
payable approximate fair value due to the relatively short maturity of these
instruments. The carrying value of the note payable approximates fair value
based on the incremental borrowing rates currently available to the Company
for
financing with similar terms and maturities.
(D)
Allowance for Doubtful Accounts
The
Company establishes an allowance for uncollectible accounts receivable, when
appropriate, based on historical collection experience and management’s
evaluation of collectibility of outstanding accounts receivable.
(E)
Inventory
Inventory
consists of raw materials, work in process and finished goods which are stated
at the lower of cost (first-in, first-out) or market. Raw materials consist
of
chemical compounds. Work in process and finished goods, referred to
as
proprietary ligands, catalysts, and building blocks, consist of material, direct
labor and manufacturing overhead.
(F)
Property and Equipment
Property
and equipment is recorded at cost and depreciated over the estimated useful
lives of the assets, principally using the straight-line method. Amortization
of equipment under capital leases and leasehold improvements is computed over
the shorter of the lease term or estimated useful life of the asset. Additions
and improvements are capitalized, while repairs and maintenance are expensed
as
incurred. The
estimated useful lives used for depreciation and amortization were three (lease
term), five and seven years for leasehold improvements, laboratory/computer
equipment and office equipment, respectively (See Note 5).
(G)
Intellectual Property Rights
Intellectual
property rights are being amortized over the lives of the underlying patents,
which generally are 17 years. Amortization expense recorded for the years ended
December 31, 2005 and 2004 was $23,648 and $61,471, respectively. Accumulated
amortization as of December 31, 2005 and 2004 was $135,779 and $112,131,
respectively. Amortization expense for each of the five years subsequent to
the
year ended December 31, 2005, is approximately $27,000 per year.
(H)
Revenue Recognition
Revenues
are comprised principally of four main components: (1) the licensing of PSRF’s
technology, (2) the sale of proprietary ligands and catalysts and building
blocks, (3) feasibility screening, and (4) custom contract synthesis development
services. Revenues as they relate to the licensing of the Company's rights
to
PSRF's intellectual property are recognized over the applicable license periods.
The Company assumes the financial risks related to these revenues by financing
the research and development of PSRF's technology as well as the defense of
PSRF's patents. Revenues as they relate to the sale of manufactured proprietary
ligands and catalysts are recognized upon the shipment of the ligands to the
customer. Revenues as they relate to feasibility screening are recognized upon
the completion of project reports and investigational studies. Revenues as
they
relate to custom contract synthesis development services are recognized upon
the
shipment of finished products. Deferred revenue in the accompanying
consolidated balance sheets represents amounts prepaid by customers to the
Company for services to be performed and products to be delivered at a
subsequent date. These deferred amounts will be recognized as revenue when
earned.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
(I)
Income Taxes
Under
Statement of Financial Accounting Standards No. 109, “Accounting for Income
Taxes,” (“SFAS 109”) deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary 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 enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in
tax
rates is recognized in income in the period that includes the enactment date.
Valuation allowances are established when it is more likely than not that
deferred tax assets will not be realized.
(J)
Stock-Based Compensation
The
Company accounts for its employee and director stock option plans using the
intrinsic value method in accordance with APB Opinion No. 25, “Accounting For
Stock Issued To Employees,” and related interpretations. The
Company measures compensation expense for employee and director stock options
as
the aggregate difference, if any, between the market value of its common stock
and exercise prices of the options on the date that both the number of shares
the grantee is entitled to receive and the exercise prices are known. However,
the Company has not recorded any expense for employee options since the strike
price was the same as the fair market value of the common stock at the date
of
grant. If the Company had elected to recognize compensation cost for all
outstanding options granted by the Company to employees by applying the fair
value recognition provisions of SFAS 123 “Accounting for Stock-Based
Compensation” to employee stock options, and amortizing the fair value over the
vesting period, net loss and loss per share for the years ended December 31,
2005 and 2004, would have been increased to the pro forma amounts indicated
below:
| |
|
|
Year
Ended
|
|
|
Year
Ended
|
|
| |
|
|
December
31,
2005
|
|
|
December
31,
2004
|
|
|
Net
loss as reported
|
|
$
|
(12,834,629
|
)
|
$
|
(4,023,558
|
)
|
|
Less:
Total stock-based employee and director compensation expense using
the
fair value based method for all awards, net of related tax effects
|
|
|
(703,772
|
)
|
|
(315,003
|
)
|
|
Pro
forma net loss
|
|
$
|
(13,538,401
|
)
|
$
|
(4,338,561
|
)
|
|
Basic
and diluted net loss per common share:
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.58
|
)
|
$
|
(0.24
|
)
|
|
Pro
forma net loss
|
|
$
|
(0.61
|
)
|
$
|
(0.25
|
)
|
For
the
purpose of valuing options granted to employees, directors and consultants,
the
Company has valued the options using the Black-Scholes option pricing model
with
the following assumptions used in 2005 and 2004:
| |
|
December
31,
2005
|
|
December
31,
2004
|
|
|
Risk-free
interest rate
|
|
|
3%-5
|
%
|
|
3%-5
|
%
|
|
Volatility
|
|
|
108%-175
|
%
|
|
39%-98
|
%
|
|
Lives
in years
|
|
|
10
|
|
|
10
|
|
|
Dividend
yield
|
|
|
0
|
%
|
|
0
|
%
|
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
The
Company accounts for stock options granted to non-employees on a fair value
basis in accordance with SFAS No. 123, “Accounting for Stock-Based
Compensation,” and Emerging Issues Task Force Issue No. 96-18, “Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or
in Conjunction with
Selling, Goods or Services.” The
non-cash charge to operations for non-employee options
with vesting or other performance criteria is valued at the end of each
reporting period based upon the change in the fair value of the Company’s common
stock.
As
a
result of amendments to SFAS 123, the Company will be required to expense the
fair value of employee and director stock options beginning with the first
quarter of 2006.
(K)
Use of Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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 from those estimates.
(L)
Impairment of Long-Lived Assets
The
Company evaluates the recoverability of its long-lived assets, where indicators
of impairment are present, by reviewing current and projected profitability
or
undiscounted cash flows of such assets. Intangible assets that are subject
to
amortization are reviewed for potential impairment whenever events or
circumstances indicate that carrying amounts may not be recoverable. For the
years ended December 31, 2005 and 2004, the Company determined that an
impairment charge on its long-lived assets was not required.
(M)
In-Process Research and Development Expense
In-process
research and development costs are expensed as incurred. These expenses are
comprised of the costs associated with the acquisition of
Greenwich.
(N)
Research and Development Expense
Research
and development costs are expensed as incurred. These expenses include the
cost
of the Company's proprietary research and development efforts, as well as costs
incurred in connection with the Company's third-party collaboration efforts.
(O)
Advertising
The
Company expenses the cost of advertising and promotions as incurred. Advertising
and promotion costs charged to operations amount to $29,681 and $13,712 for
the
years ended December 31, 2005 and 2004, respectively.
(P)
Loss Per Share
Basic
net
loss per share is calculated by dividing net loss by the weighted-average number
of common shares outstanding for the period. Diluted net loss per share is
the
same as basic net loss per share, since potentially dilutive securities
from the assumed exercise of stock options and stock warrants would have an
antidilutive effect because the Company incurred a net loss during each period
presented. The amount of potentially dilutive securities including options
and
warrants in aggregate excluded from the calculation was 26,026,366 at December
31, 2005 and 5,141,009 at December 31, 2004.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
(Q)
Segment Information
- The Company operates as two business segments - drug development and chiral
products and services. The entire business is managed by a single management
team that reports to the chief executive
officer. Accordingly, the Company prepares discrete financial information with
respect to its businesses and it has separately reportable segments as defined
by Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures
about Segments of an Enterprise and Related Information.” See Note
14.
(R)
Concentrations of Credit Risk
- Financial instruments that potentially subject us to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable.
The
Company places its cash with high quality financial institutions to limit credit
exposure.
The
Company has concentrations of credit risk with respect to accounts receivable
and vendor relationships - see Note 10. The Company does not obtain collateral
for its customers’ receivable balances.
NOTE
3 MERGER
Greenwich
Therapeutics, Inc.
On
October 18, 2005, the Company completed a merger with Greenwich Therapeutics,
Inc., (“Greenwich”), a New York based biotechnology company. In exchange for
their shares of Greenwich common stock and pursuant to the Merger Agreement,
the
stockholders of Greenwich received an aggregate of 17,128,790 shares of the
Company’s common stock and five-year warrants to purchase an additional
4,000,000 shares of the Company’s common stock at an exercise price of $1.41 per
share. One-half of the shares and warrants issued to Greenwich’s stockholders
were placed in escrow and will be released based upon the achievement of certain
milestones as discussed below:
| |
(i)
|
35%
of the escrowed securities shall be released upon the conclusion
of a
Phase I clinical trial pursuant to an investigational new drug application
(“IND”) accepted by the U.S. Food and Drug Administration (“FDA”) for
VQD-001 or SSG;
|
| |
(ii)
|
15%
of the escrowed securities shall be released immediately upon conclusion
of a Phase II clinical trial for VQD-001 or SSG under a Company-sponsored
IND; provided that a majority of the members of the Company’s then
existing medical advisory board conclude that such trial yielded
results
which, in the opinion of such advisory board, warrant initiation
of Phase
III trial(s) (provided that this milestone shall be deemed to have
been
satisfied in the event a new drug application, or NDA, relating to
VQD-001
or SSG has been accepted for review by the FDA prior to any determination
by the medical advisory board to initiate a Phase III
trial);
|
|
|
(iii) |
35%
of such escrowed securities shall be released immediately upon the
conclusion of a Phase I clinical trial pursuant to a Company-sponsored
IND
application accepted by the FDA for VQD-002 or TCN-P;
|
|
|
(iv) |
15%
of such escrowed securities shall be released immediately upon conclusion
of a Phase II clinical trial for VQD-002 or TCN-P under a
Company-sponsored IND; provided that a majority of the members of
the
Company’s then existing medical advisory board conclude that such trial
yielded results which, in the opinion of such advisory
board, warrant initiation of Phase III trial(s) (provided that this
milestone shall be deemed to have been satisfied in the event an
NDA
relating to VQD-002 or has been accepted for review by the FDA prior
to
any determination by the medical advisory board to initiate a Phase
III
trial).
|
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
In
the
event the escrowed securities relating to the milestones described above have
not been released to the Greenwich shareholders by June 30, 2008, any escrowed
securities still remaining in the escrow shall be released and delivered to
the
Company for cancellation, and the Greenwich shareholders will have no further
right, title or interest to such escrowed securities.
Additionally,
as contemplated by the merger agreement, on October 18, 2005, the Company
assumed outstanding indebtedness of Greenwich of $823,869, all of which is
payable to Paramount BioCapital Investments, Inc., (See Note 13), pursuant
to a
promissory note dated October 17, 2005, referred to as the (“Note”).
At
the
closing of the merger, the Note was amended to provide that one-third would
be
converted into securities of the Company on the same terms as the Company’s
October 2005 private placement, one-third of the outstanding indebtedness under
the Note would be repaid upon the completion by the Company of a financing
resulting in gross proceeds of at least $5 million, and the final one-third
would be payable upon completion by the Company of one or more
financings resulting in aggregate gross proceeds of at least $10 million
(inclusive of the amounts raised in its previous $8.4 million financing ).
Accordingly, on October 18, 2005, upon completion of the private placement,
the
Company satisfied a portion of the total indebtedness outstanding
under the Note by making a cash payment of $264,623 and another portion by
issuing to Paramount BioCapital Investments, Inc. 392,830 shares valued at
the $.75 offering price of the October 2005 private placement, the equivalent
of
$294,623 of the Company’s common stock. In the event that the Company does not
complete the financing(s) resulting in aggregate gross proceeds of at least
$10
million prior
to
the Note’s maturity date, the Company will be required to satisfy the final
portion at maturity in October 2006.
The
acquisition of Greenwich on October 18, 2005 was accounted for by the Company
under the purchase method of accounting in accordance with Statement of
Financial Accounting Standards No. 141 “Business Combinations”.. Under the
purchase method, assets acquired and liabilities assumed by the Company were
recorded at their estimated fair values at the date of acquisition and the
results of operations of the acquired company were consolidated with those
of
the Company from the date of acquisition.
The
total
purchase price of $7,975,218, was determined to be in-process research and
development and is comprised of $5,995,077 related to the calculated value
of
the Company’s common stock issued of $.70 per share ($.70 per share value was
based upon the average stock price of the Company’s common stock a few days
before and a few days subsequent to the July 7, 2005 definitive merger agreement
announcement), $986,039 related to the calculated value of 2,000,000 warrants
issued to Greenwich shareholders using the Black-Scholes option pricing model,
$823,869 of debt the Company assumed in addition to $170,234 of professional
fees.
The
components of the purchase price, which the Company charged to in-process
research and development, are summarized as follows ($000’s):
| |
|
|
|
|
|
Common
stock issued, excluding contingent shares*
|
|
$
|
5,995
|
|
|
Warrants
issued, excluding contingent warrants*
|
|
|
986
|
|
|
Liabilities
assumed
|
|
|
824
|
|
|
Transaction
costs
|
|
|
170
|
|
|
Total
purchase price
|
|
$
|
7,975
|
|
| |
|
|
|
|
| * |
The
purchase price does not include any of the contingent achievement-based
milestone payments described
above.
|
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
If
the
merger between Greenwich and the Company had occurred as of January 1, 2004
unuaudited pro forma revenues, net loss and net loss per share would have been
as illustrated in the following table:
| |
|
Pro
Forma (Unaudited)
|
|
| |
|
Years
Ended
|
|
| |
|
December
31,
|
|
| |
|
2005
|
|
2004
|
|
|
REVENUES
|
|
$
|
3,804,654
|
|
$
|
1,485,148
|
|
|
NET
LOSS
|
|
$
|
(13,589,531
|
)
|
$
|
(4,092,525
|
)
|
|
BASIC
AND DILUTED LOSS PER COMMON SHARE
|
|
$
|
(.47
|
)
|
$
|
(0.16
|
)
|
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED
|
|
|
29,150,897
|
|
|
25,664,977
|
|
The
above
pro forma financial information is not necessarily indicative of what the
Company’s results of operations would have been had the Merger occurred on
January 1, 2004.
Reincorporation
In
October 2005, the Company, formerly a Minnesota corporation, reincorporated
under Delaware law. The reincorporation was effected by merging the Company
with
and into VioQuest Delaware, Inc., a wholly-owned subsidiary of the Company
formed solely for the purpose of effecting the Company’s reincorporation, with
VioQuest Delaware remaining as the surviving corporation. Each share of
outstanding common stock of the Company was converted into one share of VioQuest
Delaware common stock. In connection with the reincorporation merger, VioQuest
Delaware’s name was changed to VioQuest Pharmaceuticals, Inc. Further, as a
result
of
the reincorporation, the Company’s authorized number of shares was increased to
100,000,000 shares of common
stock and 10,000,000 shares of preferred stock. The Company’s stockholders
approved both the reincorporation and an amendment to the Company’s charter
increasing the number of authorized shares of capital stock at a special meeting
held October 8, 2005. The reincorporation of the Company under Delaware law
was
a condition to completing the merger with Greenwich. The par value
of the Company’s common stock changed in October 2005 to $0.001 from
$0.01, as a result of the Company’s reincorporation from Minnesota to
Delaware.
NOTE
4
INVENTORY
The
principal components of inventory are as follows:
|
|
|
December
31, 2005
|
|
December
31, 2004
|
|
|
Raw
material compounds
|
|
$
|
410,912
|
|
$
|
308,456
|
|
|
Work
in process
|
|
|
11,868
|
|
|
47,691
|
|
|
Finished
goods
|
|
|
202,378
|
|
|
4,000
|
|
|
Total
Inventory
|
|
$
|
625,158
|
|
$
|
360,147
|
|
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
NOTE
5 PROPERTY
AND EQUIPMENT, NET
The
cost
of the major classes of property and equipment are as follows:
| |
|
|
December
31, 2005
|
|
|
December
31, 2004
|
|
|
Laboratory
equipment
|
|
$
|
725,692
|
|
$
|
519,231
|
|
|
Office
equipment
|
|
|
51,381
|
|
|
7,849
|
|
|
Computer
equipment
|
|
|
66,596
|
|
|
35,241
|
|
|
Leasehold
improvements
|
|
|
370,816
|
|
|
145,783
|
|
|
Property
and equipment
|
|
|
1,214,485
|
|
|
708,104
|
|
|
Less
accumulated depreciation and amortization
|
|
|
457,334
|
|
|
214,472
|
|
|
Property
and Equipment, Net
|
|
$
|
757,151
|
|
$
|
493,632
|
|
Depreciation
and amortization expense for property and equipment for the years ended December
31, 2005 and 2004 was $242,862 and $125,467, respectively.
NOTE
6
INCOME
TAXES
The
Company recognized a tax benefit of $236,416 for the year ended 2005 as a result
of the sale of its New Jersey operating losses. For the year ended December
31,
2004, there was no income tax expense or benefit because of the nonrecognition
of the income tax benefit from the Company’s net operating loss (NOL)
carryforwards.
The
significant components of the Company’s net deferred tax assets are summarized
as follows:
| |
|
|
|
|
| |
|
|
Year
Ended December 31,
|
|
| |
|
|
2005
|
|
|
2004
|
|
|
NOL
carryforwards - Federal
|
|
$
|
4,110,501
|
|
$
|
2,439,493
|
|
|
NOL
carryforwards - State
|
|
|
365,563
|
|
|
430,507
|
|
|
Excess
tax basis of Greenwich
|
|
|
3,190,087
|
|
|
—
|
|
|
Other,
net
|
|
|
(20,850
|
)
|
|
|
|
|
Valuation
allowance
|
|
|
(7,645,301
|
)
|
|
(2,870,000
|
)
|
|
Net
deferred tax assets
|
|
$
|
|
|
$
|
|
|
Deferred
tax assets have been fully offset by a valuation allowance because it is
management’s belief that it is more likely than not that those benefits will not
be realized.
As
of December 31, 2005, we had available for federal income tax reporting purposes
NOL carryforwards in the approximate amount of $11,823,000, expiring through
2025, which are available to reduce future taxable income, if any, that would
otherwise be subject to Federal income taxes. Our ability to use such net
operating losses may be limited by change in control provisions under Internal
Revenue Code Section 382. In addition, as of December 31, 2005, we have research
and development credits in the approximate amount of $25,000, which are
available to reduce the amount of future Federal income taxes. These credits
expire from 2006 through 2025.
We
have New Jersey NOL carryforwards in the approximate amount of $5,800,000,
expiring through 2012 that are available to reduce future taxable income, if
any, which would otherwise be subject to state income tax. As of December 31,
2005, approximately $469,000 of these New Jersey NOL carryforwards has been
approved for future sale under a program of the New Jersey Economic Development
Authority (“NJEDA”). In order to realize these benefits,
the Company must apply to the NJEDA each year and must meet various requirements
for continuing eligibility. In addition, the program must continue to be funded
by the State of New Jersey and there are limitations based on the level of
participation by other companies. As a result, future tax benefits, if any,
will
be recognized in the
financial statements as specific sales are approved. We have sold tax benefits
and realized a total of $236,000 in 2005.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
The
following is a reconciliation of the expected income tax benefit computed at
the
U.S. Federal statutory rate to the Company's actual income tax benefit:
| |
|
|
December
31, 2005
|
|
|
December
31, 2004
|
|
|
Income
tax benefit at statutory rate
|
|
$
|
(4,444,155
|
)
|
$
|
(1,368,010
|
)
|
|
State
income taxes net of Federal tax
|
|
|
(406,665
|
)
|
|
(241,413
|
)
|
|
Nondeductible
expenses and prior year true-up
|
|
|
100,741
|
|
|
|
|
|
Tax
credits
|
|
|
(25,177
|
)
|
|
|
|
|
Sale
of State NOLs
|
|
|
(236,416
|
)
|
|
|
|
|
Increase
in valuation allowance
|
|
|
4,775,256
|
|
|
1,609,423
|
|
| |
|
$
|
(236,416
|
)
|
$
|
|
|
On
October 18, 2005, the Company acquired Greenwich Therapeutics, Inc., a privately
held biotechnology company. The acquisition constituted a tax-free
reorganization under Section 368(a) of the Code.
NOTE
7
RIGHTS
TO INTELLECTUAL PROPERTY
The
Company’s exclusive right to certain PSRF patents are of material importance to
the Company's success. These PSRF patents result from inventions by the
Company’s Chief Technology Officer (“CTO”), who is also an employee at PSU. The
PSRF patents cover chemical formulations, processes for or intermediates useful
in the manufacture of products and the uses of products. Protection for PSRF’s
individual products extends for varying periods in accordance with the date
of
grant and the legal life of patents in the various countries. The protection
afforded, which may also vary from country to country, depends upon the type
of
patent and its scope of coverage. The Company is financially responsible for
all
aspects of these PSRF inventions, including legal and R&D expenses
associated with the chemical developments. The Company is no longer obligated
to
license future inventions of the CTO.
For
the
years ended December 31, 2005 and 2004, the Company has not recognized any
impairment charges to its patents, as management believes that the Company’s
patents have useful lives equivalent to their amortization period of seventeen
years. The capitalized amounts of intellectual property are comprised of
domestic and international patent filing fees, patent enhancement fees, in
addition to legal application and prosecution fees associated to the defense
of
the Company’s patents. The gross patent increase for the year ended 2005 of
approximately $109,000 relates to fees charged by our patent attorneys for
a
combination of domestic and foreign legal patent application filing fees, and
prosecution filing fees in the successful defense of our patents.
NOTE
8
STOCKHOLDERS'
EQUITY
On
February 25, 2004, the Company completed a private placement of its securities
to accredited investors that resulted
in gross proceeds of approximately $7.2 million. Investors in the private
placement purchased an aggregate of approximately 4.8 million shares of the
Company’s common stock at a price per share of $1.50 and received 5-year
warrants to purchase one share of common stock at $1.65 per share for every
two
common shares purchased in the offering (a total of 2.4 million warrants).
ThinkEquity Partners LLC, Paramount BioCapital, Inc. and Casimir Capital
L.P. acted as the placement agents for this offering and received fees of
approximately $500,000 of which Paramount BioCapital, Inc., (See Note 13),
received $300,000. Net proceeds to the Company, after deducting commissions
and
other expenses relating to the private placement, were approximately $6.7
million.
On
August
29, 2005, the Company issued 200,000 shares of its restricted common stock
to a
consultant at a price of $.95, the closing price of the Company’s common stock,
which resulted in a charge of $190,000 to consulting expense for
2005.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
On
October 18, 2005, the Company sold 11,179,975 Shares of its common stock at
a
price of $0.75 per share resulting in gross proceeds of approximately $8.38
million. In addition to the shares of common stock, the investors also received
5-year Warrants to purchase an aggregate of 4,471,975 shares at an exercise
price of $1.00 per share. In connection with the private placement, the Company
paid an aggregate of approximately $587,000 in commissions to Paramount
BioCapital, Inc., (See Note 13), which served as the placement agent in
connection with the offering, together with an accountable expense allowance
of
$50,000, and issued 5-year warrants to purchase an aggregate of 1,117,997 shares
of common stock at a price of $1.00 per share. Net proceeds to the Company
after
deducting placement agent fees and other expenses relating to the private
placement were approximately $7.5 million.
On
October 18, 2005, the Company completed a merger with Greenwich (See Note 3).
In
exchange for Greenwich stockholders’ shares of Greenwich common stock, the
stockholders of Greenwich received an aggregate of 17,128,790 shares of the
Company’s common stock and five-year warrants to purchase an additional
4,000,000 shares of the Company’s common stock at an exercise price of $1.41 per
share. One-half of the securities issued pursuant to the merger agreement were
placed in escrow pursuant to an escrow agreement (See Note 3).
The
following table summarizes the total number of options outstanding, options
issued to employees, non-employees, directors, consultants, scientific advisory
board members and expired options:
| |
|
December
31, 2005
|
|
December
31, 2004
|
|
| |
|
|
|
Weighted
|
|
|
|
Weighted
|
|
| |
|
|
|
Average
|
|
|
|
Average
|
|
| |
|
|
|
Exercise
|
|
|
|
Exercise
|
|
| |
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
| |
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of year
|
|
|
2,244,877
|
|
$
|
1.42
|
|
|
2,841,607
|
|
$
|
1.47
|
|
|
Granted
|
|
|
3,079,475
|
|
$
|
0.90
|
|
|
366,000
|
|
$
|
1.22
|
|
|
Expired
|
|
|
(348,500
|
)
|
$
|
1.41
|
|
|
(962,730
|
)
|
$
|
1.49
|
|
|
Outstanding
at end of year
|
|
|
4,975,852
|
|
$
|
1.10
|
|
|
2,244,877
|
|
$
|
1.42
|
|
|
Options
exercisable at year-end
|
|
|
1,170,121
|
|
$
|
1.36
|
|
|
1,024,488
|
|
$
|
1.38
|
|
|
Weighted-average
fair value of options granted during the year
|
|
|
|
|
$
|
0.86
|
|
|
|
|
$
|
1.14
|
|
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
The
following table summarizes the information about stock options outstanding
at
December 31, 2005:
|
Range
of
Exercise
Prices
|
|
Outstanding
Options
|
|
Weighted
Average Exercise Price
|
|
|
|
|
$.01-$0.99
|
|
|
2,694,475
|
|
$
|
0.88
|
|
|
10
|
|
|
$1.00-$1.99
|
|
|
2,268,252
|
|
$
|
1.35
|
|
|
8
|
|
|
$2.00-$2.99
|
|
|
10,000
|
|
$
|
2.17
|
|
|
4
|
|
|
$3.00-$3.99
|
|
|
875
|
|
$
|
3.20
|
|
|
1
|
|
|
$4.00-$12.00
|
|
|
2,250
|
|
$
|
7.29
|
|
|
0
|
|
|
Total
|
|
|
4,975,852
|
|
|
|
|
|
|
|
The
following table summarizes information related to warrants outstanding at
December 31, 2005:
|
Remaining
Contractual
Life
In Years
|
|
Price
|
|
Number
of Outstanding Warrants
|
|
|
4.75
|
|
$
|
1.00
|
|
|
5,589,987
(A
|
)
|
|
4.75
|
|
$
|
1.41
|
|
|
4,000,000
(B
|
)
|
|
3.15
|
|
$
|
1.65
|
|
|
2,896,132
(C
|
)
|
| |
|
|
|
|
|
12,486,119
|
|
| (A) - |
Warrants
issued as a result of the Company’s private placement of its common stock
in October 2005 to investors and Paramount BioCapital, Inc. of 4,471,990
and 1,117,997, respectively. All warrants are exercisable as of December
31, 2005.
|
| (B) - |
Warrants
issued as a result of the merger with Greenwich. In connection with
the
escrow agreement (see Note 3), one-half of the warrants are exercisable
upon the achievement of certain clinical milestones, and the other
half of
the warrants are exercisable within one year from the merger date
of
October 18, 2005.
|
| (C) - |
Warrants
issued to investors of the Company’s private placement of its common stock
in February 2004. All warrants are exercisable as of December 31,
2005.
|
NOTE
9
AGREEMENTS
Pursuant
to a January 2002 agreement between the Company and a pharmaceutical product
development customer, the Company granted the customer a worldwide,
non-exclusive, royalty free license to certain of the Company’s Intellectual
Property Rights for research purposes only in connection with certain of the
customer’s compounds. The customer paid the Company a nonrefundable license fee
of $400,000 in 2002. The fee was amortized to revenue through September 2005
when the agreement terminated. For the years ended December 31, 2005 and 2004,
the Company recognized income of $58,842 and $114,241, respectively, related
to
this agreement.
In
May
2003, the Company entered into a four-year consulting agreement with the CTO
at
an annual rate of $120,000 per year. In addition, the CTO received an option
to
purchase 650,052 shares of common stock at $1.49 per share as discussed in
Note
7.
Pursuant
to an October 2002 agreement with PSU, the Company funded the services of four
post-doctorate fellows who, under the supervision of the CTO, conducted research
and provided research quantities of chiral ligands to the Company. From October
2002 through December 31, 2005, the Company has paid and incurred expenses
of
approximately $872,000 pursuant to the agreement. This amount consists
principally of four post-doctorate
salaries, fringe benefits, materials and supplies for the stated period. The
agreement expires on April 14, 2006. The approximate obligation payable by
the
Company through April 14, 2006 is $31,000.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
NOTE
10
BUSINESS
AND CREDIT CONCENTRATIONS
In
fiscal
2005, the Company sold our proprietary products and services to a total of
approximately 35 customers. During 2005, the Company had one customer, a major
biopharmaceutical company, which accounted for approximately 64% of the
Company’s total revenues. In 2004, the Company had two customers, one a major
pharmaceutical company and the other a biotechnology company, that accounted
for
approximately 34% and 26% of the Company’s revenue, respectively. The loss of
these accounts would have a material adverse effect on the Company’s
business.
The
Company had two customers which accounted for approximately 29% and 21%,
respectively, of net customer accounts receivable as of December 31,
2005.
NOTE
11
COMMITMENTS
AND CONTINGENCIES
(A)
EMPLOYMENT AGREEMENT WITH CEO
The
Company entered into a written employment agreement dated as of February 1,
2005
with Daniel Greenleaf upon his appointment as the Company’s President and Chief
Executive Officer. The agreement provides for a 3-year term and an initial
annual base salary of $360,000, plus a guaranteed annual bonus of $100,000
during each year of the term of the agreement. In addition, Mr. Greenleaf is
entitled to a signing bonus in the amount of $50,000, of which one-half is
payable following the execution of the employment agreement and the remaining
one-half is payable on the 6-month anniversary of the agreement. Mr. Greenleaf
is further entitled to a discretionary bonus under the employment agreement
of
up to $250,000 per year upon the attainment of certain performance criteria
specified in the employment agreement, and such other benefits generally made
available to the Company’s other senior management.
In
accordance with the terms of the employment agreement, the Company issued to
Mr.
Greenleaf an option to purchase 891,396 shares of the Company’s common stock,
which represented 5% of the Company’s then-current outstanding common stock. The
option vests in three equal annual installments, commencing February 2006.
In
addition, until the Company has raised $20 million through the sale of equity
securities and has obtained the rights to one clinical stage human therapeutic,
Mr. Greenleaf shall be entitled to receive such additional options to
purchase
common stock in order to maintain his beneficial ownership (assuming the
exercise of all stock options issued to Mr. Greenleaf) at 5% of the Company’s
outstanding common stock. To the extent any additional stock options are issued
pursuant to the foregoing sentence, the options will vest in installments over
the term of the employment agreement as long as Mr. Greenleaf remains employed
by the Company and will be exercisable at the market value of the Company’s
common stock at the time of issuance. In accordance with this provision, upon
the closing of the Company’s October 2005 private placement, the Company issued
to Mr. Greenleaf an additional option to purchase 1,445,080 shares of common
stock at an exercise price of $0.89 per share. In the event Mr. Greenleaf’s
employment is terminated by the Company during its term upon a “change of
control” (as defined in the employment agreement) and on the date of such
termination the Company’s aggregate market capitalization is less than $38
million, he is entitled to receive his base salary for six months thereafter
and
all of his stock options scheduled to vest in the calendar year of such
termination shall accelerate and be deemed vested upon termination and will
remain exercisable for 12 months following such termination. In the event the
Company terminates Mr. Greenleaf’s employment during the term of the agreement
other than as a result of death, disability, cause or in connection
with a change of control where the Company’s aggregate market capitalization is
less than $38 million, then (i) Mr. Greenleaf is entitled to receive his base
salary for 12 months from such termination, his guaranteed bonus for the
calendar year in which such termination occurs, and the portion of any
discretionary bonus earned as of
the
termination, and (ii) the vesting of his stock options shall accelerate and
be
deemed vested and will remain exercisable for 12 months following such
termination.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
(B)
LEASE AGREEMENTS
The
Company leases laboratory and office space located in Monmouth Junction, New
Jersey. The lease as amended commenced effective June 1, 2003 and is for a
three-year term with a total rent, utilities and maintenance to be paid in
monthly installments that increase each year. Due to the escalation clause
in
the lease, the Company is straight-lining the expense of the lease over the
term
of the lease. The Company also issued the landlord options to purchase 20,000
shares of common stock. The fair value of the options issued to the landlord
of
$9,845 is being amortized on a straight-line basis over the term of the option
agreement and included in rent expense. In February 2004, and June 2004, the
Company amended its lease agreement to add laboratory space in order to increase
its capacity to produce research and commercial quantities of our ligands.
In
January 2006, the Company amended the lease agreement to extend its lease term
to May 31, 2009. Effective June 1, 2006, the Company’s base rent for the
remainder of the term
is
$19,439 per month. Upon six months prior written notice to the landlord, the
Company will have a one time option, without penalty, to terminate this lease
effective as of May 31, 2008. The Company’s total lease commitment of
approximately $1,124,000 for rent, utilities and maintenance fees expires in
May
31, 2009.
The
Company entered into an
agreement effective December 15, 2004, with the Science and Technology Bureau
of
Jiashan County (“Jiashan”) in Zhejiang Province of the People’s Republic of
China. The Company has agreed to lease laboratory space in an industrial park
near Shanghai, 50% of which the Company began occupying in 2005. Pursuant to
the
Company’s agreement with Jiashan, although the Company is not required to pay
rent during the initial 3-years of the lease, the Company will pay a maintenance
fee of up to $4,500 per quarter, which is comprised of maintenance and
management fees. Following the initial 3-year term, the Company may, at our
sole
discretion, either continue leasing the space for annual rent of no more than
approximately $60,000 or purchase the facility on commercially
reasonable terms. The Company has no financial obligation pursuant to the lease
agreement after the end of the three year term. The Company was also granted
the
option to purchase in the next three years certain land adjacent to the
industrial park. For purposes of entering into the lease, the Company
established a wholly owned subsidiary organized under the laws of Hong Kong,
known as Chiral Quest Ltd., which in turn is the sole shareholder of a
subsidiary in the People’s Republic of China, Chiral Quest (Jiashan) Ltd.
The
Company entered into a lease agreement effective June 15, 2005 for office space
located in Basking Ridge, New Jersey. Pursuant to the lease agreement, the
Company pays approximately $4,000 per month for rent. The Company’s total lease
commitment of approximately $147,000 for rent, utilities and maintenance fees
and expires in September 30, 2008.
Future
minimum rental payments subsequent to December 31, 2005 are as follows:
| |
|
|
|
|
| |
|
|
Years
ended
December
31,
|
|
|
2006
|
|
$
|
378,000
|
|
|
2007
|
|
|
384,000
|
|
|
2008
|
|
|
371,000
|
|
|
2009
|
|
|
138,000
|
|
| |
|
$
|
1,271,000
|
|
Total
rent expense (which includes base rent, utilities, and operating escalations
for
the Monmouth Junction and Basking Ridge, New Jersey laboratories and offices,
in
addition to the leases for the laboratory space in Pennsylvania which was
terminated in February 2005) for the Company for the years ended December 31,
2005 and 2004 was approximately $329,000 and $333,000 respectively.
VIOQUEST
PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2005 AND 2004
NOTE
12
RETIREMENT
PLAN
The
Company sponsors a defined contribution 401(k) plan which allows eligible
employees to defer a portion of their salaries for retirement planning and
income tax purposes by making contributions to the plan. There were no Company
contributions to the plan for the years ended December 31, 2005 and 2004.
NOTE
13
CERTAIN TRANSACTIONS
Paramount
BioCapital Investments, LLC, provided office, and general and administrative
services for the Company, from January 2004 through April 2004, which resulted
in $6,000 of charges to operations for the year ended December 31, 2004. Dr.
Lindsay A. Rosenwald is the managing member of BioCapital Investments,
LLC.
On
February 25, 2004, the Company completed the sale of its securities in a private
placement to accredited investors for gross proceeds of approximately $7.2
million. Paramount BioCapital, Inc. participated as one of three placement
agents for this transaction, for which it received approximately $300,000 in
commissions. Dr.
Lindsay A. Rosenwald is the Chairman, CEO and sole stockholder of Paramount
BioCapital, Inc.
On
October 18, 2005, the Company completed the sales of its securities in a private
placement to accredited investor for gross proceeds of approximately $8.4
million. Paramount BioCapital, Inc., which served as the placement agent for
this transaction, for which it received approximately $587,000 in commissions,
together with an accountable expense allowance of $50,000, and issued 5-year
warrants to purchase an aggregate of 1,117,997 shares of common stock at a
price
of $1.00 per share. Net proceeds to the Company after deducting placement agent
fees and other expenses relating to the private placement, were approximately
$7.5 million.
As
contemplated by the merger Agreement with Greenwich (see Note 3), on October
18,
2005, the Company assumed outstanding indebtedness of Greenwich of $823,869,
all
of which is payable to Paramount BioCapital Investments, Inc. pursuant to a
promissory note dated October 17, 2005, referred to as the (“Note”). At the
closing of the merger, the Note was amended to provide that one-third would
be
converted into securities of the Company on the same terms as the Company’s
October 2005 private placement, one-third of the outstanding indebtedness under
the Note would be repaid upon the completion by the Company of a financing
resulting
in gross proceeds of at least $5 million, and the final one-third would be
payable upon completion by the Company of one or more financings resulting
in
aggregate gross proceeds of at least $10 million (inclusive of the amounts
raised in a previous $5 million financing ). Accordingly, on October 18, 2005,
upon completion of the private placement, the Company satisfied a
portion of the total indebtedness outstanding under the Note by making a
cash payment of $264,623 and another portion by issuing to Paramount
BioCapital Investments, Inc. 392,830 shares valued at the $.75 offering price
of
the October 2005 private placement, the equivalent of $294,623 of the Company’s
common stock. In the event the Company does not complete the financing(s)
resulting in aggregate gross proceeds of at least $10 million prior to the
Note’s maturity date, the Company will be required to satisfy the
final portion in October 2006. Dr. Lindsay A. Rosenwald and certain trusts
established for the benefit of Dr. Rosenwald and his family collectively held
approximately 48% of Greenwich’s capital stock prior to completion of the
merger. Together, Dr. Rosenwald and such trusts also owned approximately 16%
of
the Company’s common stock prior to the completion of the merger. In addition to
Dr. Rosenwald’s relationship with Greenwich, two directors of the Company,
Stephen C. Rocamboli and Michael Weiser, M.D., Ph.D., owned approximately 3.6%
and 7%, respectively, of Greenwich’s outstanding common stock. Mr. Rocamboli and
Dr. Weiser are also employees of Paramount BioCapital, Inc.
NOTE
14
SEGMENT REPORTING
The
Company has two business segments -Drug Development and Chiral Products and
Services. The Company’s drug development business focuses on acquiring,
developing and eventually commercializing human therapeutics in the areas of
oncology, and antiviral diseases and disorders for which there are current
unmet
medical needs. The Company
has the exclusive rights to develop and commercialize two oncology drug
candidates. The Company’s chiral business, which we operate through our
wholly-owned subsidiary, Chiral Quest, Inc., provides innovative chiral
products, technology and custom synthesis development services to pharmaceutical
and fine chemical companies in all stages of a product lifecycle. For the years
ended December 31, 2005 and 2004, the Company’s drug development business
expenses primarily consisted of in-process research and development, and
administrative expenses related to salaries, recruiting fees, and rent, totaling
approximately $8.8 million or approximately 70% of the Company’s overall net
loss. The Company’s chiral business in the United States and China contributed
to the majority of the Company’s other operating expenses during 2005 and all of
the expenses in 2004. Of the Company’s total assets, approximately 6% are held
in its Chiral Quest, Ltd. Jiashan, China facility as of December 31, 2005.
The
Company’s Chiral Quest, Ltd., Jiashan, China subsidiary contributed to
approximately 2% of the Company’s overall net loss for the year ended December
31, 2005.
INDEX
TO EXHIBITS FILED WITH THIS REPORT
|
Exhibit
No.
|
|
Description
|
|
|
|
Separation
Agreement between the Company and Ronald Brandt dated April
4,
2005.
|
|
|
|
Letter
Agreement between the Company and Pamela Harris dated February
15,
2006.
|
|
|
|
Form
of Subscription Agreement issued in connection with the October
2005
private placement.
|
|
|
|
Consent
of J.H. Cohn LLP.
|
|
|
|
Certification
of Chief Executive Officer.
|
|
|
|
Certification
of Chief Financial Officer.
|
|
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
Certification
of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |