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Phage Therapeutics International Inc – ‘10SB12G/A’ on 6/5/01

On:  Tuesday, 6/5/01, at 9:31pm ET   ·   As of:  6/6/01   ·   Accession #:  1096906-1-500109   ·   File #:  0-31961

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 6/06/01  Phage Therapeutics Int’l Inc      10SB12G/A             13:816K                                   Southridge Svcs Inc/FA

Amendment to Registration of Securities of a Small-Business Issuer   —   Form 10-SB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10SB12G/A   Amendment to Registration of Securities of a          96    577K 
                          Small-Business Issuer                                  
 2: EX-3.(I)    Articles of Incorporation and Amendments               5     19K 
 3: EX-3.(II)   By-Laws                                               14     78K 
 4: EX-10.1     Advisory Agreements                                   11     68K 
 5: EX-10.2     Confidentiality Agreement                              2     11K 
 6: EX-10.3     Employee Agreements                                   47    237K 
 7: EX-10.4     Management Agreement                                   2     14K 
 8: EX-10.5     Property Lease Agreement                              26    138K 
 9: EX-10.6     Consulting Agreement                                   2±    11K 
10: EX-10.7     Stock Option Plan 2000                                17     85K 
11: EX-10.8     Securities Purchase Agreement                         28    139K 
12: EX-21       List of Subsidiaries                                   6     21K 
13: EX-27       Financial Data Schedule                                1     10K 


10SB12G/A   —   Amendment to Registration of Securities of a Small-Business Issuer
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Table of Contents
3Item 1. Description of Business
6Initial Product Line
8Patents, Trademarks & Licenses
16Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
22Item 3. Description of Property
23Item 4. Security Ownership of Certain Beneficial Owners and Management
26Item 5. Directors and Executive Officers, Promoters and Control Persons
"Directors and Officers of Phage
29Collaborative Relationships
30Item 6. Executive Compensation
31Contractual Arrangements
33Item 7. Certain Relationships and related Transactions
34Item 8. Legal Proceedings
"Item 9. Market Price for Common Equity and Related Stockholder Matters
35Item 10. Recent Sales of Unregistered Securities
41Warrants
"Item 11. Description of Securities
"Common Stock
46Stock Rights
47Item 12. Indemnification of Directors and Officers
48Item 13. Financial Statements and Supplementary Data
"Item 14. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
"Item 15. Financial Statements and Exhibits
57Accounting for impairment of long-lived assets and for long-lived assets to be disposed of
63Stock Option Plan
95Item 16. Index to Exhibits
"Item 2 -. Description of Exhibits
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-SB GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS Under Section 12(b) or (g) of the Securities Exchange Act of 1934 PHAGE THERAPEUTICS INTERNATIONAL INC. ------------------------------------- (Name of small business issuer in its charter) Florida 91-1930691 ------------------------ ------------------- (State or jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization) 19017 120th Avenue NE, Suite 102 Bothell, Washington 98011 ----------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (425) 481-6255 -------------- Securities to be registered under Section 12(b) of the Act: NONE Title of each class Name of each exchange on which to be so registered each class is to be registered Securities to be registered under Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.001 PER SHARE -------------------------------------------------------------------------------- (Title of class)
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TABLE OF CONTENTS ----------------- ITEM 1. DESCRIPTION OF BUSINESS..............................................1 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...........14 ITEM 3. DESCRIPTION OF PROPERTY.............................................20 ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..... 21 ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.....24 ITEM 6. EXECUTIVE COMPENSATION..............................................28 ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 31 ITEM 8. LEGAL PROCEEDINGS.................................................. 32 ITEM 9. MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..... 32 ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.............................33 ITEM 11. DESCRIPTION OF SECURITIES...........................................39 ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS...........................45 ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................46 ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................................46 ITEM 15. FINANCIAL STATEMENTS ...............................................46 ITEM 16. INDEX TO EXHIBITS ..................................................93
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FORWARD-LOOKING STATEMENTS This Form 10-SB contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), including, but not limited to statements related to the business objectives and strategy of Phage. Such forward-looking statements are based on current expectations, estimates and projections about Phage's industry, management beliefs, and certain assumptions made by management of Phage. Words such as"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed, forecasted, or contemplated by any such forward- looking statements. The PSLRA does not apply to initial public offerings. Factors that could cause actual events or results to differ materially include, among others, the following: the early state of development of Phage, reliance on officers and directors, ability to attract and retain qualified personnel, dependence on collaborative arrangements and errors in anticipating its need for capital. See, "Management's Discussion and Analysis or Plan of Operation" on page 14. ITEM 1. DESCRIPTION OF BUSINESS Background of Phage Phage Therapeutics International Inc. ("Phage" or the "Company") was originally incorporated in the State of Florida on July 8, 1997, under the name All Products Distribution, Corp. All Products Distribution, Corp. was founded with the specific intent of opening salons offering services such as manicures, pedicures, facials and hairstyling. This business venture was not successful and was not continued by previous management. On August 19, 1998, under its present management, All Products Distribution, Corp. changed its name to Phage Therapeutics International Inc. Phage switched its focus to biotechnology when it decided to pursue the acquisition of Phage Therapeutics, Inc. ("Phage Therapeutics"). Phage Therapeutics was incorporated in the State of Washington on December 24, 1996. The principal executive offices of Phage are located at 19017 120th Avenue NE, Bothell, Washington 98011 and Phage's telephone number is (425) 481-6255. Phage is an emerging biotechnology company that, through its controlling interest in Phage Therapeutics, a bio- pharmaceutical corporation, is focused on the discovery, development and regulatory approval of bacteriophage- based therapeutic products for the treatment of certain antibiotic-resistant infections and other bacterial infectious diseases. Bacteriophage (phage or phage therapeutic agents) are bacterial viruses that infect and destroy bacteria. A bacteriophage virus infects a host bacterial cell by attaching itself to the bacterial cell surface and then injecting its viral nucleic acid into the bacterial cell. Hundreds of new bacteriophage viruses are formed within the bacterial cell as the virus replicates. The bacterial cell is subsequently destroyed, releasing the newly formed bacteriophage viruses to infect additional bacterial cells. This process is repeated within the bacterial population about every 20 minutes until the bacteria are eliminated. Bacteriophage are highly specific, with each kind of bacteriophage typically infecting only one bacterial species. In other words, Phage is focused on developing bacterial viruses that will help individuals infected with bacteria that are resistant to traditional antibiotics. Phage has acquired approximately 88% of the issued and outstanding share capital of Phage Therapeutics through a combination of purchasing 632,000 shares of common stock directly from Phage Therapeutics and through a completion of a series of share exchange agreements, in March and April of 1999, with individual stockholders in which a total of 4,022,425 shares of Phage was issued in exchange for 9,691,000 shares of Phage Therapeutics. An additional 500,000 shares were acquired directly from four investors in Phage Therapeutics in exchange for participation in the February 23, 1999 offering of the Company at $0.05 per share. These four investors are listed in Item 10. Recent Sales of Unregistered Securities on page 30. The total issued and outstanding shares of Phage Therapeutics is 12,312,000. All of the stockholders who participated in the share exchange received their stock through Regulation D, Rule 504. Phage is in the process of acquiring an additional 852,000 shares of Phage Therapeutics, Inc. in a series of share exchange agreements for a total ownership position of 95% of Phage Therapeutics, Inc. The Company intends to acquire 100% of Phage Therapeutics, Inc. through exercise of its statutory right of acquisition provided under the Washington Business Corporation Act Title 23B of the Revised 1
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Code of Washington. The conversion ratio in the individual share exchange agreements varied depending on the amount of initial investment per share made by each individual. Stockholders who had initially invested $1.00 per share received a conversion ratio of 1-to-1. Stockholders who had initially invested $0.20 per share received a conversion ration of 2- to-1. Stockholders who had initially invested $0.02 per share received a conversion ratio of 3.5-to-1. The following is a table of the shareholders, the number of shares held in Phage Therapeutics, the conversion to Phage shares and the conversion ratio. [Enlarge/Download Table] ------------------------------ ---------------------------- --------------------------- ---------------------------- Shareholder Number of Phage Shares Converted to Phage Conversion Ration Therapeutics Inc. shares Therapeutics Purchased International, Inc. Shares ------------------------------ ---------------------------- --------------------------- ---------------------------- Graham Hughes 20,000 5,714 3.5:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Douglas Cochrane 25,000 7,142 3.5:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Ricardo Requena 1,330,000 380,000 3.5:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Auron 2000, Inc. 1,600,000 457,143 3.5:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Monika Kosaristanova 10,000 2,857 3.5:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Source Consulting 25,000 7,142 3.5:1 International, Inc. ------------------------------ ---------------------------- --------------------------- ---------------------------- Caorral Enterprises Ltd. 1,871,000 598,857 (1,571,000 at 3.5:1 & 300,000 at 2:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Vimmy, Inc. 1,050,000 450,000 (350,000 at 3.5:1 & 700,000 at 2:1) ------------------------------ ---------------------------- --------------------------- ---------------------------- Barrington Holdings Ltd. 1,015,000 493,571 (450,000 at 3.5:1, 400,000 at 2:1 & 165,000 at 1:1) ------------------------------ ---------------------------- --------------------------- ---------------------------- Tradewinds Investments Ltd. 300,000 128,571 (240,000 at 3.5:1 & 60,000 at 1:1) ------------------------------ ---------------------------- --------------------------- ---------------------------- Storytellers Groups 120,000 105,714 (100,000 at 1:1 & 20,000 at 3.5:1) ------------------------------ ---------------------------- --------------------------- ---------------------------- Roesalare Corporation 400,000 135,714 (300,000 at 3.5:1 & 100,000 at 2:1) ------------------------------ ---------------------------- --------------------------- ---------------------------- Emerald International 650,000 325,000 2:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Bolivar Longines S.A. 350,000 175,000 2:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Konrad Bartelski 150,000 75,000 2:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Richard C. Honour 200,000 100,000 2:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Colony Investments Ltd. 100,000 100,000 1:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- John Thompson 25,000 25,000 1:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Robert Zuk 50,000 50,000 1:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Lance Dunlap 100,000 100,000 1:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Bonnie Lindros 50,000 50,000 1:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Carl Lindros 100,000 100,000 1:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Theodore Sarniak 100,000 100,000 1:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Terra Resource Management Ltd. 50,000 50,000 1:1 ------------------------------ ---------------------------- --------------------------- ---------------------------- Total 9,691,000 4,022,425 ------------------------------ ---------------------------- --------------------------- ---------------------------- 2
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Business of the Issuer Business Strategy ----------------- Phage's initial business strategy is to increase its share holdings in Phage Therapeutics. The resulting combined corporate entity intends to establish itself as a leader in the discovery, development and regulatory approval of bacteriophage-based therapeutic products for the treatment of certain antibiotic resistant and other bacterial infectious diseases. Phage will subsequently manufacture and seek regulatory approval for its bacterial virus products through Phase II Clinical trials (clinical trials). Once clinical trials have commenced, Phage then plans to enter agreements with pharmaceutical companies to achieve marketing, sales and distribution of the resulting pharmaceutical products. Discussions regarding such agreements have not yet been initiated. Phage intends to enter agreements with major pharmaceutical or biotechnology companies that are in the business of marketing, sales and distribution of antibacterial products, such as antibiotics or other antibacterial agents. The Company does not intend to sell its discoveries to these third parties, rather Phage intends to license the successful product lines to these third parties for the marketing, sales and distribution of its products. At present, the Company has not identified, nor approached any specific potential pharmaceutical or biotechnology companies because the Company feels it is too early to do so. Phage believes the appropriate time to approach potential pharmaceutical or biotechnology companies that are in the business of marketing, sales and distribution of antibacterial products would be after substantial preclinical safety and efficacy data are accrued on the Company's first product candidate (see "Initial Product Line" on page 4), which is estimated to be by the last quarter of 2001. To the Company's knowledge, there are presently no bacteriophage-based products that have been approved by the US Food and Drug Administration ("US FDA"). Demonstrated Need for Bacteriophage Therapeutic Products -------------------------------------------------------- In recent years the advances of the antibiotic era, barely 60 years old, are being dissipated quickly by the rapid emergence of multi-drug resistance among common bacteria (Bug Bytes, Vol 2 (13), October 4, 1995, website: http://www.ccm.lsumc.edu/BugBytes/bb-v2n13.htm). Physicians now face the challenge of safely and effectively treating patients with serious bacterial infections. An example is the emergence of new strains of bacteria which may cause community-acquired or hospital-acquired infections, and that are resistant to many antibiotics used currently in clinical practice (New and Reemerging Infectious Diseases: a global crisis and immediate threat to the nation's health, American Society for Microbiology, January 17, 1999: 1-11 or at http://www.asmusa.org/pasrc/pdfs/newandre.pdf). The prevalence of multi-drug resistance among bacteria has grown substantially in many regions in the United States since the 1980's, rendering many of the most commonly used antibiotics as ineffective (Multiple-Antibiotic-Resistant Pathogenic Bacteria, New Engl. J. Med 1994; Vol 330 (1): 1247). By 1997, strains of bacteria with reduced susceptibility to common antibiotics were reported from Japan to the United States (Emerging Infectious Diseases, Vol.6, No.6, November-December 2000 & Vol.5, No.1, January- February 1999) As a result, bacterial resistance to antibiotics may now be considered as one of the major public health threats of the new century (Multiple-Antibiotic-Resistant Pathogenic Bacteria, New Engl. J. Med 1994; Vol 330 (1): 1247-1251). 3
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For example, Staphylococcus aureus, often referred to simply as "Staph" is a bacteria commonly found on the skin of healthy people. Occasionally, Staph can get into the body and cause an infection. This infection can be minor (such as pimples, boils, and other skin conditions) or serious (such as blood infections or pneumonia) (New and Reemerging Infectious Diseases: a global crisis and immediate threat to the nation's health, American Society for Microbiology, January 17, 1999, or at http://www.asmusa.org/pasrc/pdfs/newandre.pdf). According to an article written by H.C. Neu and published in the journal Science in 1992, more than 95% of patients with Staph infections worldwide do not respond to first-line antibiotics such as penicillin or ampicillin ("The crisis in antibiotic resistance."257: 1064-72). Methicillin is an antibiotic commonly used to treat Staph infections. Although methicillin is very effective in treating most Staph infections, some Staph bacteria have developed resistance to methicillin and can no longer be killed by this antibiotic. These resistant bacteria are called methicillin-resistant Staphylococcus aureus, or MRSA (Bug Bytes, Vol 2 (13), October 4, 1995, website: http://www.ccm.lsumc.edu/BugBytes/bb-v2n13.htm) . The Center fo Disease Control ("CDC") describes MRSA as usually developing in hospital patients who are elderly or very sick, or who have an open wound (such as a bedsore) or a tube (such as a urinary catheter) going into their body. MRSA can be found on the skin, in the nose, and in blood and urine. See the website of the Center for Disease Control (CDC) at http://www.cdc.gov. for more information. MRSA has become increasingly prevalent since the 1980s and is now endemic in most hospitals and even epidemic in some, with resistance in approximately 30% of all Staph infections (Boyce JM. Increasing prevalence of methicillin-resistant Staphylococcus aureus in the United States. Infect Control Hosp Epidemiol 1990: 11: 639-42). According to the Center for Disease Control A precise number is not known, but according to some estimates as many as 80,000 patients a year get an MRSA infection after they enter the hospital (Naxocomial enterococci resistant to vancomycin - United States, 1989-1993. MMWR Morb Mortal Wkly Rep 1993; 42: 597-9). At this time, vancomycin is the only drug that can consistently treat MRSA (Levy, Stuart, The Challenge of Antibiotic Resistance, Scientific American 1998; 0398. See also http://www.sciam.com/1998/0398issue/0398levy.html). Some large U.S. hospitals spend 10 to 15 percent of their total pharmacy budget on vancomycin alone, to treat infections caused by MRSA (Multiple-Antibiotic-Resistant Pathogenic Bacteria, New Engl. J. Med, 1994; Vol 330 (1): 1248). This adds an estimated minimum of $4.5 billion to the cost of health care in the United States each year (Multiple-Antibiotic-Resistant Pathogenic Bacteria, New Engl. J. Med 1994; Vol 330 (1): 1248). However, beginning in 1989, hospitals have reported a rapid increase in vancomycin resistant bacteria (Multiple-Antibiotic-Resistant Pathogenic Bacteria, New Engl. J. Med 1994; Vol 330 (1): 1248). This is an example of just one bacteria that Phage Therapeutics is currently researching to develop a bacterial virus to combat this multidrug resistance. Initial Product Line -------------------- Phage Therapeutics has isolated and is in the process of developing three bacteriophage product candidates which demonstrate clinical utility against the following infectious agents: the antibiotic-resistant forms of Staph and Staph species; Tuberculosis; and Pseudomonas aeruginosa. Phage Therapeutics' top bacteriophage product candidate has shown strong and reproducible therapeutic activity against most bacteria tested, including the antibiotic-resistant forms of the Staph bacterium. On approximately March 1, 2001, the first product candidate bacteriophage was sent to a contract laboratory for preclinical testing of its safety and efficacy and testing. This first product candidate is the only product which is ready for preclinical testing. The intended use of this first product candidate is to combat antibiotic-resistant forms of Staph. The objective of preclinical testing is to show that the product candidate demonstrates evidence of its intended therapeutic effect in relevant animal models of the target disease. Following the series of preclinical safety and efficacy studies, Phage and Phage Therapeutics plan to initiate Phase I clinical trials for safety under US FDA (United States Food and Drug Administration) guidelines. Based on Phage Therapeutics' own preclinical studies and discussions with the contract laboratory, Phage estimates that the preclinical safety and efficacy studies done by the contract laboratory will be close to completion by the end of the last quarter of 2001. Phage Therapeutics' two additional bacteriophage products are currently in early stages of development. The two products are bacteriophage pharmaceutical products for the treatment of Tuberculosis (TB) and Pseudomonas aeruginosa. TB is a disease caused by bacteria called Mycobacterium tuberculosis, which can attack any part of the body, but usually attacks the lungs (see the CDC website for more information at: http://www.cdc.gov/nchstp/tb;faqs/qu.htm). Pseudomonas aeruginosa is a bacterium responsible for severe 4
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nosocomial infections, life-threatening infections in immunocompromised persons, and chronic infections in cystic fibrosis patients (see the CDC website for more information at: http://www.cdc.gov/ncidod/eid/vol4no4/vandelden.htm). Both of Phage Therapeutics' bacteriophage products are at the discovery and early development stages. Phage Therapeutics already has collections of bacteriophages and clinical isolates for both new products, which are the essential biological materials to be used for the derivation of the bacteriophage products. Both products are in the early scale-up manufacturing development stage, wherein Phage is deriving synthetic culture media and manufacturing methods to produce the first Product Candidates. Phage anticipates that the two additional products will be ready for first preclinical testing by the end of the last quarter of 2001. Market Place ------------ The current annual worldwide market for infectious disease therapeutic agents is estimated to exceed $30 billion and continues to grow (Last Days of the Wonder Drugs, Discover, November 1998: 78). This growth continues in spite of the fact that bacteria have now developed resistance to nearly all of the antibiotic agents that represent the product growth leaders (Last Days of the Wonder Drugs, Discover, November 1998: 76-84). This has led to a continual stream of new antibiotic products introduced to the market, many of which have severely shortened product life spans, as a direct result of the rapid development of resistance by infectious bacteria (Last Days of the Wonder Drugs, Discover, November 1998: 76-84). The medical community, including the Center for Disease Control and the US FDA have been urging and supporting the biomedical research community to expand their efforts to identify new technologies and products employing novel mechanisms of action against infectious bacteria. The underlying technology surrounding the bacteriophage products is anticipated to yield new therapeutic agents for the treatment of life-threatening infections, especially those incited by antibiotic-resistant bacteria (The Return of the Phage, Smithsonian; Vol 44: 43). Phage anticipates stepping up to fill this void of identifying new products to fight infectious bacteria resistant to other antibiotic agents. Manufacturing Development ------------------------- Essential to the successful manufacturing of bacteriophage therapeutic products for preclinical and clinical testing, regulatory approval, and commercial sale is the establishment of current Good Manufacturing Practices (cGMP) systems of manufacturing that will result in the reproducible manufacturing of pharmaceutical products. The cGMP system for manufacturing, processing, packaging, or holding of drugs is found in Part 210 of the 21 Code of Federal Regulations of the US FDA. Part 211 regulates cGMP for finished pharmaceuticals. The purpose of establishing cGMP for methods used in, and the facilities or controls to be used for, the manufacture, processing, packing, or holding of a drug is to assure that such drug meets the requirements of the act as to safety, and has the identity and strength and meets the quality and purity characteristics that it purports or is represented to possess. The US FDA's role in the development of a new drug begins when the drug's sponsor (usually the manufacturer or potential marketer) having screened the new molecule for pharmacological activity and acute toxicity potential in animals, wants to test its diagnostic or therapeutic potential in humans. At that point, the molecule changes its legal status under the Federal Food, Drug, and Cosmetic Act and becomes a new drug subject to specific requirements of the drug regulatory system. This occurs through the Investigational New Drug Application (IND) Process. Phage and Phage Therapeutics have substantial expertise in cGMP manufacturing of pharmaceutical products. In particular, Dr. Richard Honour has created and managed Good Manufacturing Practices with ZymoGenetics, Inc.(Seattle, WA) and MicroProbe Corporation (Bothell, WA) (see Dr. Honour's resume under Item 5 "Directors and Executive Officers, Promoters and Control Persons" on page 24). Mr. Michael Maloney is a Regulatory Affairs Certified professional with more than 25 years of US and international experience in the commercialization of medical products (see Mr. Maloney's resume under "Collaborative Relationships" on page 27). Ms Deirdre Sweeney is also a Regulatory Affairs Certified professional who has experience working for the FDA (Cincinnati District Office), Bristol-Meyers Squibb (Seattle, WA) and NeoRx Corporation (Seattle, WA) (see Ms Sweeney's resume under "Advisors of Phage and Phage Therapeutics" on page 26). Phage plans to have the initial products manufactured by contract at a facility in compliance with cGMP guidelines of the US FDA. Phage will establish a cGMP manufacturing management system for both drug substance and clinical supplies manufacturing. The bacteriophage products are considered to be biologicals by the US FDA, and the individuals mentioned above all have experience in establishing systems to the US FDA standards. Computer-based quality assurance, quality control 5
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and documentation systems have been established to assure compliance with US FDA and international regulatory authorities. Phage anticipates advancing the development of one pharmaceutical product candidate through one stage of development at any time, although two additional pharmaceutical product candidates will be initiated concurrently within the molecular biology research and development facility. Competition ----------- Phage believes its competition to be represented by all biotechnology or pharmaceutical companies and research institutes that discover, manufacture and sell antibacterial products, no matter if the new products are represented by new classes of antibiotics, novel derivatives of existing products or new technologies that may result in new antibacterial products. The Company is not aware of the specific names of all of its potential competitors, with the exception of the following two companies that are known to Phage to be in the business of the development of bacteriophage pharmaceutical products. These companies are Exponential Biotherapies, Inc. of Port Washington, New York (www.ebi.org), and Intralytix, Inc. of Baltimore, MD (http://www.intralytix.com). Phage's current understanding is that both Exponential Biotherapies, Inc. and Intralytix, Inc. are developing bacteriophage products for the treatment of Vancomycin-Resistant Enterococcus (VRE), and perhaps other human bacterial infectious agents, such as Staphylococcus aureus and Escherichia coli. Phage also understands that one or both of these companies may be developing bacteriophage products for the treatment of infectious diseases of animals (Bacteriophage May Offer Alternatives in Treating Multi-Drug-Resistant Bacteria, Genetic Engineering News 1998; 18: 46). The status of the development and regulatory approval of products by these companies is proprietary and confidential to those respective companies, and as such, Phage must rely on outside information, such as journals, articles, and the companies' website. However, to the Company's knowledge, both Exponential Biotherapies, Inc. and Intralytix, Inc. remain as early-stage companies, with their technology and products at the discovery and early development stage. Therefore, any products that these two companies may have in development would not yet be in clinical trials under review by the US FDA. The Company is unaware of any other competitors at this time. Patents, Trademarks & Licenses ------------------------------- Phage is developing and patenting novel bacteriophage technologies created within its own laboratories in Washington State. Phage Therapeutics has filed a patent application number 09/082-274 on May 20, 1998, to protect Phage's bacteriophage compositions of matter, methods for their production, strains of bacteria and bacteriophage, and the therapeutic uses of bacteriophage for treating patients Staphylococcal products and to create significant barriers to entry by potential competitors. A second patent application, number 09/631-605 has been filed on August 3, 2000, to protect a proprietary, novel, natural source for Phage's library of Staphylococcal bacteriophage active against both Staphylococcus aureus and S. epidermidis. Both patent applications include bacteriophage compositions, useful methods for their production, producer strains of bacteria and therapeutic uses for treating humans and domestic animals. At this time, both patents are still pending and the Company is unaware as to when, or if, the patents will be accepted or registered. For patent purposes, Phage Therapeutics has already deposited certain producer strains with the American Type Culture Collection (ATCC) and will be depositing additional producer strains and novel bacteriophage in the near future. ATCC is a global nonprofit bioresource center that stores and distributes biological material such as bacteria and viruses for academic and industrial labs. The patent laws of the United States require an inventor who wishes to obtain a patent to provide the patent office with 1) a full disclosure of the invention, including the manner and process for making and using it which would enable a person skilled in the art to practice the invention; and 2) a disclosure of the best mode for practicing the invention (35 USC 112). If undue experimentation is required to practice an invention successfully, the disclosure is deemed by the patent office to be insufficient. In cases where a novel microorganism is involved, the patent office traditionally requires the deposit of a sample with a recognized patent depository in order to meet the above disclosure requirements. ATCC has accepted deposits for patent purposes since 1949, long before depositing was a formal requirement of any patent office. Phage Therapeutics has adopted a program to identify and protect intellectual property resulting from research and development programs within its United States research operations, as well as with its collaborating investigators and institutions. Phage's policy is to protect its technology by, among other things, filing patent applications with respect 6
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to technology considered important to the development of its business. Phage also relies on trade secrets, un- patented know-how, continuing technology innovation and the pursuit of licensing opportunities to develop and maintain its competitive position. At this time, Phage and Phage Therapeutics do not have any material licenses. Phage Therapeutics also require its employees, consultants, outside scientific collaborators and sponsored researchers and other advisors to execute confidentiality agreements (which include non-competition provisions) upon the commencement of employment or other relationship with Phage. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with Phage is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all of the technology of Phage or its subsidiary which is conceived by the individual during the course of employment with Phage is the exclusive property of Phage. Collaborative Arrangements -------------------------- Phage Therapeutics has executed advisory agreements ("Advisory Agreement" or "Advisory Agreements") with Dr. John Majnarich of Preston, Washington, Mr. Michael Maloney, of Woodinville, Washington, Dr. Seymour Froman of Sun City West, Arizona, Dr. Luiz E. Bermudez of San Francisco, California, and Dr. Tyler Kokjohn of Glendale, Arizona (collectively the "Advisors"). The Advisory Agreements engage Dr. John Majnarich for advisory services in the general field of Preclinical Testing, Mr. Michael C. Maloney for advisory services in the general field of Regulatory Affairs, Dr. Seymour Froman for advisory services in the general fields of microbiology, mycobacteriology, bacteriophage biology, mycobacteriophage, and bacteriophage therapeutics, Dr. Luiz E. Bermudez for advisory services in the general fields of bacterial infectious diseases, bacteriophage biology and bacteriophage therapeutics, Dr. Tyler Kokjohn for advisory services in the general fields of microbiology, bacteriophage biology and bacteriophage therapeutics, and Dr. Raul Barletta of Lincoln, Nebraska for advisory services in the general fields of biomedical sciences. The Advisory Agreements are for twelve (12) months starting January 1, 2001with the exception of Dr. Tyler Kokjohn's which became effective December 1, 2000. Dr. Raul Barletta's Advisory Agreement is in the process of being executed, but is effective February 15, 2001. All Advisory Agreements have an option to extend the Advisory Agreements for an additional twelve (12) month period. The Advisory Agreements are attached as Exhibit 10.1, except for Dr. Barletta's which is in the process of being executed. The Advisory Agreements cover the compensation to be paid to the Advisors which includes stock options in Phage. All the Advisors have been granted 35,000 shares at an exercise price of $0.75 per share. See the section "Incentive Stock Options" on page 40 for details of the stock option plan ("Stock Option Plan") and for the dates of grant. The vesting date for these shares will be twenty five percent (25%) after one year from the date of grant with twenty-five percent (25%) vesting every year following. The Advisory Agreements protect Phage Therapeutics' rights over the development of any inventions that the Advisors may make or develop relating to Phage Therapeutics bacteriophage technology or products during the term of their service to Phage Therapeutics. The Advisor(s) must give notice of any such invention to Phage Therapeutics, assign to Phage Therapeutics all of Advisor's rights therein, and execute any documents and otherwise reasonably cooperate with Phage Therapeutics in securing patents on such inventions. This is contingent on the Advisor(s) not being precluded from doing so by a pre-existing employment contract or agreement. All Advisors have represented that none of them are under any obligations to any third party which would prevent any of them from carrying out their duties and obligations under the Advisory Agreements. To avoid any potential conflict of interest, the Advisors have agreed to provide written notice to Phage Therapeutics within one (1) week of entering into any consulting, advisory or research agreement with a corporate third party in the field of bacteriophage technology or products during the period Advisors are providing services to Phage Therapeutics. The term "Corporate" in intended to mean any organization operating in the United States of America 7
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or in a foreign country with an expressed intent to make profits and includes organizations like limited partnerships, joint ventures, corporations, and the like. The Advisory Agreements state that the Advisors shall not disclose to Phage Therapeutics any information which is secret or confidential or belonging to Advisor or to a third party, or with respect to which Advisor is under an obligation to a third party to maintain confidentiality. If during the term of the Advisory Agreements, an Advisor discloses any inventions to Phage Therapeutics which were conceived prior to the term or are outside the scope of the Services under this Agreement, Phage Therapeutics shall have no liability to Advisor because of its use of such ideas, except that this shall not be construed as a license under any valid patent now or hereafter issued thereon. The Advisors have entered separate confidential disclosure agreements ("Confidential Agreement" or Confidential Agreements") with Phage Therapeutics. The Confidential Agreements state that all proprietary and confidential information, including knowledge of Phage Therapeutics' projects, project and project plans, genomic and oligonucleotide sequences, general activities and other proprietary and confidential information not publicly disclosed, as may be related to Phage Therapeutics' business or technical activities which may be acquired as a result of disclosures by Phage Therapeutics personnel or otherwise shall be kept as confidential by the Advisor(s). The Advisors further represent that no Advisor shall disclose Phage Therapeutics proprietary and confidential information to any third party without prior written authorization by Phage Therapeutics. The obligation of confidentiality under these agreements shall terminate five (5) years after the effective date of the Confidential Agreement. All employees and Advisors have signed Confidential Agreements. A copy of the standard Confidential Agreement as Exhibit 10.2. Phage's strategy is to enter into arrangements with licensors, licensees and others for the research, development, manufacturing, marketing and commercialization of its products. There can be no assurance that Phage will be able to establish such arrangements on favorable terms, if at all, or that such arrangements will be successful. The failure to establish successful collaborative arrangements with respect to certain products could negatively impact Phage's ability to commercialize those products. Regulatory Matters ------------------ General. Regulations imposed by federal, state and local authorities in the United States, as well as authorities in other countries, are a significant factor in the conduct of the research, development, manufacturing and eventual marketing of Phage's products. In the United States, drugs, biological products and medical devices are regulated by the United States Food, Drug and Cosmetic Act which is administered by the US FDA. There are other regulatory laws, and corresponding regulations, which require that the conduct of laboratory, preclinical and clinical studies conform with current Good Laboratory Practice ("cGLP") and current Good Clinical Practices ("cGCP"). In addition, manufacturing facilities for the research, testing and production of drugs which are commercially produced must meet Good Manufacturing Practice ("cGMP") requirements. Phage is in compliance with all regulatory requirements to which it is subject and has not been sanctioned by any regulatory authority for failure to comply with any such requirements. Regulatory Process for Therapeutic Drugs. The development and approval of a new drug requires the performance of pre-clinical testing and clinical trials. The duration of trials and number of subjects required may vary according to the disease studied, the seriousness of the side effects, the nature of the proposed treatment and the availability of existing therapies. Phage has not yet started clinical trials. Preclinical Studies. The purpose of preclinical studies is to determine the safety, efficacy, performance and scientific value of a new drug in cell and animal models before it is administered to humans. Preclinical studies also include laboratory evaluation of product chemistry, formulation and stability. Some of the preclinical testing, including toxicity studies on animal species, must be conducted by laboratories that comply with cGLP regulations. Data obtained from preclinical studies must provide an adequate basis for evaluating both the safety and scientific 8
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rationale for subsequent Phase I clinical studies in patients. Preclinical testing began last year of the Company's first Product Candidate. All of the data collected during preclinical studies must then be presented in the form of an Investigational New Drug Application ("IND") or its equivalent to the regulatory authorities in the jurisdiction where clinical studies were conducted. In the United States, clinical studies may begin 30 days after the IND application is filed unless the FDA notifies the applicant otherwise. Reproductive safety studies provide justification for allowing enrolment of female subjects of childbearing potential. Toxicity and carcinogenicity studies that may take as long as 24 months to complete may be undertaken to demonstrate the safety of drug administration for the extended period of time required for effective therapy. Formal "IND" preclinical testing began approximately on March 1, 2001 at a cGLP-compliant laboratory of the Company's first Product Candidate bacteriophage. Clinical Trials. Clinical trials involve the administration of investigational products to humans under the supervision of a qualified investigator. These trials must be conducted in compliance with cGCP guidelines under protocols set out in the IND. Clinical trials are generally conducted in three phases. Phase I clinical trials are commonly performed in healthy human subjects or, less frequently, in selected patients with the targeted disease or disorder. The objective of these trials is to obtain initial data concerning the toxicity and patient tolerance to the test article. Data regarding the absorption, distribution, metabolism and excretion of the drug may also be obtained in Phase I. In Phase II clinical trials, preliminary evidence is sought regarding the effects of the drug, the proposed dosing regimen, and the desired therapeutic efficacy with small numbers of patients with the targeted disease. In these trials, efforts are made to evaluate tolerable dose ranges, as well as the optimal dosage level and dosage schedule. Additional safety data may be compiled from these trials. Phase III clinical trials generally consist of expanded, larger-scale, multi-institutional studies of patients with the targeted disease so as to obtain statistical evidence of the efficacy and safety of the proposed drug, in comparison with standard therapy. Phase IV studies consist of collecting data from the general public to determine the long term market experience on the potential product. If substantial safety data is obtained during Phase III clinical trials, the FDA may not require Phase IV clinical trials to be conducted, but only the FDA can make this determination. The Company cannot anticipate up- front when and if Phase IV studies may be required by the FDA. Phage anticipates entering agreements with major pharmaceutical or biotechnology companies that are in the business of marketing, sales and distribution of antibacterial products. The Company anticipates licensing its products to these third parties after Phase II clinical trials are completed at the earliest, and after Phase III clinical trials at the latest. At this time, the Company has not entered any agreements with any pharmaceutical or biotechnology companies. Approval Process. The US FDA may interrupt clinical studies if the health of the subjects is threatened, if the side effects are not compensated for by the drug's benefits or for any other reason. Once Phase III clinical trials have been completed, all clinical trial results as well as information concerning the product and its composition, synthesis, manufacture, packaging and labeling methods for the purpose of obtaining approval to market the product are collated into a file known as the regulatory dossier. The dossier, along with appropriate application material, is filed according to agency-specific guidelines with the appropriate regulatory authority. This application is known as a New Drug Application ("NDA") in the United States. The agency review of an NDA generally takes two to three years and government authorities may subsequently require that the performance of Phase IV studies be completed following initial marketing of the drug to assess its long-term effects. Since drug manufacturing is also regulated, companies are required to ensure compliance with cGMP quality standards that require the control of production activities, raw-material procurement, product recalls, labeling and promotional material. In addition to these standards, which are common to all drugs, manufacturers of biopharmaceutical products must demonstrate that their products are homogeneous from one lot to the next, failing which the applicable regulatory authority may prohibit the sale of a lot and possibly require that a product be 9
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recalled. Accelerated Approval in the United States. The US FDA has enacted regulations which are intended to accelerate the process of validating the development, assessment and marketing of new diagnostic drug or drugs used for the treatment of serious diseases for which there is no other satisfactory treatment. This "fast-track" designation enables the US FDA to participate in the process of establishing research protocols and enables US FDA (but does not require it) to approve the marketing of the drug immediately following the conclusion of Phase II clinical trials. The US FDA may nonetheless require that Phase III clinical trials for a drug be completed even if it has approved the marketing of the drug. Phage estimates that it has spent approximately $1,587,354 on research and development from the date of inception to December 31, 2000, and $596,692 over the twelve month period ending December 31, 2000. For the three month period ending March 31, 2001, the Company has spent approximately $299,030 on research and development. These amounts do not include expenses associated with consulting fees, travel, meetings, rent and other facilities, and amortization. See the Audited Consolidated Financial Statements dated December 31, 2000 and the Unaudited Financial Statements for the three month period ending March 31, 2001 in Part F/S. Employees --------- Phage presently conducts its business through its Officers and Directors and through employees of Phage Therapeutics. As of May 31, 2001, Phage Therapeutics has 9 full-time employees in its Bothell, Washington laboratory and office facility. These employees are: Richard C. Honour, PhD; Richard E. Herman, PhD; Douglas Lee, MS/MBA; Larry Syltebo, BS/MT; Kenneth E. Lehman, MBA; Tracy Honour; John Sundsmo; Michael Hamrell and Lisa Goodrich. The employees of Phage Therapeutics are not unionized. Phage and Phage Therapeutics anticipate that the development of its business will require the hiring of additional employees. None of the current employees are covered by a collective bargaining agreement, and Phage Therapeutics has never experienced a work stoppage. Phage Therapeutics considers its employee relations to be good. Phage believes its future success will depend in large part upon its continuing ability to attract, train and retain highly skilled management and technical personnel. Employee agreements have been entered into for all eight employees. The employee agreements are attached as Exhibit 10.3, except for the employee agreements with Mr. John Sundsmo and Michael Hamrell which are in the process of being executed. Phage pays Stealth Investments Corp., a British Columbia registered company providing management services, a monthly fee of $15,000 in which $5,000 is paid as management fees to Mr. Darren Pylot, $5,000 is paid as management fees to Mr. Chris Tomanik, $2,500 is paid to Mr. Noah Croom, Phage's legal counsel and $2,500 is paid to Mr. Mark Patchett. Mr. Darren Pylot is the sole officer, director and shareholder of Stealth Investments Corp. Stealth Investments Corp. was incorporated in the Province of British Columbia, Canada on October 29, 1996 under the name "530021 B.C. Ltd. and changed its name to "Stealth Investments Corp. on May 12, 1998. Mr. Darren Pylot is also the Chief Financial Officer and a Director of Phage (See Item 5, Directors and Executive Officers, Promoters and Control Persons, under the heading "Directors and Officers of Phage" on page 2 4). Mr. Chris = Tomanik is an employee of Stealth Investments Corp. and is in charge of investor relations and marketing for Phage through the management services contract with Stealth Investments Corp. Mr. Noah Croom joined Stealth Investments Corp. in August 2000. Mr. Croom holds a J.D. degree from the University of Virginia and is a member of the New York State Bar Association. Mr. Croom has practiced securities law with the firm Lathan & Watkins in New York prior to becoming Phage's legal counsel. Mr. Mark Patchett is an employee of Stealth Investments Corp. who does general administrative work on behalf of Phage. The management agreement between Phage and Stealth Investments Corp. is attached as Exhibit 10.4. Risk Factors ------------ The factors set forth below, along with the other information contained herein, should be considered carefully in evaluating Phage's prospects. Further, this document contains certain forward-looking statements that involve risks 10
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and uncertainties, such as statements of Phage's plans, goals, objectives, expectations and intentions. The cautionary statements made in this section apply to all related forward-looking statements wherever they appear in this document. Readers are cautioned that, while the forward-looking statements reflect Phage's good faith beliefs, they are not guarantees of future performance, and involve known and unknown risks and uncertainties. In addition, Phage's actual results could differ materially from those discussed herein and the business, its financial condition or results of operations could be materially and adversely affected. In such case, some of the factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this document. Start-up or Development Stage Company ------------------------------------- Since its organization, Phage has had limited operations and is a "start-up" or "development stage" company. As with any company at this stage, there may be unforeseen costs, expenses, problems and difficulties of which the management may not be aware of. A commitment of substantial resources to conduct time-consuming research and development and clinical studies will be required if Phage is to complete the development of any potential products. Phage has not yet begun to market or generate revenues from the commercialization of its products and expects to incur further substantial losses for the foreseeable future. There can be no assurance that any of Phage's products will meet applicable health regulatory standards, obtain required regulatory approvals, be capable of being produced in commercial quantities at reasonable costs or be successfully marketed, or that the investment made in such potential products will be recouped through product sales to generate sufficient revenues to fund its continuing operations. There can be no assurances that Phage, or its subsidiary, Phage Therapeutics will achieve profitability in the future, or, if so, as to the timing or amount thereof. Phage's products and technologies are currently in the research and development stages and there can be no assurance that these programs conducted by Phage will result in commercially viable products. To obtain regulatory approvals for some of Phage's products and to achieve commercial success, human clinical trials must demonstrate that the products are safe for human use and that they show efficacy. No assurance can be given that any animal or human tests, if undertaken, will yield favourable results. Unsatisfactory results obtained from a particular study relating to one or more of Phage's products or technologies may cause Phage to reduce or abandon its commitment to that program. Reliance Upon Officers, Directors and Key Employees --------------------------------------------------- Phage is reliant on members of its management and scientific staff, and the loss of the services of one or more of these individuals could adversely affect Phage. In particular, Phage is reliant on its officers: Dr. Richard Honour, PhD., Chief Executive Officer, President, Secretary and a Director of Phage, Mr. Darren Pylot, Chief Financial Officer and a Director of Phage, and Mr. Robert Miller, Chairman of Phage (see "Item 5. Directors and Executive Officers, Promoters and Control Persons, Directors and Officers of Phage" on page 24). Phage is also reliant on its employees, in particular, Dr. Richard E. Herman, PhD.,a microbial geneticist and molecular biologist.(see "Advisors of Phage and Phage Therapeutics" on page 26). In addition, Phage's ability to effectively manage growth will require it to continue to implement and improve its management systems and to recruit and train qualified employees. Although Phage has been successful in the past in obtaining trained staff, there can be no assurance that Phage will be able to attract and retain skilled and experienced personnel in the future. No Key Man Life Insurance ------------------------- The success of Phage will depend to a considerable degree on the officers of Phage: Mr. Robert Miller, Chairman of the Board; Mr. Darren Pylot, Chief Financial Officer; and Dr. Richard C. Honour, Chief Executive Officer, President, and Secretary. Phage has not obtained key man life insurance for any of these officers. There can be no assurance that Phage will be able to secure key man life insurance for any of the officers. Conflicts of Interests ---------------------- Management of Phage may devote time to other companies or projects which may compete indirectly with Phage. Phage has tried to limit any potential conflicts by having all employees, consultants, outside scientific collaborators and sponsored researchers and advisors sign confidentiality agreements ("Confidentiality Agreement") , which include non-competition provisions. An attempt will be made with regard to any real or perceived conflicts of interest between Phage and management to resolve such conflicts in favor of Phage. A copy of the Confidentiality 11
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Agreement which has been entered into by all of the employees, consultants and outside scientific collaborators, is attached as Exhibit 10.2. Ability to Attract and Retain Qualified Personnel ------------------------------------------------- Phage's success depends upon the continued efforts of its senior management team and its technical, marketing and sales personnel. Phage's success also depends on its ability to attract, train and retain additional highly qualified management, technical, marketing and sales personnel. The process of hiring employees with the combination of skills and attributes required to carry out Phage's strategy is extremely competitive and time-consuming. There can be no assurance that Phage will be able to retain or integrate existing personnel, or successfully identify, hire and train additional qualified personnel. The loss of the services of key personnel, or the inability to attract additional qualified personnel, could have a material adverse effect on Phage's business, financial condition and results of operations. Tradeability of Stock --------------------- Pursuant to NASD Eligibility Rule 6530 (the "Rule") issued on January 4, 1999, issuers who do not make current filings pursuant to Sections 13 and 15(d) of the Securities Act of 1934 are ineligible for listing on the NASDAQ Over- the-Counter Bulletin Board. Pursuant to the Rule, issuers who are not current with such filings are subject to de-listing pursuant to a phase-in schedule depending on each issuer's trading symbol as reported on January 4, 1999. Phage's trading symbol on January 4, 1999 was PTXX. Therefore, pursuant to the phase-in schedule, Phage was subject to de-listing on March 22, 2000. The trading symbol was appended with an "E" on March 17, 2000 and was de-listed on March 22, 2000 for failure to comply with the Eligibility Rule NASD 6530. Currently, the stock is traded on the Pink Sheets(R), but the Company anticipates applying to NASD for reinstatement once it is in compliance with the Rule. Competition ----------- The pharmaceutical and biotechnology industries are highly competitive. Phage competes with other companies, including academic and research institutions which have substantially greater resources to those of Phage. Other companies may succeed in developing products earlier than Phage, obtaining regulatory approvals for such products more rapidly than Phage or its subsidiary, or developing products that are more effective than those proposed to be developed by Phage. The two United States companies which are known to be in the business of the development of bacteriophage pharmaceutical products are Exponential Biotherapies (Gaithersburg, MD) and Intralytix (Baltimore, MD). To Phage's knowledge, both of these companies remain as early-stage companies, with their technology and products at the discovery and early development stage, however the status of the development and regulatory approval of products by these companies is proprietary and confidential to those respective companies, and as such, Phage is relying on unsubstantiated outside information on these two companies. While Phage will seek to expand its technological capabilities in order to remain competitive, there can be no assurance that research and development by others will not render Phage's technology or products obsolete or non-competitive or result in treatments or cures superior to any therapy developed by Phage, or that any therapy developed by Phage will be preferred to any existing or newly developed technologies. Patents and Licensed Technology ------------------------------- Phage Therapeutics has filed two patents. The first patent is to protect Phage Therapeutic's bacteriophage compositions of matter, methods for their production, strains of bacteria and bacteriophage, the therapeutic uses of bacteriophage for treating patients, Staphylococcal products and to create significant barriers to entry by potential competitors. The second patent is to protect a proprietary, novel, natural source for Phage Therapeutics's library of Staphylococcal bacteriophage active against both Staphylococcus aureus and S. epidermidis. (For more information about the patent applications, please refer back to "Patents, Trademarks & Licenses" on page 6). However, at this time, both patents are still pending and the Company is unaware as to when, or if, the patents will be accepted or registered. Both of these patents are critical in protecting Phage Therapeutics' bacteriophage compositions of matter, methods for their production, strains of bacteria and bacteriophage, the therapeutic uses of bacteriophage for treating patients, Staphylococcal products and its library of Staphylococcal bacteriophage from potential competitors. There can be no assurance, however, that the filing of the above patent applications will prevent or provide meaningful protection or adequate remedies for Phage Therapeutics's technology in the event of unauthorized use or disclosure of such information. Competitors or potential competitors may have filed applications for, or may have received patents and may obtain additional and proprietary rights to, compounds or processes used by or competitive with those of Phage. The issuance of patents based on such compounds or processes could adversely affect the ability of Phage or its subsidiary to market and sell Phage's or its subsidiary's products. If a license is required, there can be no assurance that Phage or its subsidiary will be able to obtain such a license, or that, if obtainable, such a license would be available on reasonable terms. 12
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Patent litigation is becoming widespread in the biotechnology industry and it is not possible to predict how any such litigation will affect Phage's or Phage Therapeutics' efforts to perform clinical testing or manufacture and market any products under development. Further, there can be no assurance that Phage's or Phage Therapeutics' patents, if issued, would be held valid by a court of competent jurisdiction. Phage may also become involved in interference proceedings in connection with one or more of its patents or patent applications to determine priority of invention, which could result in substantial cost to Phage or Phage Therapeutics, as well as a possible adverse decision as to priority of invention of the patent or patent application involved. Regulatory Environment ---------------------- The procedure involved in obtaining regulatory approval from the competent authorities to market therapeutic products is long and costly and may delay product development. The approval to market a product may be applicable to a limited extent only or it may be refused. Such limitations or refusal could be detrimental to the sales and profitability of Phage. To date, Phage has not submitted applications to the FDA for the marketing of its products. There can be no assurance that Phage will obtain such regulatory approval on a timely basis or at all. Manufacturing and Marketing --------------------------- Phage has not yet manufactured any products for commercial distribution and in order to be successful, Phage's products must be manufactured in commercial quantities in compliance with regulatory requirements and at acceptable costs. Phage does not have facilities for the production of its products under development and will initially obtain the small amounts of its products it requires for clinical studies from contract manufacturing companies. In order to manufacture it products in commercial quantities, if it elects to do so, Phage will need to develop its own manufacturing facilities or contract with third parties to manufacture its products. There can be no assurance, however, that Phage will be able to develop or otherwise secure access to such facilities or that Phage or any third parties Phage contracts with will be able to produce commercial quantities of Phage's products at reasonable cost, or at all. Product Liability ----------------- The sale and use of products under development by Phage, and the conduct of clinical studies involving human subjects, may entail risk of product liability. Phage does not currently have in place product liability insurance for its products but expects that, as Phage expands, it will require such insurance. There can be no assurance that Phage will be able to obtain appropriate levels of product liability insurance prior to the sale of its products. An inability to obtain insurance on economically feasible terms or to otherwise protect against potential product liability claims could inhibit or prevent the commercialization of products developed by Phage. The obligation to pay any product liability claim or recall a product could have a material adverse effect on the business, financial condition and future prospects of Phage. Control by Certain Shareholders ------------------------------- Phage has acquired approximately 88% of the issued and outstanding common shares of Phage Therapeutics. Phage acquired its share position in Phage Therapeutics by purchasing shares directly from Phage Therapeutics and by acquiring shares from other stockholders of Phage Therapeutics Phage issued shares in its common stock in exchange for the shares of Phage Therapeutics it acquired from individual stockholders. In these transactions, sufficient common shares of Phage were issued such that a controlling interest in Phage rests with the former stockholders of Phage Therapeutics if they chose to act as a group. In total 4,022,425 shares in the capital stock of Phage were issued to the former stockholders of Phage Therapeutics which represents approximately 31% of the issued and outstanding share capital of Phage. Phage is not aware of any agreement among the 24 former stockholders of Phage Therapeutics to act as group or in concert with one another in connection with their share ownership in Phage. Reports to Shareholders ----------------------- Phage intends to furnish its shareholders with annual reports containing audited financial statements and such other periodic reports as Phage may determine to be appropriate or as may be required by law. Upon the effectiveness of this Registration Statement, Phage will be required to comply with periodic reporting, proxy solicitation and certain other requirements by the Securities Exchange Act of 1934. The public may read and copy any materials Phage files with the Securities Exchange Commission (the "SEC") at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the 13
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operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. General The following discussion and analysis should be read in conjunction with the financial statements, including the notes thereto, appearing elsewhere in this document. Overview Since Phage switched its focus to biotechnology in August 1998, Phage has been involved in research and developing its products. During this time, there have been no revenues from operations. Without revenues to offset expenditures, Phage has reported a loss in each of its years of existence. To date, Phage has financed its operations through raising capital through private placements and loans from shareholders. [See December 31, 2000 Consolidated Financial Statements - Notes 5 & 6]. The most valuable asset of Phage is its intellectual property and bacteriophage technologies, which include the patent application to protect Phage's bacteriophage compositions of matter, methods for their production, strains of bacteria and therapeutic uses of bacteriophage for treating patients. Although Phage believes that its intellectual property to be very valuable in the real sense, this value is not quantified as such on Phage's Balance Sheet. Plan of Operation The Company anticipates the following expenditures over the next twelve months: 1. Repayment of Indebtedness $ 296,000 2. Personnel Costs (Salaries, Taxes & Benefits) $1,350,000 3. Intellectual Property Development $ 150,000 4. Pharmaceutical R&D: A. Manufacturing Development $ 0 B. Manufacturing Scale-Up $ 650,000 C. Analytical Methods Development $ 200,000 D. Formulations Development $ 75,000 E. Preclinical Safety and Efficacy Testing $ 385,000 F. Preclinical 'Proof of Principle' Tests $ 285,000 G. Clinical Supplies Manufacturing $ 100,000 H. CGMP Documentation $ 75,000 I. Initial Stability Studies $ 50,000 J. 'Phase I in Normals' Clinical Trials $ 100,000 K. Phase I/II Clinical Trials $ 100,000 L. Phase II Clinical Trials $ 0 5. FDA Regulatory Costs: A. Internal $ 100,000 B. Outsourced $ 125,000 14
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6. Laboratory Operations: A. Internal $ 170,000 B. Outsourced $ 150,000 C. Work on Products 2 & 3 $ 45,000 7. Facilities (Rent, Telephones, Maintenance) $ 144,000 8. Equipment (Lab & Office) $ 200,000 9. Legal (Corporate & Securities) $ 50,000 10. Accounting (Corporate, Securities, Tax & Audit) $ 30,000 11. Investor & Public Relations $ 20,000 12. Business Operations $ 150,000 Total $5,000,000 Phage anticipates expending approximately $5,000,000 over the next twelve month period in pursuing its anticipated plan of operations. At this time, Phage has received approximately $3,444,700 from its equity financing over the past twelve months. Phage anticipates covering the additional $1,555,300 by additional equity financing and from the exercise of outstanding warrants (see the next paragraph). In February 2000, the Company completed an offering of 1,942,858 units at $0.70 per unit pursuant to Regulation D, Rule 506 of the Securities Act of 1933, as amended. The total proceeds of $1,360,000 received subsequent to the year end will help Phage complete its anticipated plan of operations.. Each unit consists of one Common Stock and one share purchase warrant which entitles the holder to purchase one share of Common Stock for $1.25 per share at any time on or before June 1, 2001 and thereafter for $2.00 per share at any time on or before the end June 3, 2002. All Warrants not exercised on or before June 3, 2002 will expire. As of May 31, 2001, one purchaser exercised 50,000 warrants for 50,000 shares of Common Stock for the price of $62,500. On October 23, 2000 Phage entered into a Securities Purchase Agreement with seven purchasers for $3,000,000 paid to Phage in exchange for 4,285,714 units ("Unit" or "Units") (see Securities Purchase Agreement as Exhibit 10.5). Each "Unit" consisting of one share of Phage's common stock with a par value of $0.001 per share (the "Common Stock") and one Common Stock purchase warrant (the "Warrant"). For every one and a half Warrants the holder will entitle the holder to acquire one additional share of Common Stock of Phage at an exercise price of $0.70 per share. In October 2000, Phage received $1,500,000 as payment for the first part of this agreement and 2,142,857 Units were issued to the seven purchasers. The second payment of $1,500,000 has been received by Phage and the additional 2,142,857 Units were recently issued to the purchasers as of May 2000. For a list of the purchasers names, please see (Item 10. Recent Sale of Unregistered Securities which starts on page 33). The first set of Warrants associated with this Securities Purchase Agreement are exercisable until August 15, 2000. The second set of Warrants associated with this Securities Purchase Agreement are exercisable until January 15, 2002. The second set of Warrants are only exercisable if the first set of Warrants are exercised. An additional $2,000,000 is anticipated from the exercise of the Warrants. The Company anticipates the Warrants will be fully exercised since each one and one half Warrants is exercisable for one share of Common Stock in the Company for $0.70 which is less than the price of the stock trading on the Pink Sheets LLC ($2.05 as of May 26, 2001). However, there is no guarantee that any or all of the Warrants will be exercised. All funds received will go towards the Company's operations. 15
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The Company also receives cash from the exercise or employee stock options and proceeds from the sale of stock by Phage Therapeutics International Inc., pursuant to the employee stock purchase plan. Since inception, the employee stock option exercises and proceeds from the sale of stock by Phage Therapeutics International Inc., pursuant to the employee stock purchase plan provided no cash until May 17, 2001, when two individuals exercised stock options each for 50,000 shares of Common Stock of the Company for an aggregate of $55,000. For a list of names, see Item 10. Recent Sales of Unregistered Securities starting on page 33. Proceeds from the exercise of employee stock options will vary from period to period based upon, among other factors, fluctuations in the market value of the Company's stock relative to the exercise price of such options. If the Company is unable to complete its further financing requirements, it will then modify its expenditures and plan of operations to coincide with the actual financing completed. It is anticipated that if there is any shortfall in raising capital to continue Phage's plan of operations, then Phage may be required to delay, scale back or eliminate some or all of its research and development programs or cease operations. Phage plans to cut-back its plan of operations by reducing the amount spent on personnel costs, and research and development, in particular, preclinical safety and efficacy testing and preclinical 'proof of principle' tests, and Phase I and II clinical trials. These tests can still be conducted with less funding. Phage anticipates that the financing raised to date will be used in the next twelve months as follows : 1. Repayment of Indebtedness $ 100,000 2. Personnel Costs (Salaries, Taxes & Benefits) $ 400,000 3. Intellectual Property Development $ 150,000 4. Pharmaceutical R&D(1): $ 0 A. Manufacturing Development B. Manufacturing Scale-Up $ 650,000 C. Analytical Methods Development $ 200,000 D. Formulations Development $ 75,000 E. Preclinical Safety and Efficacy Testing $ 180,350 F. Preclinical 'Proof of Principle' Tests $ 180,350 G. Clinical Supplies Manufacturing $ 100,000 H. CGMP Documentation $ 75,000 I. Initial Stability Studies $ 50,000 J. 'Phase I in Normals' Clinical Trials $ 100,000 K. Phase I/II Clinical Trials $ 0 L. Phase II Clinical Trials $ 0 5. FDA Regulatory Costs: A. Internal $ 100,000 B. Outsourced $ 125,000 16
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6. Laboratory Operations: A. Internal $ 170,000 B. Outsourced $ 150,000 C. Work on Products 2 & 3 $ 45,000 7. Facilities (Rent, Telephones, Maintenance) $ 144,000 8. Equipment (Lab & Office) $ 200,000 9. Legal (Corporate & Securities) $ 50,000 10. Accounting (Corporate, Securities, Tax & Audit) $ 30,000 11. Investor & Public Relations $ 20,000 12. Business Operations $ 150,000 Total $3,444,700 1. The Pharmaceutical Research and Development is only for the first product candidate bacteriophage. The other two product candidates (for the treatment of TB and Pseudomonas aeruginosa) are in the early stages of development and very little cost, if any, is anticipated in the next twelve months for these two product candidates. The Company anticipates that these two additional product candidates will be ready for preclinical testing by the end of the last quarter of 2001. At that time, the Company will decide how much financing will go towards the testing of these two products. Fiscal Year Ended December 31, 2000 ----------------------------------- The Auditors for Phage have audited the consolidated balance sheets of Phage as at December 31, 2000 and 1999 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended and for the period from inception to December 31, 2000. [See Audited Financials under Part F/S]. Period Ended March 31, 2001 --------------------------- The information in this report for the three months ended March 31, 2001 and 2000 is unaudited but includes all adjustments (consisting only of normal recurring accruals, unless otherwise indicated) which Phage Therapeutics International Inc ("Phage" or the "Company") considers necessary for a fair presentation of the financial position, results of operations, changes in stockholders' equity and cash flows for those periods. Revenues, Costs and Expenses Period Ended March 31, 2001 --------------------------- General and administrative expenses increased to $311,674 during the three months ended March 31, 2001 from $164,918 over the same period last year. This increase was primarily due to higher staff-related costs as the Company continues to hire new employees to support its existing products and prepares for anticipated new product development. During the three months ended March 31, 2001, the Company had a loss for the period of $600,769 compared with a loss of $173,532 over the same period last year. This increase was due to higher expenses incurred by the Company with regard to research and development, and general and administrative expenses. The basic and diluted loss per share is $(0.06) for the three month period ended March 31, 2001 as compared to $(0.02) for the same period last year. 17
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During the three months ended March 31, 2001, interest and other income increased to $9,935 from $3,370 over the same period last year. This is due to interest received on cash and cash equivalents. Fiscal Year Ended December 31, 2000 ----------------------------------- As of the year ended December 31, 2000, Phage had a cumulative loss from the date of inception of $5,533,597. During each of the last two years (2000 and 1999), Phage reported a loss for the period of $1,347,844 and $1,487,498 respectively. There have been no revenues since Phage's date of inception. Phage has received its cash flow from its financing activities, including equity financing and loans to Phage by shareholders. The losses per year are related to the expenses incurred by Phage, namely the costs related to general and administrative costs and costs related to research and experimentation. The basic and diluted loss per share as of the year ended December 31, 2000 is ($0.16) cents per share. In 1999, Phage had higher expenses related to general and administrative costs than at Year End 2000. In 1999, the general and administrative costs totalled $852,238, whereas in 2000 these same expenses were $815,338. The reason that Phage had higher expenses in 1999 than in 2000 related to general and administrative costs is due in part to Phage being in its initial development stage in 1999, when expenditures are typically higher to secure leases, hire personnel, and legal costs. In 1999, the Company incurred expenses of $265,466 in relation to research and development. In 2000, these expenses totalled $596,692. In 2000, Phage has conducted research and preclinical trials which accounts for the increase in spending in relation to research and development. Research and development costs will continue to be a large expense of Phage because Phage anticipates continuing to discover and develop new bacteriophages. As of December 31, 2000, Phage had assets totalling $1,188,377. This is comprised of $1,029,134 in cash & cash equivalents, $23,720 in prepaid expenses and other current assets, and $60,523 in capital assets which includes research and development equipment, computer and office equipment, furniture and fixtures, leasehold improvements, and the accumulated amortization, and $75,000 in deposits (for the security deposit for the laboratory facility in Bothell, Washington). This is a change from $52,025 in assets at year end 1999. In 1999, Phage had $1,223 cash & cash equivalents, $8,282 in prepaid expenses an other current assets, $42,520 in capital assets which includes research and development equipment, computer and office equipment, furniture and fixtures, leasehold improvements, construction and accumulated amortization. The difference between the total assets in 2000 and 1999 is due in large part because of the influx of investment cash from two private placements which took place during 2000. Please see "Item 10. Recent Sales of Unregistered Securities" on page 35 for details of these private placements. These private placements had investors investing approximately $2,860,000 by the end of 2000. The current liabilities of Phage as of the year ended December 31, 2000 total $692,835 and stockholders' equity totalled $503,911. At the year ended December 31, 1999, the current liabilities of Phage were $1,107,432 and stockholders' equity totalled ( $1,047,038). The basic and diluted loss per share was $(0.16) as of the year ended December 31, 2000, and $(0.23) as of the year ended December 31, 1999. Liquidity and Capital Resources Period Ended March 31, 2001 --------------------------- The Company had cash, cash equivalents and prepaid expenses and other current assets of $ 1,795,941 as at the three month period ended March 31, 2001, compared with $ 1,052,854 at December 31, 2000. Cash provided by equity financing has been and is expected to continue to be the Company's primary source of funds. Since inception, the Company has had no revenue from operations. Fiscal Year Ended December 31, 2000 ----------------------------------- For the twelve months ended December 31, 2000, Phage received proceeds from the issuance of common stock of $ 2,860,000 in two separate private placements. In the first private placement completed in March of 2000 Phage raised $1,360,000 and in the second private placement completed in November 2000 it raised an additional $ 1,500,000. Both private placement were conducted on reliance of Regulation D Rule 506 of the Securities Act. As of the date of this registration statement Phage has received the total funds for the second closing of the second private placement which totals an additional $ 1,500,000 and the units ("Units") related to this private placement will be issued out shortly. See Exhibit 10.8 for the Securities Purchase Agreement which details the second private placement. 18
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At current operating rates Phage believes that it can satisfy its cash requirements over the next 12 months. However, Phage's long term capital requirements beyond the next 12 months will depend on many factors, including, but not limited to, the rate of development of Phage's product, Phage's ability to develop and maintain its research and development program, the level of resources required to test Phage's products and other factors, some of which may be beyond the Phage's control. A slower than expected rate of development of the Phage's products, extra-ordinary costs associated with Phages' research and development program, would materially adversely affect Phage's liquidity. Phage has no commitments for additional financing, and there can be no assurances that any such additional financing would be available in a timely manner, or, if available, would be on terms acceptable to Phage. Phage requires substantial capital in order to meet its ongoing corporate obligations and in order to continue and expand its current and strategic business plan. Initial working capital has been obtained by the private sale of Phage's Common Shares from December 1996 to present. Phage can meet its short term cash flow needs from the proceeds obtained from a recent sale of its Common Shares. In the long term, Phage intends to continue to utilize the sale of its investment securities to meet its cash flow needs until it is in the position to market or sell its product. Phage has recently entered into a new lease agreement in Bothell, Washington for a period of five years at a lease rate of $8,575.71 per month. Phage currently has no other material commitments for capital expenditures going forward. See Exhibit 10.5 for the Property Lease Agreement. Research and Development During the three months ended March 31, 2001, research and development expenses increased to $ 299,030 from $ 11,484 for the three month period ended March 31, 2000. This increase was primarily due to higher laboratory costs to scale up manufacturing for the Company's first bacteriophage product by the laboratory Intelligene Expressions, Inc. The Company entered an agreement with Intelligene Expressions, Inc. in September 11, 2000. The Company has already paid $355,000 to Intelligene Expressions, Inc. and will be paying an additional $55,000 upon completion of Phase 5, 6, and 7 for a total of $165,000. The Company has agreed to several research and development contracts with various universities and research institutes. The Company is contracted to pay for this year $306,253, of which $146,649 has been paid and $102,492 is prepaid at March 31, 2001. In addition, the Company has agreed to a total of $549,115 in contracts which are based on performance, controlled by management of the Company, which could be completed more than a year from now. The Company has advanced $178,223 on these contracts and at March 31, 2001, $97,893 is prepaid. From the date of inception to the period ending December 31, 2000, the Company has spent $1,587,354 on research and development with $596,692 being spent over the 12 month period ending December 31, 2000. Phage plans to use more out-sourced contract research organizations to reduce overhead and to contain the burn rate, plus there is anticipated to be more flexibility derived from out-sourcing of the key pharmaceutical development and manufacturing activities. The net effect may be realized as an acceleration of the pharmaceutical development time frames, in that Phage should be able to focus more attention on the development of the first products, and less time on financing and corporate development activities. The major risks to this pharmaceutical development plan are related to the schedules of the contract research organizations, the ability of Phage to get into the queue at the most beneficial time for Phage's purposes, and the ability of the contract research organizations to perform to Phage's expectations. An additional risk may be Phage's ability to manage multiple out-sourced activities concurrently with the limited staff and advisors. 19
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Need for Additional Capital/Phage's Auditors Have Issued a Going Concern Opinion -------------------------------------------------------------------------------- Phage's auditors have issued a going concern opinion, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business (see Note 1 of the December 31, 2000 Financials). The auditors state that as at December 31, 2000 the Company had a working capital of $360,019 and has incurred losses of $5,533,597 from the date of inception to December 31, 2000. The Company anticipates expending approximately $5,000,000 over the next twelve month period in pursuing its anticipated plan of operations. As stated earlier, the Company anticipates covering these costs by additional equity financing. During 2000, the Company completed two offerings of 4,085,715 units at $0.70 per unit pursuant to Regulation D, Rule 506 of the United States Securities Act of 1933, as amended. The total proceeds of $2,860,000 will help the Company complete its anticipated plan of operations. If the Company is unable to complete its further financing requirements, it will then modify its expenditures and plan of operations to coincide with the actual financing completed. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. In the previous amended filing of this 10SB document filed on February 8, 2001, the auditors issued a going concernwith regard to the December 31, 1999 financials. This 10SB document has been updated to include the December 31, 2000 financials including the corresponding going concern statement as stated in the previous paragraph and as found in Note 1 of the December 31, 2000 Financials as attached under section F/S by the auditors for the period ended December 31, 2000. The previous going concern opinion has been removed since it corresponded with the December 31, 1999 financials which are now consolidated in this current filing. The Company has received $1,360,000 in February 2000 for the issuance of 1,942,858 units at $0.70 per unit pursuant to Regulation D, Rule 506 of the Securities Act of 1933, as amended. Each unit consists of one Common Stock and one share purchase warrant which entitles the holder to purchase one share of Common Stock for $1.25 per share at any time on or before June 1, 2001 and thereafter for $2.00 per share at any time on or before the end June 3, 2002. All Warrants not exercised on or before June 3, 2002 will expire. As of May 31, 2001, one purchaser exercised 50,000 warrants for 50,000 shares of Common Stock for the price of $62,500. The Company has also received the total $3,000,000 in relation to the private placement pursuant to Regulation D, Rule 506 which took place in October 2000. There were two stages to this financing, and the second and final stage has recently been completed in May 2001 (see Item 10 "Recent Sales of Unregistered Securities" starting on page 33 for the list of investors). The Company has issued the total 4,285,714 units to the investors. An additional $2 million is expected to be raised by the exercise of warrants associated with this private placement. However, there is no guarantee that these warrants will be exercise. The Company also receives cash from the exercise or employee stock options and proceeds from the sale of stock by Phage Therapeutics International Inc., pursuant to the employee stock purchase plan. Since inception, the employee stock option exercises and proceeds from the sale of stock by Phage Therapeutics International Inc., pursuant to the employee stock purchase plan provided no cash until May 17, 2001, when two individuals exercised stock options each for 50,000 shares of Common Stock of the Company for an aggregate of $55,000. For a list of names, see Item 10. Recent Sales of Unregistered Securities starting on page 33. Proceeds from the exercise of employee stock options will vary from period to period based upon, among other factors, fluctuations in the market value of the Company's stock relative to the exercise price of such options. Should Phage be unsuccessful in its efforts to raise the additional capital it needs, it will be required to curtail its plans or it may be required to cut back or stop operations. There can be no assurance that the investors will exercise any or all of their warrants, nor can there be any assurance that Phage will raise additional capital or generate cash from operations sufficient to meet its obligations and planned requirements. Phage may seek additional sources of capital, including an additional offering of its equity securities, an offering of debt securities or obtaining financing through a bank or other entity. This may not be available on a timely basis, in sufficient amounts or on terms acceptable to Phage. The inability of Phage to raise additional equity capital or borrow funds required to effect its business plan, may have a material adverse effect on Phage's financial condition and future prospects. Additionally, to the extent that further funding ultimately proves to be available, both debt and equity financing involve risks. Debt financing may require Phage to pay significant amounts of interest and principal payments, reducing the resources available to Phage's business operations. Some types of equity financing may be highly dilutive to Phage's stockholders' interest in Phage's assets and earnings. Any debt financing or other financing of securities senior to common stock will likely include financial and other covenants that will restrict Phage's flexibility. ITEM 3. DESCRIPTION OF PROPERTY. As of November 15, 2000, Phage has moved into its new laboratory facility at 19017 120th Avenue NE, Suite 102, Bothell, Washington 98011. This laboratory facility is approximately 5,148 square feet. Phage has signed a five year term lease with an option to renew fo an additional five years. The rent is currently $8,575.71 per month which includes rent and operating costs. The following is the rent per square feet over the next five years: 20
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Year 1: $15.50/sq.ft./year Year 2: $16.12/sq.ft./year Year 3: $16.77/sq.ft./year Year 4: $17.44/sq.ft./year Year 5: $18.13/sq.ft./year The Company has paid a $75,000 security deposit. See Exhibit 10.1 for a copy of the lease agreement. Phage vacated its former laboratory facility in November, 1999 and rented space at BioReseach Labs, Inc., located in Redmond, Washington, which is owned by John Majnarich, PhD., an advisor of Phage (see "Collaborative Relationships" on page 25 for Dr. Majnarich's resume). Phage was able to rent space at BioResearch Labs, Inc. as part of the $5,000 per month paid to Dr. Majnarich to conduct research and development for Phage and Phage Therapeutics. No separate monies were paid to either BioResearch Labs, Inc., nor to Dr. Majnarich for the rental of space by Phage. Prior to this arrangement, Phage Therapeutics had entered a lease agreement effective May 1, 1997 which was to expire April 2002. In November, 1999 Phage Therapeutics received from the lessor a release from the remaining term of the lease in exchange for payments of $35,000, $23,242 and $19,370 to be made on March 20, 2000, June 10, 2000 and September 10, 2000 respectively. These amounts totaling $77,612 represent unpaid rent of approximately $54,000 (for four months) plus a penalty for lease termination. All amounts have been included in the Consolidated Financial Statements as of December 31, 1999 and are included in rent expense and recorded as a liability at December 31, 1999. This lease was for approximately 17,000 square feet in Bothell, Washington. From December 15, 1999 to November 15, 2000, Phage rented office space to do administrative work at 19110 Bothell Way NE, Suite 103, Bothell, Washington, 98011 for $1,000 per month. The Company had this temporary office space to do administrative work. Since Phage and Phage Therapeutics has moved into its new laboratory facilities, it no longer rents this separate office space. The new lab facility will be used to conduct research on the discovery of new products, to conduct supportive development work on Phage's products, and for office administration. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security Ownership of Beneficial Owners --------------------------------------- The following table sets forth the security and beneficial ownership for the common stock of Phage known by the Company to have more than five (5%) of the voting securities as of May 30, 2001. Unless otherwise indicated, Phage believes that the persons named in the table below, based on information furnished by such owners, have sole voting and investment power with respect to the Common Stock beneficially owned by them, subject to community property laws, where applicable. 21
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[Enlarge/Download Table] Name and Address of Beneficial Amount and Nature of Beneficial Ownership Owner -------------------- ------------------------------------- -------------------- ------------------------- Title of Class Number Percentage -------------------- ------------------------------------- -------------------- ------------------------- Common Cadaques S.A. 678571 5.16% Benito Blanco 675, Apt.4 Montevideo, Uruguay Common Cede & Co.(1) 3070219 23.37% P.O. Box 222 Bowling Green Station New York, NY 10274 Common GIG Limited 1750000 13.32% 105 Marbel Drive Grand Cayman, Cayman Islands, BWI Common Ricardo Requena 1358950 10.34% 25 de Mayo 444 Piso 2 11000 Montevideo, Uruguay Common Robert Miller (2) 787143 6.0% 1645 South Miami Avenue Miami, Florida 33129 Common Auron 2000 Inc.(2) 512418 3.9% 601 Brickell Key Drive, Suite 802 Miami, FL 33131 -------------------- ------------------------------------- -------------------- ------------------------- 1. Cede & Co. hold these shares for beneficial holders of the Company's Common Stock. The Company is unaware as to who the beneficial holders are, or if any own more than 5% of the Company's Common Stock. 2. Mr. Robert Miller owns 100% of Auron 2000, Inc., therefore is the beneficial owner of the Auron 2000, Inc. shares for a total of 1299,561 common shares or 9.9% of the total issued and outstanding. Shares owned by Mr. Robert Miller and Auron 2000, Inc. are listed separately in the above table. Security Ownership of Management -------------------------------- The following table sets forth the beneficial ownership for each class of equity securities of Phage beneficially owned by all directors and officers of the Company as of May 30, 2001. [Enlarge/Download Table] Amount and Nature of Beneficial Ownership Title of Class Name and Address of Beneficial Owner Number(1) Percentage ------------------ -------------------------------------------- ----------------------------- ----------------------- Common Robert Miller, Chairman of the Board 787,143 9.9% 1645 South Miami Avenue Miami, Florida 33129 512,418 (These shares are registered to Auron 2000, Inc., of 601 Brickell Key Drive, Suite 802, Miami, FL 33131, which is solely owned by Mr. Miller) ------------------ -------------------------------------------- ----------------------------- ----------------------- Common Richard Honour, Chief Executive Officer, 100,000 0.91% President and Secretary 500,000 (4) ---- 19211 64th Place NE Kenmore, Washington 98028 ------------------ -------------------------------------------- ----------------------------- ----------------------- Common Darren Pylot, Chief Financial Officer 50,100 (2) 0.0009% 1135 West 27th Avenue Vancouver, British Columbia, Canada V6H 2B7 240,000 (4) ---- ------------------ -------------------------------------------- ----------------------------- ----------------------- Common Gaetano Morello, Director 100,000 0.91% Vancouver, British Columbia 100,000 (3) ---- 50,000 (4) ---- ------------------ -------------------------------------------- ----------------------------- ----------------------- Common Kenneth E. Lehman, Treasurer 0 ---- Kenmore, Washington ------------------ -------------------------------------------- ----------------------------- ----------------------- 1. Beneficial, including options 2. 100 of these shares are registered to Stealth Investments Limited, 534 West Pender Street, Vancouver, B.C., Canada V6B 1V5, which is solely owned by Darren Pylot. 3. Includes Shares to be issued on exercise of the Warrants. Warrants expire February 22, 2002. 4. Granted stock options. 22
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Stock Options of Management --------------------------- The following table lists the stock options owned by the directors, officers, advisors and control persons of the Company: [Enlarge/Download Table] Title of Name and Address of Beneficial Number of Shares Price Expiration Class Owner --------------------------------------------------------------------------------------------------------- Common Richard Honour, Chief Executive 500000 $0.55 January 3, Officer, President and Secretary 2005 19211 64th Place NE Kenmore, Washington 98028 ---------- ----------------------------------- -------------------------- -------------- --------------- Common Darren Pylot, Chief Financial 240,000 (1) $0.55 January 3, Officer 2005 1135 West 27th Avenue Vancouver, British Columbia, Canada V6H 2B7 ---------- ----------------------------------- -------------------------- -------------- --------------- Common Robert Miller, Chairman of the 0 0 N/A Board 1645 South Miami Avenue Miami, Florida 33129 ---------- ----------------------------------- -------------------------- -------------- --------------- Common Gaetano Morello, Director 50000 $0.75 October 10, 2975 East 4th Avenue 2005 Vancouver, British Columbia, Canada V5M 1I1 ---------- ----------------------------------- -------------------------- -------------- --------------- Common Richard Herman 200000 $0.55 January 3, 15314 NE 62 Court 2005 Redmond, Washington 98052 ---------- ----------------------------------- -------------------------- -------------- --------------- Common Douglas I. Lee 75000 $0.55 January 3, 7509 42nd Avenue NE 2005 Seattle, Washington 98115 ---------- ----------------------------------- -------------------------- -------------- --------------- Common John J. Majnarich 35000 $0.75 October 10, 4785 308th Avenue SE 2005 Preston, Washington 98050 ---------- ----------------------------------- -------------------------- -------------- --------------- Common Deirdre (Dee) Sweeney 0 0 N/A Redmond, Washington ---------- ----------------------------------- -------------------------- -------------- --------------- Common Kenneth E. Lehman 85000 $0.75 November 1, Kenmore, Washington 2004 ---------- ----------------------------------- -------------------------- -------------- --------------- Common Michael C. Maloney 35000 $0.75 October 10, 16050 NE 165th Street 2005 Woodinville, Washington 98072 ---------- ----------------------------------- -------------------------- -------------- --------------- Common Graham Hughes 25000 $0.55 January 3, 4861 Cambridge Street 2005 Burnaby, BC Canada V5C 1H9 ---------- ----------------------------------- -------------------------- -------------- --------------- Common Mark Patchett 5000 $0.75 February 2, 309 - 1163 The High Street 2005 Coquitlam, BC Canada V3B 7W2 ---------- ----------------------------------- -------------------------- -------------- --------------- Common Chris Tomanik 240,000 (1) $0.55 January 3, 1051 Strathaven Drive, 2005 North Vancouver, BC V7H 2I5 ---------- ----------------------------------- -------------------------- -------------- --------------- 23
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---------- ----------------------------------- -------------------------- -------------- --------------- Common Michael Hamrell 35000 $0.75 38397 19017 - 120th NE, Suite 102 Bothell, WA 98011 ---------- ----------------------------------- -------------------------- -------------- --------------- Common Seymour Froman 35000 $0.75 38335 20415 Wintergreen Drive Sun City West, AZ 85375 ---------- ----------------------------------- -------------------------- -------------- --------------- Common Luiz Bermudez 35000 $0.75 38397 Kuzell Institute for Arthritis and Infectious Diseases 2200 Webster Street, Suite 305, San Francisco, CA 94115-1821 ---------- ----------------------------------- -------------------------- -------------- --------------- Common Tyler Kokjohn 35000 $0.75 38321 Microbiology Arizona College of Osteopathic Medicine Midwestern University, AZ ---------- ----------------------------------- -------------------------- -------------- --------------- Common Raul Barletta 35000 $0.75 38397 Dept. of Veterinary & Biomedical Sciences University of Nebraska, Lincoln, NE 68583-0905 ---------- ----------------------------------- -------------------------- -------------- --------------- Total shares subject to options 1,665,000 (2) ---------- ----------------------------------- -------------------------- -------------- ---------------- 1. Messrs. Pylot and Tomanik exercised stock options for 50,000 common shares each on May 17, 2001, leaving each with a total of 190,000 shares exercisable under the Stock Option Plan. 2. 100,000 shares have been issued under the Stock Option Plan with 50,000 shares of Common Stock to Mr. Pylot and 50,000 shares of Common Stock to Mr. Tomanik leaving the total shares currently subject to options at 1,445,000.
Changes in Control ------------------ Phage currently has no arrangements which may result in a change of control. ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. Directors and Officers of Phage ------------------------------- The names, ages and positions of the executive officers and directors of Phage are: Name Age Position ---- --- -------- Richard Honour 61 President, Chief Executive Officer, Secretary & Director Robert H. Miller 48 Chairman of the Board & Director Darren Pylot 33 Chief Financial Officer & Director Gaetano Morello 37 Director Kenneth Lehman 54 Treasurer The above listed officers and directors will serve until the next annual meeting of the shareholders or until their death, resignation, retirement, removal, or disqualification, or until their successors have been duly elected and qualified. Vacancies in the existing Board of Directors are filled by majority vote of the remaining Directors. Officers of the Company serve at the will of the Board of Directors. There is no family relationship between any executive officer and director of the Company. In addition to the foregoing, Phage will recruit and appoint additional directors and officers as needed who have the requisite complement of skills to successfully implement the mandate of Phage. The following describes the principal occupation of each officer and director of Phage for the previous five years: 24
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Richard Honour, PhD. Dr. Honour was appointed President, and Chief Executive Officer on March 6, 2001 and continues to serve as Secretary and Director since his appointment August 15, 2000. Prior to Dr. Honour being appointed President and Chief Executive Officer, Dr. Honour served as Vice President of Research and Development, as well as Secretary and Director of Phage from August 15, 2000. Dr. Honour has also previously served as President and Chief Executive Officer of Phage from October 27, 1998 to December 16, 1999, and as Vice President of Research and Development and Secretary from August 15, 2000. He was President & CEO of ZymoGenetics, a company dedicated to the identification of novel proteins to treat and prevent human diseases( Seattle, WA, 1983-85) and MicroProbe Corporation, a company which uses a scanning electron microscope for qualitative and quantitative chemical analysis (Bothell, WA, 1985-90) and Executive VP for Pharmaceutical Development with Cytran, Inc., a private biopharmaceutical company dedicated to developing and commercializing small peptides for the treatment of cancer and other diseases (Kirkland, WA, 1991-95). He then worked with the investment banking firm of Chanen, Painter & Co. (Seattle, WA, 1995-97). Previously, Dr. Honour was Executive Director of a National Cancer Institute-sponsored clinical trials research program at the University of Southern California, School of Medicine (Los Angeles, CA, 1973-83), which evaluated new cancer therapeutic agents and multidisciplinary regimens, where he also held a faculty appointment. His career and experience have focused on the discovery and development of diagnostic and therapeutic products for human infectious diseases and cancer. Dr. Honour earned a Doctorate degree from the University of California (1972), where he specialized in microbiology. He is a Director for several private technology and health care companies and he is a biotechnology and health care advisor for the Washington Technology Center, University of Washington, as well as for two venture capital firms. Robert H. Miller. Mr. Miller was appointed Chairman of the Board of Directors and a Director on March 14, 2001. From 1990 to 1996, Mr. Miller was President and a Director of Consolidated Madison Holdings Ltd., of Toronto, Ontario, Canada, which was involved in Brazilian resource exploration. In 1996, the name of the company merged with and changed its name to Ourominas Minerals Inc., which is listed on the Canadian Ventures Exchange ("CDNX") and the Toronto Stock Exchange ("TSE"), having a head office at #1020 - 1090 West Georgia Street, Vancouver, British Columbia. Mr. Miller continued working with the company until 1997. From 1996 to 1998, Mr. Miller was also a Director of Zmax Corporation located in Germantown, U.S.A. Zmax Corporation developed computer software. Since 1991, Mr. Miller is President of Job Industries Ltd., an inactive CDNX high tech industrial cleaning company, located in Vancouver, British Columbia, Canada. Mr. Miller is also a Director of Stamford International, Inc., since 1999. Stamford International, Inc. is a publicly traded holding company which has a controlling interest in Nanovation Technologies Inc., a company who has an exclusive license from Northwestern University for the world wide rights to the Photonic wire microvcavity laser project, and that has funded construction of a nano-fabrication laboratory on the Northwestern University campus. Stamford International, Inc. is an Over-the-Counter TSE listed company. From 2000 to the present, Mr. Miller has been Directors of both Life Span Biosciences Inc., a biotechnology research company located in Seattle, Washington, and Digital Snaps, Inc., a digital inventory technology company located in Vancouver, British Columbia, Canada. Darren Pylot. Mr. Pylot was appointed Chief Financial Officer on March 6, 2001 and continues to be a Director of the Company since his appointment on May 26, 1998. Prior to Mr. Pylot becoming Chief Financial Officer, Mr. Pylot held the position of President since May 26, 1998. Mr. Pylot has also served as Chief Executive Officer from March 15, 1999 to March 6, 2001. Mr. Pylot is the founder and President of Stealth Investments Corp. (a private British Columbia company which provides management services). Since 1994 he has been the President and a Director of Serena Resources Ltd., a publicly traded mineral exploration company. From January 1997 to August 1999, Mr Pylot was a Director of Stamford International Inc., a publicly traded holding company which has a controlling interest in Nanovation Technologies Inc., a company who has an exclusive license from Northwestern University for the world wide rights to the Photonic wire microvcavity laser project, and that has funded construction of a nano-fabrication laboratory on the Northwestern University campus. Mr. Pylot no longer has any affiliation with Stamford International, Inc. Gaetano Morello. Dr. Gaetano Morello was appointed Director of Phage on February 8, 2000 and appointed Chairman from March 13, 2000 until his resignation March 14, 2001. He is a licensed naturopathic physician practicing in West Vancouver, British Columbia and a contributing author to several medical publications, including The American Journal of Natural Medicine. Dr. Morello lectures in Canada, the United States, Germany and Italy on the scientific basis of natural medicine. Dr. Morello has experience in the clinical applications of the scientific foundations of natural medicine. From 1992 to 1999, Dr. Morello was a medical consultant at Enzymatic Therapy Canada, Inc., an herbal supplements and vitamin producer, with its own in-house testing laboratory located at 8500 Baxter Place, Burnaby, British Columbia, Canada V5A 4T8. Also from 1992 to 1999, Dr. Morello was a Clinician at the West Vancouver Clinic of Naturopathic Medicine, a naturopathic clinic at Suite 101 - 585 16th Street, West Vancouver, British Columbia, Canada V7V 3R8. From 1999 to the present, Dr. Morello is Managing Director and President of Operations of Enzymatic Therapy Canada, Inc. and a Clinician at the NaturoMed Clinic, a naturopathic clinic located at Suite 204 - 601 West Broadway, Vancouver, British Columbia, Canada V5Z 4C2. Kenneth E. Lehman, B.A., MBA, was appointed Treasurer of Phage in November, 2000. Mr. Lehman is a controller with approximately 18 years of experience in managerial accounting and project management with US West Communications, Inc., Seattle, WA, a telecommunications company (1982-2000). Mr. Lehman's operational experience includes general accounting, financial statements, financial analysis, accounting policies and procedures, fixed asset management, and audits. Prior to this experience, Mr. Lehman was part of the United States Army, Finance Corps, 101st Airborne Division from 1969 to 1971. Mr. Lehman received his Bachelor of Arts in Accounting from the University of Washington in 1974 and his Masters of Business 25
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Administration, Finance and Accounting from City University in Seattle, Washington in 1986. Mr. Lehman has begun working for Phage Therapeutics as a controller on a full-time basis starting November 1, 2000. Involvement in Other Public Companies ------------------------------------- Mr. Darren Pylot is also the President and Director of Serena Resources Ltd. which is currently inactive. Serena Resources Ltd. has applied to the Canadian Ventures Exchange ("CDNX") for Mining Property approval and is awaiting approval from CDNX. Mr. Miller is currently President and Director of Job Industries Ltd., which is currently delisted from the CDNX due to inactivity and is a Director of Stamford International, Inc., which is traded on the Over-the-Counter exchange on the Toronto Stock Exchange (TSE). Job Industries Ltd's business is high tech industrial cleaning. Stamford International, Inc. has a controlling interest in Nanovation Technologies Inc., a company who has an exclusive license from Northwestern University for the world wide rights to the Photonic wire microvcavity laser project, and that has funded construction of a nano-fabrication laboratory on the Northwestern University campus. Involvement in Certain Legal Proceedings ---------------------------------------- Except as indicated below and/or hereinbefore, to the knowledge of Management, during the past five years, no present or former director, executive officer, or person nominated to become a director or executive officer of Phage: (1) Filed a petition under federal bankruptcy laws or any state insolvency law, nor had a receiver, fiscal agent or similar officer appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing; (2) Was convicted in a criminal proceeding or named subject of a pending criminal proceeding (excluding traffic violations and other minor offences); (3) Was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him or her from or otherwise limiting his/her involvement in any type of business, securities or banking activities; (4) Was found by a court of competent jurisdiction in a civil action, by the Securities and Exchange Commission or the Commodity Futures Trading Commission, to have violated any federal or state securities law, and the judgment in such civil action or finding by the Securities and Exchange Commission has not been subsequently reversed, suspended, or vacated. Directors, Executive Officers of Phage Therapeutics --------------------------------------------------- The Board of Directors and Officers of Phage Therapeutics mirrors the current Board of Directors of Phage in composition and positions held. Advisors and Key Employees of Phage and Phage Therapeutics ---------------------------------------------------------- Phage's management team and advisors have extensive experience in biotechnology and biopharmaceutical development, including the development of human therapeutic products. Various of the these members have direct experience in research management, drug substance and finished product pharmaceutical manufacturing, analytical methods, pharmaceutical product development, preclinical studies design and management, FDA documentation systems, quality control and quality assurance systems, Phase I, II and III clinical investigations, pharmaceutical product corporate strategic planning, intellectual property and licensing, and corporate finance. The management team and advisors are as follows: Richard E. Herman, PhD, is a microbial geneticist and molecular biologist with 18 years of experience in biotechnology. From 1985 to 1996, Dr. Herman was a Director of Microbial Research at Bio Techniques Laboratories, Inc. in Redmond, WA. Bio Techniques Laboratories, Inc. is in the business of developing biotherapeutics for humans and animals. From 1997 to 2000, Dr. Herman was Director of Microbiology for Phage Therapeutics, Inc. and in 2001 was appointed Vice President of Pharmaceutical Development. Dr. Herman holds a PhD degree and has worked on the interaction of bacteriophage T4 with an antibiotic resistance plasmid in E.coli. Dr. Herman has conducted research on the infective processes of Herpes Simplex Virus in nerve cells and developed cloning techniques for streptococci bacteria of importance to industrial fermentations. While Director of Microbial Research at BioTechniques Laboratories (Redmond, WA), Dr. Herman led product development, directed animal field trials (including poultry, swine, beef and dairy cattle) and patented products containing beneficial bacteria designed to improve the health of the intestinal tracts of animals and humans. Dr. Herman was awarded the PhD degree from the University of Minnesota in genetics, an MS degree in cellular biology, and a BA degree in biology. Dr. Herman has entered an employment agreement with Phage Therapeutics effective as of November 1, 2000. 26
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Douglas I. Lee, MA, MBA, is a microbiologist and product development specialist with more than 14 years of experience in the biotechnology industry. From 1991 to 1997, Mr. Lee was a Senior Scientist and Product Technology Manager at BARD Diagnostic Sciences, Inc. in Redmond, WA. BARD Diagnostic, previously known as Bainbridge Sciences, Inc. became a subsidiary of the BARD Parent company. BARD Diagnostic specializes in making monoclonal antibody based rapid dipstick and EIA tests for cancer diagnostics. Mr. Lee led the discovery of the monclonal antibody and characterization of the antigen for bladder cancer. As Product Technology Manager, Mr. Lee managed the transfer of products from Research and Development to manufacturing. From 1997 to the present, Mr. Lee has been a Senior Scientist with Phage Therapeutics, Inc. Mr. Lee brings expertise in the fields of infectious disease microbiology and virology, based on past employment at the University of Washington (Department of Infectious Diseases) (1978-1983), Genetic Systems Corporation (Seattle, WA) (1983-1986), Immunex Corporation (Seattle, WA) (1986-1987), and MicroProbe Corporation (Bothell, WA) (1987-1991). In 1996, Mr. Lee earned an MBA degree from the University of Washington. Mr. Lee has entered an employment agreement with Phage Therapeutics effective as of November 1, 2000. Deirdre (Dee) Sweeney, B.SC., is a regulatory affairs consultant with more than 24 years of regulatory experience having worked for the Federal Drug Administration (Cincinnati District Office ) (1976-1986), Bristol-Meyers Squibb Company (Seattle, WA) (1988-1992) and most recently, NeoRx Corporation (Seattle, WA) (1992-1997) where she held the position of Director of Regulatory Affairs. Ms Sweeney was responsible for directing all FDA and foreign health authority liaison and compliance activities related to NeoRx projects, including biologics, drugs, and a combination drug/device, with a primary focus on cancer and cardiovascular diseases. Currently, Ms Sweeney has her own regulatory consulting business, Sweeney Regulatory Consulting (Redmond, WA), which she started in 1997. Sweeney Regulatory Consulting provides regulatory services to companies engaged in the development and manufacture of biotechnology products, pharmaceuticals, and medical devices. Ms Sweeney was President of the Organization of Regulatory and Clinical Associates (ORCA) from 1999 to 2000 and is currently serving on the Board of Directors of Washington Biotechnology and Biomedical Association (WBBA) which she has served on for the past seven years. Ms Sweeney received her Bachelor of Science degree in Biology and Art from Bowling Green State University. Ms Sweeney is part of the Regulatory Affairs Professional Society and has been Regulatory Affairs Certified (RAC) since 1991. Ms Sweeney is an advisor to Phage and Phage Therapeutics. Ms Sweeney has entered a consulting agreement ("Consulting Agreement") with Phage Therapeutics International, Inc. with the term of Consulting Agreement from October 16, 2000 to October 16, 2001. The Consulting Agreement is attached as Exhibit 10.6. This Consulting Agreement provides that Ms Sweeney shall provide regulatory consulting services related to FDA requirements for submission of Investigational New Drug Applications (INDs) to conduct clinical studies used to support the development and marketing of Phage and Phage Therapeutics' products. Ms Sweeney has also signs a Confidential Disclosure Agreement with Phage to protect Phage and Phage Therapeutics' confidential information. Collaborative Relationships --------------------------- In addition to Phage Therapeutics's biotechnology business and laboratory operations in Washington, Phage Therapeutics collaborates with several academic research groups and universities for the evaluation and characterization of bacteriophage that represent an important source of Phage's bacteriophage technology and products. Phage Therapeutics is initiating individual consulting and advisory agreements with certain of these key investigators including: Michael C. Maloney, RAC, Advisor, is a regulatory professional with more than 21 years of United States and international experience in the commercialization of medical products. Mr. Maloney is currently President and Chief Executive Officer of La Haye Laboratories, Inc., Redmond, WA. Mr. Maloney has held these positions since 1995. La Haye Laboratories, Inc. is in the business of the discovery, development, and regulatory approval of new biopharmaceutical and nutraceutical compounds and products for the treatment of human diseases. From 1992 to 1995 Mr. Maloney served as Director of Regulatory Affairs at Cytran, Inc., located in Kirkland, WA. Cytran, Inc. is a pharmaceutical company in the business of the discover, development, and regulatory approval of pharmaceutical products for the treatment of immune suppression, infectious diseases and cancer. Mr. Maloney has experience in quality assurance, manufacturing, documentation, clinical investigations, product licensing and regulatory compliance. Mr. Maloney has participated in the successful introduction of a broad spectrum of medical products, including Class I, II and III medical devices, in vitro diagnostics, and critical care monitoring equipment. In addition, he has participated in the development of biological and therapeutic agents. Also, he has a broad range of experience in filing product licensing applications, including IDE, 510(k), PMA and IND applications, as well as international dossiers. He is a member of the Regulatory Affairs Professional Society (RAPS), is Regulatory Affairs Certified by RAPS, and is a member of the American Society for Quality Control. John J. Majnarich, PhD, is a biochemist and senior research executive with more than thirty years of laboratory and management experience. Dr. Majnarich is President & Scientific Director of Bioconsultants, Inc. a division of Bio Research Laboratories of Redmond, WA. Dr. Majnarich has held these positions since 1990. Bioconsultants, Inc. and Bio Research Laboratories are contract services laboratories supporting the development of human and animal diagnostic and therapeutics products. Dr. Majnarich has special expertise in the evaluation and testing of natural and 27
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synthetic compounds for use as animal or human therapeutic products. Dr. Majnarich founded Biomed Research Laboratories, Inc. ("Biomed") of Bellevue, WA. in 1972 and continued his career as President and Scientific Director of Biomed until 1990. Dr. Majnarich developed and managed Biomed into one of the world's leading fish vaccine research and manufacturing companies. Dr. Majnarich was also Director of the Biological Division of Schick Laboratories, Seattle, WA, from 1966 to 1972 where he managed the licensing of a human therapeutic product with the United States FDA. Dr. Majnarich has more than twenty years of experience working with the USDA and the United States FDA in the development, testing and licensing of new human therapeutic products, including natural products and foods. Dr. Majnarich holds a Doctorate in Biochemistry from the University of Washington. Seymour Froman, PhD, is a microbiologist with over 51 years of experience in the field of microbiology. Dr. Froman has held various positions at the Olive View Medical Center in Sylmar, California over the past 50 years, including Medical Microbiologist, Direct of Microbiological Research Laboratory, Head Medical Microbiologist , Clinical Microbiologist and most recently as a consultant to Olive View Medical Center for 12 years (1981-1990). Dr. Froman held the position of Adjunct Faculty at the California State University, Northridge, California from 1982 to 1990. For the past five years, Dr. Froman has been semi-retired, although active in associations, including the Fellow American Academy of Microbiology, American Society for Microbiology, and the Southern California Branch, American Society for Microbiology. Luiz Bermudez, M.D., is a medical doctor and PhD of Microbiology. For the past eleven years, Dr. Bermudez has been an Associate Professor and Chief of Laboratory of Bacterial Pathogenesis and Immunology of Kuzell Institue for Arthritis and Infectious Diseases in San Francisco, California. Dr. Bermudez is also an Assistant Adjunct Professor in the Department of Cell and Molecular Biology at San Francisco State University since 1995. Dr. Bermudez is active with the Recombinant DNA Committee, at the California Pacific Medical Center Research Institute in San Francisco, California, as it's Chair, and is also a member of the Pathogen Task Force and Tuberculosis Committee, Infectious Diseases Society of America. Tyler Kokjohn, PhD, has been an Assistant Professor, at the School of Biological Sciences in the University of Nebraska-Lincoln from 1992 to 1997. Dr. Kokjohn then became Assistant Professor of Microbiology at the Arizona College of Osteopathic Medicine in Midwestern University of Glendale, Arizona for the next two years. Since 2000, Dr. Kokjohn has been an Associate Professor of Microbiology at the Arizona College of Osteopathic Medicine. Dr. Kokjohn is a member of the American Society for Microbiology, the American Association for the Advancement of Science, and the Society of Protozoologists. Raul Barletta, PhD, is an Associate Professor at the University of Nebraska-Lincoln since 1997. Prior to this, Dr. Barletta was an Assistant Professor at the University of Nebraska-Lincoln from 1991. Dr. Barletta works in the Department of Veterinary and Biomedical Sciences. Dr. Barletta has published many articles including one of his most recent works entitled "Regulation of Escherichia coli sheA gene and characterization of its encoded haemolytic activity" which was published in 1998 in the FEMS Microbiology Letters (168:85-90) with co-authors; S.V. Fernandez, J. Xing, V. Kapur, S.J. Libby and R.A. Moxley. ITEM 6. EXECUTIVE COMPENSATION General ------- Compensation is paid indirectly to Darren Pylot, as disclosed below under the sub-heading "Contractual Arrangements". Starting on November 1, 2000, Dr. Richard Honour is being paid as an employee of Phage Therapeutics at a cost of $10,000 per month. The employment agreement is attached as Exhibit 10.3. From January 1, 2000 to October 31, 2000, Dr. Honour was paid as a consultant to Phage Therapeutics at a cost of $4,666 per month. In 1998 and 1999, Dr. Richard Honour was paid as an employee of Phage Therapeutics at a salary of $144,000 per annum. During 2000, Phage Therapeutics accrued wages of $20,000 and accrued consulting fees of approximately $56,000 to Dr. Honour. As at December 31, 2000, the Company owed $75,413 to Dr. Honour. See Note 9 on page 21 of the December 31, 2000 Financials in Part F/S. Mr. Kenneth Lehman, an officer of the Company (Treasurer) entered an employment agreement with Phage Therapeutics, Inc. as of November 1, 2000 in which Mr. Lehman receives a salary of $84,000 per year as Controller for Phage Therapeutics, Inc. Mr. Lehman also receives $17.00 per hour under another employment agreement with Phage Therapeutics, Inc., entered in November 1, 2000, for his services as a Facilities Manager. Mr. Lehman does 28
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not receive compensation for his duties as Treasurer. None of the other Directors of the Company have received any cash compensation, directly or indirectly, for their services rendered as Directors of the Company during the most recently completed financial year of Phage. Phage does not have any non-cash compensation plans for its Directors and it does not propose to pay or distribute any non-cash compensation during the current financial year, other than pursuant to the granting of stock options. Contractual Arrangements ------------------------ Since September 1, 1998, Phage has had a management agreement ("Management Agreement") with Stealth Investment Corp., a British Columbia company, to provide day to day management services to Phage. The Management Agreement is terminable by either party with two months notice and provides for a base fee of $10,000 per month until October 31, 2000, thereafter increased to $15,000 per month plus related expenses. Stealth Investments Corp. is a privately held British Columbia registered company in which Mr. Darren Pylot is the sole officer, director and shareholder. Mr. Pylot is also the Chief Financial Officer and a Director of Phage. Stealth Investments Corp. was incorporated in the Province of British Columbia, Canada on October 29, 1996 under the name "530021 B.C. Ltd. and changed its name to "Stealth Investments Corp. on May 12, 1998. The latest Management Agreement, which was executed November 1, 2000 is attached as Exhibit 10.4. Under the Management Agreement, Mr. Pylot is paid $5,000 per month by Phage for his management services. Three other employees of Stealth Investments Corp. are paid a total of $10,000 by Phage for their management services. In particular, $5,000 is paid as management fees to Mr. Chris Tomanik, $2,500 is paid to Mr. Noah Croom, Phage's legal counsel and $2,500 is paid to Mr. Mark Patchett for his management services to the Company. The Company paid or accrued management fees of $65,000 (1999 - $45,000), consulting fees of $65,000 (1999 - $45,000), office rent of $22,484 (1999 - $18,976), office administration of $5,872 (1999 - $8333) and investor relations of $7,760 (1999 - $1,871). As at December 31, 2000 the Company owed Stealth $68,798 (1999 - $93,199). See Note 9 on page 21 of the December 31, 2000 Financials in Part F/S. Summary Compensation Table The following table sets forth all annual and long term compensation for services in all capacities to Phage for the three most recently completed financial years in respect of each of the individuals who were, the Chief Executive Officer and the other four most highly compensated executive officers of Phage whose individual total compensation for the most recently completed financial year exceeds $100,000 (collectively " the Named Executive Officers") including any individual who would have qualified as a Named Executive Officer but for the fact that the individual was not serving as such an Officer at the end of the most recently completed financial year. [Enlarge/Download Table] Annual Compensation(1) Long Term Compensation ----------------------------------------- Awards Payouts -------------------------------------------------------------------------- ------------ -------------------------- ----------- Securities Restricted LTIP All Other Under Shares or Payouts Compensation Option/ Restricted ($) ($) Name and SAR's Share Principal Salary* Bonus Other Annual Granted Units Position Year ($) ($) Compensation ($) (#) ($) -------------------------------------------------------------------------- ----------------------------------------- ----------- Gaetano 2000 $Nil Nil Nil 50,000 Nil Nil Nil Morello, 1999 Nil Nil Nil Nil Nil Nil Nil Director 1998 Nil Nil Nil Nil Nil Nil Nil Robert Miller, 2000 $Nil Nil Nil Nil Nil Nil Nil Chairman of 1999 Nil Nil Nil Nil Nil Nil Nil the Board 1998 Nil Nil Nil Nil Nil Nil Nil Darren Pylot(2), 2000 $5,000 Nil Nil 240,000 Nil Nil Nil Chief Financial 1999 $5,000 Nil Nil Nil Nil Nil Nil Officer 1998 $5,000 Nil Nil Nil Nil Nil Nil Richard 2000 $10,000/mo Nil Nil 500,000 Nil Nil Nil Honour, CEO 2000 $4,666/mo (3) and President 1999 12,000/mo Nil Nil Nil Nil Nil Nil 1998 12,000/mo Nil Nil Nil Nil Nil Nil Kenneth 2000 $7,000/mo(4) Nil Nil 85,000 Nil Nil Nil Lehman, 1999 ---- --- --- --- --- --- --- Treasurer 1998 ---- --- --- --- --- --- --- 1. Perquisites and other personal benefits do not exceed the lesser of $50,000 and 10% if the total of the annual salary and bonus of the named executive officers for the financial year. 2. Mr. Darren Pylot is paid $5,000 per month by Stealth Investments Corp. which in turn is paid $15,000 per month from Phage for management services. (See "Contractual Arrangements" on page 29). 3. As of November 1, 2000, Dr. Richard Honour is being paid as an employee of Phage Therapeutics at a salary of $10,000 per month. From January 1, 2000 to October 31, 2000, Dr. Honour was paid under a consulting arrangement with Phage Therapeutics at $4,666 per month. For 1999 and 1998, Dr. Honour was paid as an employee. 5. Mr. Kenneth Lehman joined the Company on November 1, 2000. 29
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Long Term Incentive Plan (LTIP) Awards for Named Executive Officers Phage has had no LTIP awards during the most recently completed financial year. Stock Option and Stock Option Appreciation Rights (SAR's) for Named Executive Officers Stock Option Grants ------------------- No stock options have been granted yet in 2001 to its executive officers and the Company does not anticipate granting further stock options to its executive officers in the near future. The following table sets forth the information regarding the stock option grants during 2000 for the Chief Executive Officer and Phage's other executive officers: [Enlarge/Download Table] Stock Options Granted in Last Fiscal Year - Individual Grants ------------------------------------------------------------- Number of Securities Percentage of Total Exercise Price Underlying Options Options Granted to ($/Share) Name and Principal Position Granted Employees in Fiscal Year ------------------------------------------------------------------------------------------------------------ Robert Miller, Chairman of the 0 0% 0 Board Darren Pylot, Chief Financial Officer 240,000 (1) 14.8% 0.55 Gaetano Morello, Director 50,000 3.1% 0.75 Richard Honour, Chief Executive 500000 30.8% 0.55 Officer, President and Secretary Kenneth Lehman, Controller & 85,000 5.2 0.75 Treasurer Total Stock Options Issued in 2000 to the CEO and Executive Officers 875,000 53.9% <FN> 1. Mr. Darren Pylot exercised stock options for 50,000 common shares of the Company on May 17, 2001 leaving him with 190,000 shares underlying the Stock Option Plan. </FN> 30
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Stock Options ------------- The Board of Directors and shareholders of Phage have adopted an incentive stock option plan (the "Plan") providing for the granting of stock options to officers, directors, employees and key consultants of Phage and its subsidiaries or affiliates. The purpose of the Plan is to enable Phage to attract and retain persons whose efforts will assist in the future growth and success of Phage. Under the Plan, Phage is authorized to issue options up to a total of 10% of the shares of the common stock of Phage outstanding from time to time. The options under the plan are non-assignable (except in the event of death) and vest over a five year period. The vesting schedule will be determined by the Board of Directors or Administrator of the Plan. Options granted under the Plan terminate within 30 days, in respect of any optionee, in the event that such optionee ceases to be a full-time employee, director or officer of the Corporation or within six months after the death of such optionee. The Board of Directors may, at its sole discretion, determine the time during which options shall vest and the method of vesting, or that no vesting restriction shall exist. Phage has reserved 3,000,000 shares of common stock pursuant to the Stock Option Plan as approved by the shareholders on March 12, 1999. Currently, 1,795,000 stock options have been issued under the Stock Option Plan. In addition to the foregoing, Phage anticipates it will assume the obligations of the stock option plan for Phage Therapeutics and options issued under that plan on and when it is able to acquire 100% of the issued and outstanding share capital of Phage Therapeutics. Phage is in the process of acquiring an additional 812,000 shares of Phage Therapeutics, Inc. in a series of share exchange agreements for a total ownership position of 92% of Phage Therapeutics, Inc. The Company intends to acquire 100% of Phage Therapeutics, Inc. through exercise of its statutory right of acquisition provided under the Washington Business Corporation Act Title 23B of the Revised Code of Washington. Phage Therapeutics, Inc. has granted 1,475,000 common shares pursuant to their stock option plan and none have been exercised as of the filing of this document and the Company has not taken any corporate action with regard to these outstanding options. Phage Therapeutics is currently in the process of cancelling its stock options with the approval of the optionees. SARS ---- Phage has had no SARS during the most recently completed financial year. Termination of Employment, Change of Control, and Employment Contracts Phage has no plan or arrangement in respect of compensation received or that may be received by executive officers in Phage's most recently completed or current financial year to compensate such officers in the event of the termination of employment on resignation, retirement, or change of control in the event of a change in responsibilities following a change in control, where in respect of an executive officer the value of such compensation exceeds $42,000. Indebtedness to Company of Directors and Officers None of the directors, senior officers or proposed nominees of management of Phage or associates or affiliates of the foregoing persons is or has been indebted to Phage at any time since the beginning of the last completed financial year of Phage. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Related Transactions -------------------- Phage has acquired approximately 88% of issued and outstanding share capital of Phage Therapeutics through a combination of purchasing stock directly from Phage Therapeutics and through completion of a series of share exchange agreements with individual stockholders. Phage intends to pursue and enter into further share exchange agreements with the remaining stockholders of Phage Therapeutics in due course to increase its holding to 100%. During the 1999 fiscal year, Phage received several loans from Prostar Limited, a shareholder of Phage, which totaled $140,198. The loans bear an interest of 11% per annum are repayable on demand. As of December 31, 1999 the loan 31
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totaled $145,943 including interest. As of December 31, 2000, the amount owed to Prostar is $161,407 which includes interest. None of this loan has been paid to Prostar Limited as of yet. As stated in the section entitled "Contractual Arrangements" on page 29, Phage pays Stealth Investments Corp. for providing management services to the Company at a monthly fee of $15,000 of which $5,000 per month is paid directly to Mr. Darren Pylot . Three other employees of Stealth Investments Corp. are paid a total of $10,000 by Phage for their management services. In particular, $5,000 is paid as management fees to Mr. Chris Tomanik, $2,500 is paid to Mr. Noah Croom, Phage's legal counsel and $2,500 is paid to Mr. Mark Patchett for his management services to the Company. Stealth Investments Corp. is a privately held British Columbia registered company in which Mr. Darren Pylot is the sole officer, director and shareholder. Mr. Pylot is also the Chief Financial Officer and a Director of Phage. Stealth Investments Corp. was incorporated in the Province of British Columbia, Canada on October 29, 1996 under the name "530021 B.C. Ltd. and changed its name to "Stealth Investments Corp. on May 12, 1998. The Management Agreement is attached as Exhibit 10.4. Except as herein above set forth, there have been no related party transactions, or any other transactions or relationships required to be disclosed pursuant to Item 404 of Regulation S-B. ITEM 8. LEGAL PROCEEDINGS. Phage is not a party to any material legal proceedings, however, an individual whom Phage Therapeutics, Inc engaged on a limited basis to assist with introductions related to raising private equity capital has asserted that certain private placement funds were received by Phage Therapeutics, Inc as a result of introductions made by that individual. Phage is in the process of determining the validity of the claims asserted. Should the claims be determined valid, Phage Therapeutics will be expected to pay approximately $10,000 in cash as a finder's fee, issue 35,000 Phage Therapeutics common shares and issue warrants to purchase an additional 25,000 shares of common stock at $1.00 per share for a term of seven years. As the probability of outcome is not certain, no accrual has been made in the financial statements, nor have any shares been reserved in connection with this contingency. Prior to inception of Phage Therapeutics, a founder entered into a consulting agreement with an individual to assist with the setup of licensing arrangements between Phage Therapeutics and certain research institutions. A dispute has arisen regarding the amount of payment required under the consulting arrangement, which terminated in June 1997. Phage's exposure in relation to this consulting agreement is a cash amount owed of approximately $17,000, 25,000 Phage Therapeutics common shares, and an option for 41,668 additional common shares of Phage Therapeutics. The $17,000 has been accrued in the financial statements. No accrual has been made in the financial statements for the shares and no shares have been reserved. To the best of management's knowledge, no other proceedings by or against Phage has been threatened. To management's knowledge, no governmental authority is contemplating the institution of a proceeding against Phage. None of Phage's directors, officers, affiliates or beneficial owners of five percent or more of any class of Phage's voting securities are a party adverse to Phage nor do any of the foregoing individuals have a material interest adverse to Phage. ITEM 9. MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Information As of May 25, 2001, the Issuer had 13,138,301 shares of Common Stock issued and outstanding, of which 3,522,718 are free trading and the remaining 9,615,583 are restricted. The following table shows the high and low bid quotations for Phage's common stock for each full quarterly period and month since Phage's shares were listed for trading on the OTC Bulletin Board(R). Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. Phage's Common Stock was originally listed on the NASDAQ Bulletin Board as APDP in February 1998 and began trading during that month. In August 1998, the Company symbol changed to PTXX. From March 22, 2000 Phage has been trading on the Pink Sheets(R). 32
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BID PRICES ---------- YEAR PERIOD HIGH LOW ---- ------------ -------- ------ 2000 First Quarter 4.218 0.844 Second Quarter delisted Third Quarter delisted Fourth Quarter delisted 1999 First Quarter 0.353 0.188 Second Quarter 1.758 1.323 Third Quarter 1.666 0.969 Fourth Quarter 1.115 0.740 Pursuant to NASD Eligibility Rule 6530 (the "Rule") issued on January 4, 1999, issuers who do not make current filings pursuant to Sections 13 and 15(d) of the Securities Act of 1934 are ineligible for listing on the NASDAQ Over- the- Counter Bulletin Board. Pursuant to the Rule, issuers who are not current with such filings are subject to de-listing pursuant to a phase-in schedule depending on each issuer's trading symbol as reported on January 4, 1999. Phage's trading symbol on January 4, 1999 was PTXX. Therefore, pursuant to the phase-in schedule, Phage was subject to de- listing on March 22, 2000. The trading symbol was appended with an "E" on March 17, 2000 and was de-listed on March 22, 2000 for failure to comply with the Eligibility Rule NASD 6530. Dividends The payment of dividends by Phage, if any, in the future, rests within the discretion of its Board of Directors and will depend, among other things, upon Phage's earnings, its capital requirements and its financial condition, as well as other relevant factors. Phage has not paid a cash or stock dividend and does not anticipate paying any cash or stack dividends in the foreseeable future. ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES Since May 25, 2001, the following Common Shares have been issued and remain outstanding by the Company: The figures in this schedule reconcile to both the audited financial statements, the records of the Company and the records of the transfer agent. [Enlarge/Download Table] ------------------------------------------------------------------------------------------------------------- On October 31, 1997, 1,000,000 common shares were issued to Yarek Bartoz for services rendered to the Company. Mr. Bartoz paid $1,000 for these shares. The aggregate total for this offering was $1,000. These shares were issued under Regulation D, Rule 504. ------------------------------------------------------------------------------------------------------------- Mth/Day Yr. Name and Address Quantity Cash or Amount Paid on Each Share Other Consideration ------------------------------------------------------------------------------------------------------------- October 31 97 Yarek Bartosz 1,000,000 Services & $0.001 Cash --------------------------------------------------------------------- ---------------------------------------- On October 31, 1997, 77,000 common shares were issued to 44 investors at $0.10 per share for an aggregate of $7,700. These shares were issued under Regulation D, Rule 504. The following is the list of investors for this offering: ------------------------------------------------------------------------------------------------------------- Mth/Day Yr. Name and Address Quantity Cash or Amount Paid on Each Share Other Consideration ------------------------------------------------------------------------------------------------------------- October 31 97 Chris Anger 1000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Edward Anger 1000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Mike Anger 1,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Bill Archer 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Bonnie Archer 1,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Karina Archer 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Nicole Archer 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- 33
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------------------------------------------------------------------------------------------------------------- October 31 97 Walter Archer 1,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Milan Bartosz 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Miro Bartosz 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Kent Campbell 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Greg Clark 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Bernie De Groot 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Debra Ann Edwards 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Kenneth Brian Edward 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Tammy Edwards 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Edith M. Ferris 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Jarek Godzic 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Robert Godzic 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 David Grant 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Norma Hanson 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Dean Husarik 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Colette Imbery 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Keith Johanson 1,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Kevin Leggings 4,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Harjit Mand 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Ariff Manji 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Nazim Manji 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Niment Manji 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Peter Marotta 3,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Stephen McCourt 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Marion McDonald 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Rueben McDonald 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Barbara Ann McGowan 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Melanie McMurray 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Jim McSorley 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Mavis Messerschmidt 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Ron Miller 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Asharf Mithani 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Shaurioz Mithani 2,000 Cash $0.100 ------------------------------------------------------------------------------------------------------------- 37194 97 Brian Rakos 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Lynette Sikora 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Elaine Sulima 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- October 31 97 Lenard Sulima 1,500 Cash $0.100 ------------------------------------------------------------------------------------------------------------- On February 24, 1998, 750,000 units ("Unit" or "Units") were issued to 4 investors. Each Unit consists of one common share and one purchase share warrant, each whole warrant entitling the holder to purchase one additional common share for $1.00 on or before one year from the date of the acquisition of the units. These Units were issued at $0.20 per Units for an aggregate $150,000. These shares were issued under Regulation D, Rule 504. The following is the list of investors for this offering: ------------------------------------------------------------------------------------------------------------- Mth/Day Yr. Name and Address Quantity Cash or Amount Paid on Each Share Other Consideration ------------------------------------------------------------------------------------------------------------- February 24 98 Cadaques S.A. 200,000 Cash $0.20 ------------------------------------------------------------------------------------------------------------- February 24 98 Stratton S.A. 200,000 Cash $0.20 ------------------------------------------------------------------------------------------------------------- February 24 98 Maria Dolores Longo 150,000 Cash $0.20 ------------------------------------------------------------------------------------------------------------- February 24 98 Carlos Casarotti 200,000 Cash $0.20 ------------------------------------------------------------------------------------------------------------- 34
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------------------------------------------------------------------------------------------------------------- On April 8, 1998, 250,000 units ("Unit" or "Units") were issued to 4 investors. Each Unit consists of one common share and one purchase share warrant, each whole warrant entitling the holder to purchase one additional common share for $1.00 on or before one year from the date of the acquisition of the units. These Units were issued at $0.20 per Unit for an aggregate $50,000. These shares were issued under Regulation D, Rule 504. The following is the list of investors for this offering: ------------------------------------------------------------------------------------------------------------- Mth/Day Yr. Name and Address Quantity Cash or Amount Paid on Each Share Other Consideration ------------------------------------------------------------------------------------------------------------- April 8 98 Alex Feldman 25,000 Cash $0.20 ------------------------------------------------------------------------------------------------------------- April 8 98 Christian Hevia 5,000 Cash $0.20 ------------------------------------------------------------------------------------------------------------- April 8 98 Spacestar Enterprise 200,000 Cash $0.20 ------------------------------------------------------------------------------------------------------------- April 8 98 Neil Ryan 20,000 Cash $0.20 ------------------------------------------------------------------------------------------------------------- On July 8, 1998, 200,000 warrants ("Warrants") were exercised by one investor. Each Warrant entitled the holder to purchase one common share at $1.00 per share. The aggregate of the exercise of Warrants is $200,000. These shares were issued under Regulation D, Rule 504. The following is the investor who exercised the Warrants: ------------------------------------------------------------------------------------------------------------- Mth/Day Yr. Name and Address Quantity Cash or Amount Paid on Each Share Other Consideration ------------------------------------------------------------------------------------------------------------- July 8 98 Spacestar Enterprise 200,000 Cash $1.00 ------------------------------------------------------------------------------------------------------------- On July 8, 1998, 50,000 warrants ("Warrants") were exercised by one investor. Each Warrant entitled the holder to purchase one common share at $1.00 per share. The aggregate of the exercise of Warrants is $50,000. These shares were issued under Regulation D, Rule 504. The following is the investor who exercised the Warrants: ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- Mth/Day Yr. Name and Address Quantity Cash or Amount Paid on Each Share Other Consideration ------------------------------------------------------------------------------------------------------------- July 30 98 Stratton S.A. 50,000 Cash $1.00 ------------------------------------------------------------------------------------------------------------- Beginning September 8, 1998 to October 2, 1998, the Company issued 786,500 common shares to 5 investors at $0.25 per share for an aggregate offering of $196,625. These shares were issued under Regulation D, Rule 504. The following is the list of investors for this offering: ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- Mth/Day Yr. Name and Address Quantity Cash or Amount Paid on Each Share Other Consideration ------------------------------------------------------------------------------------------------------------- September 8 98 Millport Securities 200,000 Cash $0.25 ------------------------------------------------------------------------------------------------------------- September 11 98 Middlegate Investment 200,000 Cash $0.25 ------------------------------------------------------------------------------------------------------------- September 11 98 Middlegate Investment 40,000 Cash $0.25 ------------------------------------------------------------------------------------------------------------- September 11 98 RFH Investments Ltd. 109,000 Cash $0.25 ------------------------------------------------------------------------------------------------------------- October 2 98 Grayson Consulting 162,500 Cash $0.25 ------------------------------------------------------------------------------------------------------------- October 8 98 Colony Investments 75,000 Cash $0.25 ------------------------------------------------------------------------------------------------------------- 35
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-------------------------------------------------------------------------------------------------------------- On February 23, 1999, 9 investors purchased 7,000,000 common shares of the Company at $0.05 per share for an aggregate of $350,000. These shares were issued under Regulation D, Rule 504. The following is the list of investors for this offering: ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- Mth/Day Yr. Name and Address Quantity Cash or Amount Paid on Each Share Other Consideration ------------------------------------------------------------------------------------------------------------- February 23 99 Barrington Holdings 1,000,000 Cash $0.05 ------------------------------------------------------------------------------------------------------------- February 23 99 Vimmy, Inc. 1,000,000 Cash $0.05 ------------------------------------------------------------------------------------------------------------- February 23 99 Coaorral Enterprises 1,000,000 Cash $0.05 ------------------------------------------------------------------------------------------------------------- February 23 99 High Seas Investment 775,000 Cash $0.05 ------------------------------------------------------------------------------------------------------------- February 23 99 Eurobank Corporation 1,000,000 Cash $0.05 ------------------------------------------------------------------------------------------------------------- February 23 99 Prostar Limited 775,000 Cash $0.05 ------------------------------------------------------------------------------------------------------------- February 23 99 Grayson Consulting 400,000 Cash $0.05 ------------------------------------------------------------------------------------------------------------- February 23 99 Emerald International 1,000,000 Cash $0.05 ------------------------------------------------------------------------------------------------------------- February 23 99 Rainbow End 50,000 Cash $0.05 International ------------------------------------------------------------------------------------------------------------- March 25 99 1/4 REVERSE SPLIT 2,528,375 ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- In April and June of 1999, the Company entered share exchange agreements with purchasers of Phage Therapeutics, Inc. stock. In exchange for 9,691,000 shares in Phage Therapeutics, Inc., the stockholders received a total of 4,022,425 shares in the Company. In total there were 24 stockholders who were part of this share exchange. These shares were issued under Regulation D, Rule 504. The following is the list of participants in this share exchange: ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- Mth/Day Yr. Name and Address Quantity Cash or Amount Paid on Each Share Other Consideration ------------------------------------------------------------------------------------------------------------- April 25 99 Ricardo Requena 380,000 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Caorral Enterprises, 200,000 Share 0 Inc.* Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Emerald International* 1,000,000 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Barrington Holdings Ltd.* 200,000* Share 0 Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Ricardo Requena 380,000 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Auron 2000, Inc. 457,143 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Monika Kosaristanova 2,857 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Source Consulting 7,142 Share 0 International, Inc. Exchange ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- April 25 99 Caorral Enterprises, Inc. 598,857 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Vimmy Inc. 450,000 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- 36
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------------------------------------------------------------------------------------------------------------- April 25 99 Barrington Holdings Ltd. 493,571 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Tradewinds Investments 128,571 Share 0 Ltd. Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Roesalare Corporation 135,714 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Emerald International 325,000 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Bolivar Longines S.A. 175,000 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Konrad Bartelski 75,000 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Richard C. Honour 100,000 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Colony Investments Ltd. 100,000 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Theodore Sarniak 100,000 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- April 25 99 Terra Resource 50,000 Share 0 Management Ltd. Exchange ------------------------------------------------------------------------------------------------------------- June 10 99 John Thompson 25,000 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- June 10 99 Robert Zuk 50,000 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- June 10 99 Lance Dunlap 100,000 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- June 10 99 Bonnie Lindros 50,000 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- June 10 99 Carl Lindros 100,000 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- June 10 99 Graham Hughes 5,714 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- June 10 99 Douglas Cochrane 7,142 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- June 10 99 Storytellers Group 105,714 Share 0 Exchange ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- On April 12, 1999, 3 investors purchased 187,500 common shares of the Company at $0.20 per share for an aggregate of $37,500. These shares were issued under Regulation D, Rule 504. The following is the list of investors for this offering: ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- Mth/Day Yr. Name and Address Quantity Cash or Amount Paid on Each Share Other Consideration ------------------------------------------------------------------------------------------------------------- April 12 99 High Seas Investment 50,000 Cash $0.20 ------------------------------------------------------------------------------------------------------------- April 12 99 Epicenter Venture 87,500 Cash $0.20 ------------------------------------------------------------------------------------------------------------- April 12 99 Prostar Limited 50,000 Cash $0.20 ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- On September 17, 1999, the Company settled a debt with Hornblower & Weeks for placement services to the Company. As settlement for the debt, the Company issued 71, 429 common shares to Hornblower & Weeks. These shares were issued under Regulation D, Rule 504. The following lists the amount of shares issued to Hornblower & Weeks: ------------------------------------------------------------------------------------------------------------- 37
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------------------------------------------------------------------------------------------------------------- Mth/Day Yr. Name and Address Quantity Cash or Amount Paid on Each Share Other Consideration ------------------------------------------------------------------------------------------------------------- September 17 99 Hornblower & Weeks 71,429 Services - 0 (placement agent & settlement of debt) ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- On February 11, 2000, the Company issued 1,942,858 common shares of the Company to 8 investors at $0.70 per share for an aggregate of $1,360,000.60. These shares were issued under Regulation D, Rule 506. The following is the list of investors for this offering: ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- Mth/Day Yr. Name and Address Quantity Cash or Amount Paid on Each Share Other Consideration ------------------------------------------------------------------------------------------------------------- February 11 00 GIG Limited 750,000 Cash $0.70 ------------------------------------------------------------------------------------------------------------- February 11 00 PROSTAR Limited 414,287 Cash $0.70 ------------------------------------------------------------------------------------------------------------- February 00 Gaba Ventures 100,000 Cash $0.70 ------------------------------------------------------------------------------------------------------------- February 11 00 Tradewinds Investments 142,857 Cash $0.70 Ltd. ------------------------------------------------------------------------------------------------------------- February 11 00 High Seas Investment Ltd. 185,714 Cash $0.70 ------------------------------------------------------------------------------------------------------------- February 11 00 Gaetano Morello 100,000 Cash $0.70 ------------------------------------------------------------------------------------------------------------- February 11 00 David G. Mills 50,000 Cash $0.70 ------------------------------------------------------------------------------------------------------------- February 11 00 RFH Investments Inc. 200,000 Cash $0.70 ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- On December 13, 2000, the Company issued 2,142,857 common shares of the Company to 7 investors at $0.70 per share for an aggregate of $1,500,000. These shares were issued under Regulation D, Rule 506. The following is the list of investors for this offering: ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- Mth/Day Yr. Name and Address Quantity Cash or Amount Paid on Each Share Other Consideration ------------------------------------------------------------------------------------------------------------- December12 00 Robert Miller 485,714 Cash $0.70 ------------------------------------------------------------------------------------------------------------- December 12 00 Bolivar Longines SA 100,000 Cash $0.70 ------------------------------------------------------------------------------------------------------------- December 12 00 Ricardo Requena 200,000 Cash $0.70 ------------------------------------------------------------------------------------------------------------- December 12 00 Cadaques S.A. 500,000 Cash $0.70 ------------------------------------------------------------------------------------------------------------- December 12 00 Blanca de Longo 100,000 Cash $0.70 ------------------------------------------------------------------------------------------------------------- December 12 00 Stratton S.A. 257,143 Cash $0.70 ------------------------------------------------------------------------------------------------------------- December 12 00 GIG Limited 500,000 Cash $0.70 ------------------------------------------------------------------------------------------------------------- On May 3, 2001, the Company issued 2,142,857 common shares of the Company to 6 investors at $0.70 per share for an aggregate of $1,500,000. These shares were issued under Regulation D, Rule 506. The following is a list of investors in this offering: ------------------------------------------------------------------------------------------------------------- May 3 01 Robert Miller 301,429 Cash $0.70 ------------------------------------------------------------------------------------------------------------- 38
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------------------------------------------------------------------------------------------------------------- On December 13, 2000, the Company issued 2,142,857 common shares of the Company to 7 investors at $0.70 per ------------------------------------------------------------------------------------------------------------- May 3 01 Bolivar Longines SA 100,000 Cash $0.70 ------------------------------------------------------------------------------------------------------------- May 3 01 Ricardo Requena 670,000 Cash $0.70 ------------------------------------------------------------ ------------------------------------------------ May 3 01 Cadaques S.A. 178,571 Cash $0.70 ------------------------------------------------------------ ------------------------------------------------ May 3 01 Stratton S.A. 392,857 Cash $0.70 ------------------------------------------------------------ ------------------------------------------------ May 3 01 GIG Limited 500,000 Cash $0.70 ------------------------------------------------------------ ------------------------------------------------ On May 17, 2001, 100,000 shares were issued to two individuals under the Stock Option Plan for an aggregate of $55,000. These shares were issued under Regulation D, Rule 506. The following is a list of the optionees exercising their options: ------------------------------------------------------------------------------------------------------------- May 17 01 Darren Pylot 50,000 Cash $0.55 ------------------------------------------------------------ ------------------------------------------------ May 17 01 Chris Tomanik 50,000 Cash $0.55 ------------------------------------------------------------ ------------------------------------------------ TOTAL 13,138,301 ------------------------------------------------------------ ------------------------------------------------
On May 30, 2001, David Mills exercised 50,000 warrants for 50,000 shares of Common Stock of Phage for an aggregate price of $62,500. These shares have not been issued by the transfer agent as of the filing of this 10SB. Warrants -------- On February 11, 2000, the Company issued 1,942,858 warrants ("Warrants")as part of a unit offering comprised of one share of Common Stock and one Warrant. These Warrants entitle the holders to purchase one share of Common Stock for $1.25 per share at any time on or before June 1, 2000 and thereafter for $2.00 per share at any time on or before June 3, 2002. On May 30, 2001, 50,000 Warrants were exercised by one purchasers for an aggregate price of $62,500. No other warrants have been exercised at this time. The Securities Purchase Agreement entered into on October 23, 2000 entitles each purchaser to purchase units ("Units") which are comprised of one share of Common Stock and one Warrant (see Exhibit 10.8, Securities Purchase Agreement). Each one and a half Warrants entitles the holder to purchase an additional share of Common Stock in the Company for $0.70 per share. The first set of Warrants total 2,142,857 Warrants (or 1,428,571 one and a half Warrants) entitling the holders to purchase 1,428,571 shares of Common Stock of the Company for $0.70 per share. These Warrants expire August 15, 2001. At this time, none of the Warrants have been exercised. The second set of Warrants expire January 15, 2002 and are only exercisable if the first set of Warrants are exercised by August 15, 2001. The second set of Warrants also total 2,142,857 Warrants (or 1,428,571 one and a half Warrants) entitling the holders to purchase 1,428,571 shares of Common Stock of the Company. ITEM 11. DESCRIPTION OF SECURITIES. Qualification The following statements constitute brief summaries of Phage's Articles of Incorporation and Bylaws, as amended. Such summaries do not purport to be complete and are qualified in their entirety by reference to the full text of the Articles of Incorporation and Bylaws. Common Stock Phage's Articles of Incorporation authorize it to issue up to 50,000,000 shares of Common Stock, $.001 par value per share. As of May 25, 2001, the total issued and outstanding common shares is 13,138,301 held by 56 shareholders. Liquidation Rights ------------------ 39
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Upon liquidation or dissolution, each outstanding share of Common Stock will be entitled to share equally in the assets of Phage legally available for distribution to shareholders after the payment of all debts and other liabilities. Dividend Rights --------------- There are no limitations or restrictions upon the rights of the Board of Directors to declare dividends out of any funds legally available therefor. Phage has not paid dividends to date and it is not anticipated that any dividends will be paid in the foreseeable future. The Board of Directors initially may follow a policy of retaining earnings, if any, to finance the future growth of Phage. Accordingly, future dividends, if any, will depend upon, among other considerations, Phage's need for working capital and its financial condition at the time. Voting Rights ------------- Holders of shares of Common Stock of Phage are entitled to cast one vote for each share held at all shareholders meetings for all purposes. Debt and Other Securities ------------------------- Phage is not registering any security other than its Common Stock. Change of Control ----------------- There are no provisions in Phage's Articles of Incorporation or Bylaws that would delay or prevent a change of control of Phage. There are no anti-takeover provisions in Phage's Articles of Incorporation or Bylaws. Other Rights ------------ Shares of Common Stock are not redeemable, have no conversion rights and carry no preemptive or other rights to subscribe to or purchase additional shares of Common Stock in the event of a subsequent offering. Nevada law does not require shareholder approval for the issuance of authorized but unissued shares of Common Stock. Such issuances may be made for a variety of corporate purposes, including future private and public offerings to raise additional capital or to facilitate corporate acquisitions. Non-Cumulative Voting --------------------- The Common Shares of Phage do not have cumulative voting rights, which means that the holders of more than fifty percent of the shares of the Common Stock voting for election of directors may elect all the directors if they choose to do so. In such event, the holders of the remaining shares aggregating less than fifty percent will not be able to elect directors. Transfer Agent -------------- Phage has appointed Interwest Transfer Company, Incorporated, 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117 as transfer agent for Phage's shares of the Common Stock. Incentive Stock Options & Non-Statutory Stock Options Phage has issued incentive stock options and non-statutory stock options pursuant to the 2000 Stock Option Plan to directors, officers, employees and certain professional consultants to Phage. The following table shows the break-down of the stock options issued by Phage: 40
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[Enlarge/Download Table] Date Name Price per Amount of Vesting Date Expiry Date Share Shares --------------- ------------- ----- ---------- ---------------------- --------------- January 4, 2000 Chris Tomanik $0.55 240,000 (2) 50% upon issuance and January 3, 2005 50% after one year from date of grant January 4, 2000 Darren Pylot $0.55 240,000 (2) 50% upon issuance and January 3, 2005 50% after one year from date of grant January 4, 2000 Douglas Lee $0.55 75,000 (2) 50% upon issuance and January 3, 2005 50% after one year from date of grant January 4, 2000 Graham Hughes $0.55 25,000 (2) 25% after one year from January 3, 2005 date of grant, with 25% vesting every year following January 4, 2000 Richard Herman $0.55 200,000 (2) 50% upon issuance and January 3, 2005 50% after one year from date of grant January 4, 2000 Richard Honour $0.55 500,000 (2) 50% upon issuance and January 3, 2005 50% after one year from date of grant February 3, 2000 Mark Patchett $0.55 5,000 (2) 50% upon issuance and February 2, 2005 50% after one year from date of grant October 10, 2000 Gaetano Morello $0.75 50,000 (2) 50% upon issuance and October 10, 2005 50% after one year from date of grant October 10, 2000 John Majnarich $0.75 35,000 (2) 50% upon issuance and October 10, 2005 50% after one year from date of grant October 10, 2000 Michael Maloney $0.75 35,000 (2) 50% upon issuance and October 10, 2005 50% after one year from date of grant November 1, 2000 Kenneth Lehman $0.75 75,000 (3) 25% after one year from November 1, 2003 date of grant, with 25% vesting every year following November 1, 2000 Kenneth Lehman $0.75 10,000 (3) 25% after one year from November 1, 2003 date of grant, with 25% vesting every year following December 7, 2000 Larry Syltebo $0.75 50,000 (3) 25% after one year from December 7, 2003 date of grant, with 25% vesting every year following February 15, 2001 Michael Hamrell $0.75 35,000 (2) 25% after one year from February 15, 2004 date of grant, with 25% vesting every year following November 1, 2000 Tracy Honour $0.75 10,000 (3) 25% after one year from November 1, 2003 date of grant, with 25% vesting every year following 41
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April 1, 2001 John Sundsmo $0.75 50,000 (3) 25% after one year from April 1, 2004 date of grant, with 25% vesting every year following December 15, 2000 Seymour Froman $0.75 35,000 (2) 25% after one year from December 15, 2004 date of grant, with 25% vesting every year following February 15, 2001 Luiz Bermudez $0.75 35,000 (2) 25% after one year from February 15, 2004 date of grant, with 25% vesting every year following February 15, 2001 Raul Barletta $0.75 35,000 (2) 25% after one year from February 15, 2004 date of grant, with 25% vesting every year following December 15, 2000 Tyler Kokjohn $0.75 35,000 (2) 25% after one year from December 15, 2003 date of grant, with 25% vesting every year following May 1, 2001 Lisa Goodrich $0.75 20,000 (3) 25% after one year from May 1, 2004 date of grant, with 25% vesting every year following Total 1,795,000 <FN> 1. The reason the Company has decided to issue stock options with a vesting date to be determined is because the Company anticipates issuing more stock options within the next few months to new employees that may be joining the Company. Phage believes it will determine a vesting date by March 2001 regardless of whether more stock options are issued. 2. Non-statutory stock options issued to Service Providers which include employees, directors or consultants/advisors. 3. Incentive stock options issued to employees of Phage. </FN>
Terms of the Stock Incentive Plan --------------------------------- General. The Board of Directors and Majority Stockholders have adopted and approved a stock option plan (the "Plan"). The purpose of the Plan is to enable Phage to offer its officers, directors, employees, consultants and advisors performance-based incentives and other equity interests in Phage, thereby attracting, retaining, and rewarding such personnel. Phage believes that increased share ownership by such persons more closely aligns stockholder and employee interests by encouraging a greater focus on the profitability of Phage. There is reserved for issuance under the Plan an aggregate of 10% of shares of Common Stock of Phage issued and outstanding from time to time. All of such shares may, but need not, be issued pursuant to the exercise of incentive stock options. Options granted under the Plan may be either "incentive stock options," as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or non-statutory stock options. In addition, awards of or rights to purchase shares of Phage's Common Stock ("Stock Rights") may be granted under the Plan. Phage has reserved for issuance 3,000,000 shares of the common stock of Phage pursuant to the Stock Option Plan. There are currently 1,795,000 stock options issued under the Stock Option Plan. In addition to the foregoing, Phage anticipates it will assume the obligations of the stock option plan for Phage Therapeutics and options issued under that plan on and if it is able to acquire 100% of the issued and outstanding share capital of Phage Therapeutics Currently, 1,405,000 options are issued and outstanding exercisable for shares of Phage Therapeutics. Administration. The Plan will be administered by the Board of Directors or a committee appointed by the Board of Directors (the "Administrator"). The Administrator, subject to the terms and conditions of the Plan, has authority to: - select the persons to whom options and Stock Rights are to be granted; 42
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- determine the number of shares of Common Stock to be covered by each option and Stock Right granted; - approve forms of option agreements for use under the Plan; - determine the terms and conditions of any option or Stock Right; - reduce the exercise price of any option or Stock Right if the fair market value of the Common Stock covered by such option or Stock Right has declined since the date the option or Stock Right was granted; - institute an option exchange program; - interpret the Plan and awards granted under the Plan; - prescribe, amend and rescind rules and regulations relating to the Plan or sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; - modify or amend each option or Stock Right issued; - allow optionees to satisfy withholding tax obligations by electing to have Phage withhold from the shares to be issued on exercise of an option or Stock Right that number of shares having a fair market value equal to the amount required to be withheld; - authorize any person to execute on behalf of Phage any instrument required to effect the grant of an option or Stock Right previously granted by the Administrator; and - make all other determinations and take all other actions necessary or advisable for the administration of the Plan. All decisions, interpretations and other actions of the Administrator are final and binding on all holders of options and Stock Rights. Eligibility; Limitations of Options. Non-statutory stock options and Stock Rights may be granted under the Plan to employees, directors and consultants of Phage or any parent or subsidiary of Phage. Incentive stock options may be granted only to employees. Section 162(m) of the Code places limits on the deductibility for federal income tax purposes of compensation paid to certain executive officers of Phage. In order to preserve Phage's ability to deduct the compensation income associated with options granted to such persons, the Plan provides that no employee may be granted, in any fiscal year of Phage, options to purchase more than 1,000,000 shares of Common Stock plus options to purchase up to an additional 1,000,000 shares of Common Stock in connection with such employee's initial commencement of service to Phage. Terms and Conditions of Options. Options granted under the Plan are subject to additional terms and conditions under the individual option agreement. These terms and conditions include: - Exercise Price. The Administrator will determine the exercise price of options granted at the time of grant. The exercise of an incentive stock option may not be less than 100% of the fair market value of the Common Stock on the date such option is granted; provided, however, the exercise of an incentive stock option granted to a 10% stockholder may not be less than 110% of the fair market value of the Common Stock on the date such option is granted. The fair market value of the Common Stock is generally determined with reference to the closing sale price for the Common Stock (or the closing bid if no sales were reported) on the last market trading day prior to the date the option is granted. The exercise price of a non-statutory stock option may be determined by the Administrator, provided however, the exercise price of a nonstatutory stock option intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code may not be less than 100% of the fair market value of the Common Stock on the date of grant. - Exercise of Option. The Administrator determines when options become exercisable, and may in its discretion, accelerate the vesting of any outstanding option. - Form of Consideration. The means of payment for shares issued on exercise of an option is specified in each option agreement. The Plan permits payment to be made by cash, check, promissory note, other shares of Common Stock of Phage (with some restrictions), cashless exercise, a reduction in the amount of any Company liability to the optionee, any other form of consideration permitted by applicable law, or any combination thereof. - Term of Option. The term of an incentive stock option may be no more than ten years from the date of grant; provided that in the case of an incentive stock option granted to a 10% stockholder, the term of the option may be no more than five years from the date of grant. No option may be exercised after the 43
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expiration of its term. - Termination of Employment. If an optionee's employment, directorship or consulting relationship terminates for any reason (other than death or disability), then all options held by the optionee under the Plan expire on the earlier of (i) the date set forth in his or her notice of grant or stock option agreement or (ii) the expiration date of such option. To the extent the option is exercisable at the time of such termination, the optionee may exercise all or part of his or her option at any time before termination. - Permanent Disability; Death. If an optionee's employment, directorship or consulting relationship terminates as a result of permanent and total disability (as defined in the Code) or death, then all options held by such optionee under the Plan will generally expire on the earlier of (i) twelve months from the date of termination of optionee's employment or (ii) the expiration date of the option. The optionee or, if applicable, the executor or other legal representative of the optionee's estate may exercise all or part of the optionee's option at any time before such expiration to the extent that the option was exercisable at the time of termination of employment. - Non-transferability of Options. Options granted under the Plan generally are not transferable other than by will or the laws of descent and distribution, and may be exercised during the optionee's lifetime only by the optionee. - Value Limitation. If the aggregate fair market value of all shares of Common Stock subject to an optionee's incentive stock option which are exercisable for the first time during any calendar year exceeds $100,000, the excess portion of such option will be treated as a non-statutory stock option. - Other Provisions. The stock option agreement may contain other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator. Stock Rights. A Stock Right may award the recipient Common Stock or may give the recipient the right to purchase Common Stock. Shares received or purchased pursuant to a Stock Right will be subject to a restricted stock agreement between Phage and the recipient. Unless the Administrator determines otherwise, the restricted stock agreement will give Phage a reacquisition option exercisable on the voluntary or involuntary termination of the recipient's employment or consulting relationship with Phage for any reason (including death and disability). The acquisition price for any shares reacquired by Phage will be the original price paid by the recipient, if any. The reacquisition option lapses at a rate determined by the Administrator. A Stock Right and the stock acquired (while restricted) is generally nontransferable other than by will or the laws of descent and distribution. Adjustments of Options on Changes in Capitalization. In the event that the stock of Phage changes by reason of any stock split, reverse stock split, stock dividend, combination, reclassification or other similar changes in the capital structure of Phage affected without the receipt of consideration, appropriate adjustments will be made in the number and class of shares of stock subject to the Plan, the number and class of shares of stock subject to any option or Stock Right outstanding under the Plan, and the exercise price of any such award. In the event of a liquidation or dissolution, any unexercised options will terminate. The Administrator may, in its discretion, provide that each optionee will fully vest in and have the right to exercise the optionee's option or Stock Right as to all of the optioned stock, and shall release all restrictions on any restricted stock prior to the consummation of the liquidation or dissolution. In the event of a merger, sale or share exchange of Phage into another corporation that results in a change of control of Phage, options that would have become vested within 18 months after the closing date of the merger transaction will accelerate and become fully vested on the closing of the transaction. In the event of a change of control transaction, any other outstanding options that are not accelerated would be assumed by the successor company or an equivalent option would be substituted by the successor company. If any of these options are not assumed or substituted, they would terminate. Amendment and Termination of the Plan. The Administrator may amend, alter, suspend or terminate the Plan, or any part of the Plan, at any time and for any reason. No such action by the Board or stockholders may alter or impair any option or Stock Right previously granted under the Plan without the written consent of the optionee/recipient. Unless terminated earlier, the Plan will terminate ten years from the date of its approval by the stockholders or the Board, whichever is earlier. Federal Income Tax Consequences of Options - Incentive Stock Options. An optionee who is granted an incentive stock option does not generally recognize taxable income at the time the option is granted or on its exercise, although the exercise may subject the optionee to the alternative minimum tax. On a disposition of the shares more than two years after grant of the option and one year after exercise of the option, any gain or loss is treated as long-term capital gain or 44
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loss. If these holding periods are not satisfied, the optionee recognizes ordinary income at the time of disposition equal to the difference between the exercise price and the lower of: o the fair market value of the shares at the date of the option exercise; or o the sale price of the shares. Any gain or loss recognized on such a premature disposition of the shares in excess of the amount treated as ordinary income is treated as long-term or short-term capital gain or loss, depending on the holding period. A different rule for measuring ordinary income on such a premature disposition may apply if the optionee is an officer, director, or 10% stockholder of Phage. Phage is entitled to a deduction in the same amount as the ordinary income recognized by the optionee. Federal Income Tax Consequences of Options - Non-statutory Stock Options. An optionee does not recognize any taxable income at the time he or she is granted a non-statutory stock option. On exercise, the optionee recognizes taxable income generally by the excess of the then fair market value of the shares over the exercise price. Any taxable income recognized in connection with an option exercise by an employee of Phage is subject to tax withholding by Phage. Phage is entitled to a deduction in the same amount as the ordinary income recognized by the optionee. On a disposition of such shares by the optionee, any difference between the sale price and the optionee's exercise price, to the extent not recognized as taxable income as provided above, is treated as long-term or short-term capital gain or loss, depending on the holding period. Stock Rights. Restricted stock is generally acquired pursuant to Stock Rights. At the time of acquisition, restricted stock is subject to a "substantial risk of forfeiture" within the meaning of Section 83 of the Code. As a result, the recipient will not generally recognize ordinary income at the time of acquisition. Instead, the recipient will recognize ordinary income on the dates when the stock ceases to be subject to a substantial risk of forfeiture. The stock will generally cease to be subject to a substantial risk of forfeiture when it is no longer subject to Phage's right to reacquire the stock on the recipient's termination of employment with Phage. At such times, the recipient will recognize ordinary income measured as the difference between the purchase price (if any) and the fair market value of the stock on the date the stock is no longer subject to a substantial risk of forfeiture. The purchaser may accelerate to the date of acquisition his or her recognition of ordinary income, if any, and the beginning of any capital gain holding period, by timely filing an election pursuant to Section 83(b) of the Code. In such event, the ordinary income recognized, if any, is measured as the difference between the purchase price and the fair market value of the stock on the date of purchase and the capital gain holding period commences on such date. The ordinary income recognized by a purchaser who is an employee will be subject to tax withholding by Phage. Different rules may apply if the purchaser is also an officer, director, or 10% stockholder of Phage. A copy of the Stock Option Plan is attached as Exhibit 10.7. ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Under Florida law, director immunity from liability to a corporation or its shareholders for monetary liabilities applies automatically unless it is specifically limited by a corporation's Articles of Incorporation(which is not the case with Phage's Articles of Incorporation). Excepted from that immunity are: (i) a willful failure to deal fairly with the corporation or its shareholders in connection with a matter in which the director has a material conflict of interest; (ii) a violation of criminal law(unless the director had reasonable cause to believe that his or her conduct was lawful or no reasonable cause to believe that his or her conduct was unlawful);(iii) a transaction from which the director derived an improper personal profit; and (iv) willful misconduct. Under certain circumstances, Florida law provides for indemnification of Phage's officers, directors, employees and agents against liabilities that they may incur in such capacities. In general, any officer, director, employee or agent may be indemnified against expenses, fines, settlements or judgments arising in connection with a legal proceeding to which such person is a party, if that person's actions were in good faith, were believed to be in Phage's best interest, and were not unlawful. Unless such person is successful upon the merits in such action, indemnification may be awarded only after a determination by independent decision of the Board of Directors, by legal counsel, or by a vote of the shareholders, that the applicable standard of conduct was met by the person to be indemnified. The circumstances under which indemnification is granted in connection with an action brought 45
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on behalf of Phage is generally the same as those set forth above; however, with respect to such actions, indemnification is granted only with respect to expenses actually incurred in connection with the defense or settlement of the action. In such actions, the person to be indemnified must have acted in good faith and in a manner believed to have been in Phage's best interest, and must not have been adjudged liable for negligence or misconduct. The foregoing is only a summary description and is qualified in its entirety by reference to the applicable Florida Business Corporation Act, specifically Section 607.0850 thereof. Article X of Phage's Articles of Incorporation limits directors' personal liability to Phage or its shareholders to acts or omissions which involve intentional misconduct, fraud or a knowing violation of law, including repayment of distributions made in violation of Florida Corporate law. Except as otherwise disclosed in "Certain Relationships and related Transactions", as of the date hereof, Phage has no contracts in effect providing any person or entity with any specific rights of indemnification although Phage's Bylaws may authorize its Board of directors to enter into and deliver such contracts to provide a person or entity with specific rights of indemnification in addition to the rights provided in the Articles of Incorporation and Bylaws to the fullest extent provided under Florida law. Phage has no special insurance against liability although Phage's Bylaws provide that Phage may, unless prohibited by Florida law, maintain such insurance. Insofar as indemnification for liabilities arising under the securities Act, may be permitted to directors, officers and controlling persons of Phage, Phage has been advised that in the opinion of the commission, such indemnification is against public policy as expressed in the securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Phage of expenses incurred or paid by a director, officer or controlling person of Phage in the successful defense of any action, suit or proceedings) is asserted by such director, officer or controlling person in connection with any securities being registered, Phage will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issues. INDEMNIFICATION OF DIRECTORS, OFFICERS OR OTHER PERSONS CONTROLLING PHAGE FOR LIABILITIES ARISING UNDER THE SECURITIES ACT IS HELD TO BE AGAINST PUBLIC POLICY BY THE COMMISSION AND IS, THEREFORE, UNENFORCEABLE. ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements of the Company as of the end of December 31, 2000 appear at the end of this registration statement beginning with the Index to Financial Statements on page 46 . The quarterly financials for the period ending March 31, 2001 have been filed on the Company's 10QSB filed with the SEC on May 21, 2001, with an amendment filed May 22, 2001. The 10QSB is hereby incorporated by reference. The quarterly financials for the period ending March 31, 2001 appear at the end of this registration statement beginning with the Index to Financial Statements on page 46. ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no changes or disagreements with the accountants on accounting and financial disclosure. ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS. The financial statements required as a part of this Registration Statement are included beginning on the index page 47 of this Registration Statement. 46
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PHAGE THERAPEUTICS INTERNATIONAL INC. (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 TABLE OF CONTENTS Page No. Consolidated balance sheets 1 Consolidated statements of operations 2 Consolidated statements of cash flows 3 & 4 Consolidated statements of changes in stockholders' equity 5 & 6 Notes to the consolidated financial statements 7 to 21 47
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[Enlarge/Download Table] PHAGE THERAPEUTICS INTERNATIONAL INC. 1 (A Development Stage Company) CONSOLIDATED BALANCE SHEETS (Unaudited) ======================================================================================== March 31, December 31, 2001 2000 -------------- ------------ ASSETS Current Cash and cash equivalents $ 1,515,593 $ 1,029,134 Prepaid expenses and other current assets 280,348 23,720 -------------- ------------ Total current assets 1,795,941 1,052,854 Capital assets (Note 4) 188,045 60,523 Deposit, non-current (Note 11) 75,000 75,000 -------------- ------------ Total assets $ 2,058,986 $ 1,188,377 ======================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Accounts payable $ 205,879 $ 222,545 Accrued liabilities 167,055 164,672 Due to related parties (Note 9) 133,578 144,211 Notes payable (Note 5) 153,262 161,407 -------------- ------------ Total current liabilities 659,774 692,835 Minority interest (8,369) (8,369) -------------- ------------ 651,405 684,466 -------------- ------------ Stockholders' equity Capital stock (Note 6) Authorized 50,000,000 common shares with a par value of $0.001 Issued and outstanding December 31, 2000 - 10,895,444 March 31, 2001 - 10,895,444 10,895 10,895 Additional paid-in capital 5,877,670 5,877,670 Subscriptions received in advance (Notes 6 and 12) 1,500,000 10,000 Non-qualified stock options outstanding (Note 7) 153,382 138,943 Deficit accumulated during the development stage (6,134,366) (5,533,597) -------------- ------------ Total stockholders' equity 1,407,581 503,911 -------------- ------------ Total liabilities and stockholders' equity $ 2,058,986 $ 1,188,377 ======================================================================================== Nature and continuance of operations (Note 1) Commitments and contingencies (Note 11) Subsequent events (Note 12) The accompanying notes are an integral part of these consolidated financial statements. 48
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[Enlarge/Download Table] PHAGE THERAPEUTICS INTERNATIONAL INC. 2 (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) ========================================================================================================================== Cumulative Amounts From Date of Inception on December 24, Three Month Three Month 1996 to Period Ended Period Ended March 31, March 31, March 31, 2001 2001 2000 ----------------- ---------------- ---------------- EXPENSES General and administrative $ 3,952,309 $ 311,674 $ 164,918 Research and development 1,886,384 299,030 11,484 ----------------- ---------------- ---------------- Loss from operations (5,838,693) (610,704) (176,402) ----------------- ---------------- ---------------- OTHER INCOME (EXPENSE) Interest income 47,228 9,935 3,370 Loss on disposal of capital assets (Note 4) (376,392) - (500) ----------------- ---------------- ---------------- (329,164) 9,935 2,870 ----------------- ---------------- ---------------- Loss before extraordinary item (6,167,857) -600769 (173,532) EXTRAORDINARY ITEM Gain on extinguishment of debts, net of income taxes of $Nil 33,491 - - ----------------- ---------------- ---------------- Loss for the period $ (6,134,366) $ (600,769) $ (173,532) ==================================================================== ================= ================= ================= Basic and diluted loss per share $ (0.06) $ (0.02) ==================================================================== ================= ================= ================= Weighted average number of shares outstanding 10,895,444 7,392,586 ==================================================================== ================= ================= ================= The accompanying notes are an integral part of these consolidated financial statements. 49
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[Enlarge/Download Table] PHAGE THERAPEUTICS INTERNATIONAL INC. 3 (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ================================================================================================================================== Cumulative Amounts From Date of Inception on December 24, Three Month Three Month 1996 to Period Ended Period Ended March 31, March 31, March 31, 2001 2001 2000 ----------------- ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Loss for the period $ (6,134,366) $ (600,769) $ (173,532) Adjustments to reconcile net loss to net cash used in operating activities: Amortization 165,307 5,878 12,501 Compensation expense from vesting of non-qualified stock options 153,382 14,439 4,785 Loss on disposal of capital assets 376,392 - - Interest note payable 25,064 3,855 - Consulting 160,000 - - Change in non-cash working capital items (Increase) decrease in prepaid expenses and other current assets (278,348) (256,628) 6,250 Increase (decrease) in accounts payable 166,861 (16,666) (48,471) Increase (decrease) in accrued liabilities 167,055 2,383 (68,775) Increase (decrease) in due to related parties 133,578 (10,633) (56,284) ----------------- ---------------- ---------------- Net cash used in operating activities (5,065,075) (858,141) (323,526) ---------------- ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of cash on purchase of subsidiary 173 - - Purchases of capital assets (737,025) (133,400) (1,300) Deposit (75,000) - - ----------------- ---------------- ---------------- Net cash used in investing activities (811,852) (133,400) (1,300) ----------------- ---------------- ---------------- - continued - The accompanying notes are an integral part of these consolidated financial statements. 50
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[Enlarge/Download Table] PHAGE THERAPEUTICS INTERNATIONAL INC. 4 (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) ============================================================================================================ Cumulative Amounts From Date of Inception on December 24, Three Month Three Month 1996 to Period Ended Period Ended March 31, March 31, March 31, 2001 2001 2000 ----------------- ----------------- ----------------- Continued... CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of capital assets 7,281 - - Notes payable (repayment) 128,198 (12,000) 56,000 Net proceeds received from stock issuances 5,757,041 - 1,360,000 Subscriptions received in advance 1,500,000 1,490,000 - ----------------- ----------------- ----------------- Net cash provided by financing activities 7,392,520 1,478,000 1,416,000 ----------------- ----------------- ----------------- Change in cash position during the period 1,515,593 486,459 1,091,174 Cash and cash equivalents, beginning of period - 1,029,134 1,223 ----------------- ----------------- ----------------- Cash and cash equivalents, end of period $ 1,515,593 $ 1,515,593 $ 1,092,397 ==================================================== ================= ================= ================= Supplemental disclosure with respect to cash flows (Note 10) The accompanying notes are an integral part of these consolidated financial statements. 51
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[Enlarge/Download Table] PHAGE THERAPEUTICS INTERNATIONAL INC. 5 (A Development Stage Company) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) Common Stock Subscrip- Non- Deficit ------------------------ tions qualified Accumulated Additional Received Stock During the Number Paid-in In Options Development of Shares Amount Capital Advance Outstanding Stage Total ----------- ------------- ------------- ----------- ----------- ------------ ------------ Stock issued for expenses incurred by founder 571,429 $ 571 $ 39,429 $ - $ - $ - $ 40,000 Stock issued for cash - December 1996 1,785,707 1,786 98,214 - - - 100,000 Stock issued for cash - March through July 1997 1,600,000 1,600 638,400 - - - 640,000 Stock issued for cash - August through December 1997 735,000 735 734,265 - - - 735,000 Issuance of non-qualified stock options - - - - 6,494 - 6,494 Loss for the period - - - - - (1,324,750) (1,324,750) ----------- ----------- ------------ ---------- --------- ------------ ------------- Balance at December 31, 1997 4,692,136 4,692 1,510,308 - 6,494 (1,324,750) 196,744 Stock issued for cash - February through March 1998 165,000 165 264,835 - - - 265,000 Stock issued as compensation for bridge loan financing 22,857 23 79,977 - - - 80,000 Stock issued for cash - April through May 1998, net of offering expenses of $66,959 500,000 500 432,541 - - - 433,041 Contribution of capital by shareholders - - 300,000 - - - 300,000 Investment banking fee paid by shareholders - - (300,000) - - - (300,000) Advances on merger letter of intent converted to common stock November 1998 - - 332,000 - - - 332,000 Deferred compensation from non- qualified stock options outstanding - - - - 31,438 - 31,438 Loss for the year - - - - - (1,373,505) (1,373,505) ----------- ----------- ------------ ---------- --------- ------------ ------------- Balance at December 31, 1998 5,379,993 5,380 2,619,661 - 37,932 (2,698,255) (35,282) Advances on merger converted to common stock - February 1999 - - 50,000 - - - 50,000 Assumption of debt by parent converted to common stock, February 1999 - - 150,000 - - - 150,000 Acquisition of parent 2,028,375 2,028 (36,873) - - - (34,845) Minority interest recorded at March 25, 1999 (1,486,852) (1,486) 16,022 - - - 14,536 Shares issued for cash and receivables - April 1999 187,500 188 149,812 - - - 150,000 - continued - The accompanying notes are an integral part of these consolidated financial statements. 52
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[Enlarge/Download Table] PHAGE THERAPEUTICS INTERNATIONAL INC. 6 (A Development Stage Company) CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) Common Stock Subscrip- Non- Deficit -------------------------- tions qualified Accumulated Additional Received Stock During the Number Paid-in In Options Development of Shares Amount Capital Advance Outstanding Stage Total ------------- ---------- ------------- ------------ ------------ ------------- -------------- Continued... Shares issued for acquisition of additional shares of subsidiary - April 1999 629,284 628 (6,795) - - - (6,167) Shares issued for consulting 71,429 71 79,929 - - - 80,000 Deferred compensation from non- qualified stock options outstanding - - - - 72,218 - 72,218 Loss for the year - - - - - (1,487,498) (1,487,498) ------------- ---------- ------------- ------------ ------------ ------------- -------------- Balance at December 31, 1999 6,809,729 6,809 3,021,756 - 110,150 (4,185,753) (1,047,038) Shares issued for cash in March 2000 1,942,858 1,943 1,358,057 - - - 1,360,000 Shares issued for cash in December 2000 2,142,857 2,143 1,497,857 - - - 1,500,000 Deferred compensation from non- qualified stock options outstanding - - - - 28,793 - 28,793 Subscriptions received in advance - - - 10,000 - - 10,000 Loss for the year - - - - - (1,347,844) (1,347,844) ------------- ---------- ------------- ------------ ------------ ------------- -------------- Balance at December 31, 2000 10,895,444 10,895 5,877,670 10,000 138,943 (5,533,597) 503,911 Deferred compensation from non-qualified stock options outstanding - - - - 14,439 - 14,439 Subscriptions received in advance - - - 1,490,000 - - 1,490,000 Loss for the period - - - - - (600,769) (600,769) ------------- ---------- ------------- ------------ ------------ ------------- -------------- Balance at March 31, 2001 10,895,444 $ 10,895 $ 5,877,670 $ 1,500,000 $ 153,382 $ (6,134,366) $ 1,407,581 =================================== ============= ========== ============= ============ ============ ============= ============= The accompanying notes are an integral part of these consolidated financial statements. 53
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PHAGE THERAPEUTICS INTERNATIONAL INC. 7 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 1. NATURE AND CONTINUANCE OF OPERATIONS Phage Therapeutics International Inc. ("Phage", or the "Company") is a development stage company focused on the development, manufacturing and marketing of bacteriophage therapeutic agents as pharmaceutical products. The products will be developed specifically for the treatment of antibiotic-resistant and other bacterial infectious agents. The Company was originally incorporated in the State of Florida on July 8, 1997 under the name All Products Distribution Corporation, and changed its name to Phage Therapeutics International Inc. on August 19, 1998. The consolidated Company's date of inception is considered to be December 24, 1996, the date of inception of Phage Therapeutics, Inc. ("PhageTx" or the "Subsidiary"), the Company's legally owned subsidiary. The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As at March 31, 2001 the Company had a working capital of $1,136,167 and has incurred losses of $6,134,366 from the date of inception , December 24, 1996 to March 31, 2001. The Company anticipates expending approximately $5,000,000 over the next twelve month period in pursuing its anticipated plan of operations. The Company anticipates covering these costs by additional equity financing. Subsequent to March 31, 2001, the Company completed an offering of 2,142,857 units at $0.70 per unit pursuant to Regulation D, Rule 506 of the United States Securities Act of 1933, as amended. The total proceeds of $1,500,000 will help the Company complete its anticipated plan of operations. If the Company is unable to complete its further financing requirements, it will then modify its expenditures and plan of operations to coincide with the actual financing completed. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, changes in stockholders' equity and cash flows at March 31, 2001 and for the periods then ended have been made. These financial statements should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2000. The results of operations for the period ended March 31, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001. 2. SIGNIFICANT ACCOUNTING POLICIES In preparing these financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for the period. Actual results in the future periods could be different from these estimates made in the current period. The following is a summary of the significant accounting policies of the Company. Basis of consolidation and presentation The consolidated financial statements include the accounts of Phage Therapeutics International Inc. and its majority- owned subsidiary Phage Therapeutics, Inc., a Washington corporation. As of March 31, 2001, the Company owned approximately 88% of the outstanding common stock of Phage Therapeutics, Inc. All significant inter-company transactions have been eliminated in consolidation. 54
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PHAGE THERAPEUTICS INTERNATIONAL INC. 8 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Basis of consolidation and presentation (cont'd...) Effective March 25, 1999, the Company acquired 71% of the outstanding common stock of Phage Therapeutics, Inc. through a series of share exchange agreements with certain PhageTx shareholders (see Note 3). Added to the Company's previous share holdings of PhageTx, this transaction increased the Company's interest in PhageTx, to approximately 80%. As a result of this transaction, the former shareholders of PhageTx obtained control of the Company. For accounting purposes, this acquisition has been treated as a recapitalization of the Company. The accounting for this recapitalization is similar to a reverse take-over in which the financial statements presented include the accounts of PhageTx since inception (December 24, 1996) and the accounts of the company since the date of acquisition, March 25, 1999 to March 31, 2001. Cash and cash equivalents All short-term investments, which consist entirely of bank repurchase agreements and certificates of deposit, with maturities of three months or less at date of purchase are considered to be cash equivalents. The amounts are recorded at cost, which approximates fair market value. Capital assets Capital assets are recorded at cost and are amortized over their useful lives using the straight-line method, which range from three to five years. Research and development expenses Research and development costs are expensed as incurred. Accounting for impairment of long-lived assets and for long-lived assets to be disposed of The Company has adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). In accordance with SFAS No. 121, Long-Lived Assets to be held and used by the Company are reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, the Company bases its evaluation on such impairment indicators as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. In the event that facts and circumstances indicate that the carrying amount of an asset may not be recoverable and an estimate of future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss will be recognized. As at December 31, 2000, the Company's analysis indicated that there was an impairment of its long-lived assets as outlined in Note 4. Management has estimated that the research and experimentation costs to date are greater than the estimated future undiscounted cash flows. Therefore, research and experimentation costs to date have been expensed during the development stage period. 55
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PHAGE THERAPEUTICS INTERNATIONAL INC. 9 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Financial instruments The Company's financial instruments consist of cash and cash equivalents, deposit, non-current, accounts payable, accrued liabilities, due to related parties and notes payable to related party. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximate their carrying values, unless otherwise noted. Loss per share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under SFAS 128, basic and diluted earnings per share are to be presented. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares outstanding in the period. Diluted earnings per share takes into consideration common shares outstanding (computed under basic earnings per share) and potentially dilutive common shares. The Company is a development stage company and has recorded a loss per share. The weighted average number of shares outstanding for 2001, 10,895,444 and 2000, 7,392,586, do not include the 1,942,858 (2000 - 2,028,572) warrants outstanding, the stock options of 2,880,000 (2000 - 2,755,000) and the 2,142,857 common shares issued subsequent to March 31, 2001 as their effect would be anti-dilutive. Of the total 1,942,858 shares issued in the three month period ended March 31, 2000, 582,857 shares are included in the weighted average number of 7,392,586 shares outstanding at March 31, 2000. Income taxes Income taxes are provided in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Stock-based compensation Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and has adopted the disclosure only provisions of SFAS 123. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee is required to pay for the stock. The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services". 56
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PHAGE THERAPEUTICS INTERNATIONAL INC. 10 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Accounting for derivative instruments and hedging instruments In June 1998, the Financial Accounting Standards Board ("FASB") issued the Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on the derivative designation. The effective date of SFAS 133 was deferred by FASB Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", and further amended by FASB Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Transactions". Since the Company does not have derivative instruments and hedging activities, pursuant to SFAS 133, there would be no impact on its financial position or the results of its operations from the adoption of this accounting policy. Segment Reporting In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. The statement is effective for fiscal years beginning after December 15, 1997. The Company does not have any reporting requirements as defined by SFAS No. 131. 3. RECAPITALIZATION During March 1999 the Company issued 3,393,141 common shares to acquire 71% of the issued and outstanding shares of Phage Therapeutics, Inc. (the "PhageTx Acquisition"). This transaction increased the Company's ownership of PhageTx to approximately 80%. As a result of this transaction the former shareholders of PhageTx acquired control over a majority of shares of the Company. Accordingly, the transaction has been treated for accounting purposes as a recapitalization of the Company and, therefore, these financial statements represent a continuation of the legal subsidiary, PhageTx, not the Company, as the legal parent. In accounting for this transaction: i) PhageTx is deemed to be the purchaser and parent company for accounting purposes. Accordingly, its net assets are included in the consolidated balance sheet at their historical book values; ii) Phage was formed for the sole purpose of seeking a target acquisition candidate and its net assets as of the Effective Date were negative. Accordingly, the acquisition of the Company will be accounted for at the net book value of the net assets of the Company recorded at the date of acquisition. The net assets acquired are as follows: Cash and equivalents $ 173 Account receivable 4,000 Accounts payable (39,018) ----------------- Net assets acquired $ (34,845) ================ 57
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PHAGE THERAPEUTICS INTERNATIONAL INC. 11 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 3. RECAPITALIZATION (cont'd...) iii) Historical cost financial statements presented are those of PhageTx, with equity amounts of PhageTx retroactively restated to reflect the number of shares received in the business combination. iv) The consolidated statements of operations and cash flows include PhageTx's results of operations and cash flows from December 24, 1996 (date of inception) and Phage's results of operations from the Effective Date. 4. CAPITAL ASSETS ========================================== ================= ================= March 31, December 31, 2001 2000 ----------------- ---------------- Research and development equipment $ 111,777 $ 33,499 Computer and office equipment 69,557 52,309 Furniture and fixtures 20,979 18,178 Leasehold improvements 41,414 6,341 ----------------- ---------------- 243,727 110,327 Accumulated amortization (55,682) (49,804) ----------------- ---------------- $ 188,045 $ 60,523 ========================================== ================= ================= In accordance with SFAS No. 121, Long-Lived Assets to be held and used by the Company, are reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. As at December 31, 2000, the Company's analysis of its capital assets determined an impairment value of $6,598 on research and development equipment, computer and office equipment and furniture and fixtures. The amount of $6,598 was the net book value of $104,529 in capital cost minus accumulated amortization of $97,931. The amount was recorded as a loss on disposal of capital assets. 5. NOTES PAYABLE TO RELATED PARTY ======================================================================= March 31, December 31, 2001 2000 ----------------- ----------------- Principal amount $ 140,198 $ 140,198 Accrued interest 13,064 21,209 ----------------- ----------------- $ 153,262 $ 161,407 ================= ================= ======================================================================= In 1999, the Company received several loans from Prostar Limited which totalled $140,198. The loans bear interest at 11% per annum and are repayable on demand. 58
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PHAGE THERAPEUTICS INTERNATIONAL INC. 12 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 6. CAPITAL STOCK As a result of the PhageTx Acquisition transaction, all historical stockholders' equity amounts have been retroactively restated to reflect the number of shares received in the business combination. Accordingly, the historical equity amounts shown in the Consolidated Statement of Changes in Stockholders' Equity reflect the equity transactions completed by PhageTx, with share amounts restated to reflect the equivalent number of shares of the Company's common stock, issued in exchange for the respective shares of PhageTx stock. Equity transactions are shown as if the Company had acquired 100% of the issued and outstanding shares of PhageTx common stock, an adjustment is recorded to indicate the number of shares of the legal parent outstanding as of the date of the acquisition, and a non-controlling interest is deducted from the total share amount to reflect the number of shares of PhageTx not yet owned by the Company as of the date of the acquisition. At inception of PhageTx, 2,357,136 shares of common stock were issued at an average price of approximately $0.06 per share, as restated. Consideration for issuance of the shares consisted of $100,000 in cash and $40,000 as reimbursement of expenses paid on behalf of PhageTx by a founder. Between April 1997 and July 1997 an additional 1,600,000 shares of common stock were issued for cash consideration at a price of $0.40 per share, as restated. Under the terms of an employment agreement, the President and CEO of PhageTx was granted the right to purchase 100,000 shares of common stock (which is included in the 1,600,000 shares), at a price of $0.40 per share, as restated, representing the market price of the stock at the time employment commenced. Beginning April 1997, a monthly amount of $5,000 was withheld from salary payments as consideration for the stock purchase. All consideration related to this stock purchase had been received by PhageTx as of December 31, 1997. In August 1997 PhageTx initiated a financing round which raised $1.0 million. As of December 31, 1997, 735,000 shares of common stock had been issued in connection with this round at a price of $1.00 per share. Subsequent to December 31, 1997, an additional 265,000 shares of common stock were subscribed to complete the minimum specified in the offering, with 100,000 of these shares purchased by the Company. The amount paid by the Company for these shares is treated as a contribution of capital to PhageTx in the consolidated financial statements. During April and May 1998, PhageTx completed a private placement financing round raising an additional $500,000 to fund PhageTx's short-term operations. PhageTx engaged a placement agent to assist with the financing round. In connection with this financing, the placement agent received approximately 13% of the cash raised in the offering as commission and expense reimbursement and was to receive approximately 85,000 post-consolidated common shares, as restated of the Company. Certain founders of PhageTx transferred to the placement agent, for a total value of $300,000, the 85,000 common shares of PhageTx from their shareholdings. This transaction was recorded as a contribution of capital. Prior to the beginning of the financing round described above, PhageTx completed a bridge debt financing of $200,000 which consisted of promissory notes, each with a term of 40 days, paying interest at 10% per annum. These notes were repaid in April 1998. The note holders also received, as consideration for entering into the note agreements, 22,857 shares of newly issued common stock, as restated, for a total value of $80,000. Between June and October 1998 Phage advanced to PhageTx a total of $332,000 as pre-payment on letters of intent to merge the two entities. Under the terms of the letters of intent, if a merger transaction was not completed within a specified period of time, the advances converted to common stock of PhageTx at a price of $1.00 per share. In November 1998, these advances were converted to PhageTx common stock. Upon restatement for the PhageTx Acquisition transaction effective March 25, 1999, this amount is treated as a contribution of capital to PhageTx by the Company. 59
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PHAGE THERAPEUTICS INTERNATIONAL INC. 13 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 6. CAPITAL STOCK (cont'd...) During February 1999, pursuant to the letters of intent, the advances of $50,000 to PhageTx were converted to common stock of PhageTx. During February 1999, certain shareholder notes payable and expenses paid by shareholders on behalf of PhageTx were assigned by the shareholders to the Company. PhageTx issued to the Company 150,000 shares of PhageTx common stock in satisfaction of the debt of $150,000. Similar to the above transaction, this amount is treated as a contribution of capital to PhageTx by the Company upon restatement for the PhageTx Acquisition transaction. During April 1999 the Company sold an additional 187,500 shares of common stock at a price of $0.80 per share. Under the terms of private placement and investment banking agreements entered into by PhageTx in March 1998, upon the completion of certain placement milestones the placement agent was to receive (1) warrants for 300,000 shares of PhageTx common stock with an exercise price of $1.25 per share for a three-year term beginning at the first public trade of PhageTx stock; and (2) upon a merger with a public company or completion of an initial public offering the placement agent would receive 500,000 shares of PhageTx common stock. These agreements were terminated in June 1998. Based on completion of the PhageTx Acquisition transaction, the former placement agent asserted that the Company was liable under the aforementioned agreements to issue common shares and warrants in satisfaction of the stated terms. During July 1999, in settlement of the liability, the Company issued to the placement agent 71,429 shares of common stock, plus warrants to purchase 85,714 shares of common stock at an exercise price of $1.25 per share until March 25, 2001. Because these shares were issued in settlement of a debt owed by PhageTx, an amount of $80,000, calculated by multiplying the number of common shares issued by a price of $1.119 per share, has been recorded as consulting fees in general and administrative expense. In March 2000, the Company issued pursuant to a private placement 1,942,858 units at $0.70 per unit, for total proceeds of $1,360,000. Each unit consists of one common share of the Company and a warrant, which entitles the holder thereof, to purchase another common share of the Company at $1.25 per share until February 22, 2001 and $2.00 per share until February 22, 2002. Subsequent to year end, on February 12, 2001, these warrants were amended and extended from their expiry dates to June 2, 2001 and June 2, 2002. The private placement was issued in accordance with Regulation D, Rule 506 of the United States Securities Act of 1933, as amended. In October 2000, the Company entered into a securities purchase agreement with seven purchasers to purchase 4,285,714 units at $0.70 per unit for total proceeds of $3,000,000. Each unit consists of one common share of the Company and a warrant. For every one and a half warrants, the holder thereof, is entitled to purchase another common share of the Company at an exercise price of $0.70 per share. The exercise date of the warrants has not yet been determined by the Company, therefore, the warrants have not been issued. The Company has received $1,500,000. As payment for the first part of this agreement, the 2,142,857 common shares associated with this payment have been issued. At March 31, 2001, the Company has received the second payment of $1,500,000. The 2,142,857 common shares were issued in May 2001, in accordance with Regulation D, Rule 506 of the United States Securities Act of 1933, as amended. 60
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PHAGE THERAPEUTICS INTERNATIONAL INC. 14 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 6. CAPITAL STOCK (cont'd...) Warrants =============================== ================= ================= March 31, December 31, 2001 2000 ----------------- ---------------- Balance, beginning of period 2,028,572 85,714 Issued - 1,942,858 Exercised - - Expired (85,714) - ----------------- ---------------- Balance, end of period 1,942,858 2,028,572 =============================== ================= ================= As at March 31, 2001 there were 1,942,858 warrants outstanding that are exercisable into commons shares as follows: =========== ==================================== ===================== Number Exercise of Shares Price Expiry Date ----------- ------------------------------------ --------------------- 1,942,858 $ 1.25 June 2, 2001 if not exercised, then at 2.00 June 2, 2002 =========== ==================================== ===================== 7. STOCK OPTIONS Phage Therapeutics International Inc. Stock option plan In January 2000, the board of directors modified the existing stock option plan of the Company and adopted an incentive stock option plan providing for the granting of stock options to officers, directors, employees and key consultants of the Company and its subsidiaries or affiliates. Under the modified plan, the Company is authorized to issue options up to a total of 10% of the shares of the common stock of the Company outstanding from time to time. The options under the modified plan are non-assignable (except in the event of death) and are exercisable for a term of five years. Options granted under the modified plan terminate within 30 days, in respect of any optionee, in the event that such optionee ceases to be a full-time employee. The board of directors may, at its sole discretion, determine the time during which options shall vest and the method of vesting, or that no vesting restriction shall exist. SFAS 123, "Accounting for Stock-Based Compensation", encourages but does not require companies to record compensation cost for employee stock-based compensation plans at fair value. The Company has chosen to account for the employee stock-based compensation using APB 25, "Accounting for Stock Issued to Employees". Accordingly, compensation cost for stock options is measured as the excess, if any, of quoted market price of the Company's stock at the date of the grant over the option price. No stock-based compensation has resulted from the use of this standard. 61
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PHAGE THERAPEUTICS INTERNATIONAL INC. 15 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 7. STOCK OPTIONS (cont'd...) Following is a summary of the stock option activity: [Enlarge/Download Table] ================================== =============== ============= ============= =========== March 31, 2001 March 31, 2000 Weighted Weighted Average Average Number Exercise Number Exercise of Shares Price of Shares Price --------------- ------------- ------------- ----------- Outstanding, beginning of period 1,405,000 $ 0.57 - $ - Granted - - 1,285,000 0.55 --------------- ------------- Outstanding, end of period 1,405,000 $ 0.57 1,285,000 $ 0.55 ================================== =============== ============= ============= =========== The weighted average fair value of options granted to employees, non-employees and consultants during March 31, 2000 was $0.67 per share. Had compensation cost been recognized on the basis of fair value pursuant to SFAS 123, net loss and loss per share would have been adjusted as follows: ========================================================================== Three Month Three Month Period Ended Period Ended March 31, March 31, 2001 2000 ----------------- -------------- Net loss As reported $ (600,769) $ (168,747) ================ ============== Pro-forma $ (606,821) $ (174,799) ================= ============== Basic and diluted loss per share As reported loss per share $ (0.06) $ (0.02) ================ ============== Pro-forma $ (0.06) $ (0.02) ================ ============== ========================================================================== 62
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PHAGE THERAPEUTICS INTERNATIONAL INC. 16 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 7. STOCK OPTIONS (cont'd...) Phage Therapeutics International Inc. (cont'd...) Stock option plan (cont'd...) Following is a summary of the status of options outstanding at March 31, 2001: ================================================================================ Outstanding Options Exercisable Options --------------------------------------- ---------------------- Weighted Average Weighted Weighted Remaining Average Average Contractual Exercise Exercise Exercise Price Number Life Price Number Price -------------------------------------------------------------------------------- $0.55 1,280,000 3.9 $ 0.55 1,280,000 $ 0.75 0.75 125,000 4.2 0.75 65,000 0.75 ----------- ----------- 1,405,000 1,345,000 ================================================================================ The Company granted Nil (2000 - 1,285,000) options to consultants and non-employees during the period, which are accounted for under SFAS 123 and EITF 96-18. The stock compensation recognized using FASB 123 for March 31, 2000 was $86,695, using the Black-Scholes option-pricing model. The options will be amortized over a two year period which is the expected period that the services will be performed by the consultants and non-employees. The stock compensation expense for the period was $14,439 (2000 - $4,785), of which $6,558 (2000 - $2,536) was allocated to general and administrative and $7,881 (2000 - $2,249) was allocated to research and experimentation. The assumptions used in calculating the fair value of options granted during the current period using the Black-Scholes option-pricing model are as follows: Risk free interest rate 6.434% - 6.590% Expected life of the options 2 years Expected volatility 2.18% Expected dividend yield - Phage Therapeutics, Inc. During 1997 PhageTx's Board of Directors adopted a Stock Option Plan under which an aggregate of 2,000,000 shares of common stock were reserved for grants to employees, advisors and consultants. Shareholder approval of the Plan was granted as of March 30, 1998. Options granted under this plan were designated as incentive or nonqualified at the discretion of the Plan Administrator. Generally, the options vest ratably over three and four-year periods. All options expire no later than ten years from the date of grant. Incentive stock options are exercisable at not less than the fair market value of the stock at the date of grant, and nonqualified stock options are exercisable at prices determined at the discretion of the Plan Administrator, but not less than 85% of the fair market value of the stock at the date of grant. 63
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PHAGE THERAPEUTICS INTERNATIONAL INC. 17 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 7. STOCK OPTIONS (cont'd...) Phage Therapeutics Inc. (cont'd...) The Plan contains a clause specifying terms of the conversion of options on a stock for stock exchange. Under the Plan, if the shareholders of PhageTx receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of common stock in any transaction involving a merger, all options granted under the Plan shall be converted into options to purchase shares of Exchange Stock unless PhageTx and the corporation issuing the Exchange Stock, in their sole discretion, determine that any or all such options granted under this Plan shall not be converted into options to purchase Exchange Stock, but instead shall terminate. The amount and price of converted options shall be determined by adjusting the amount and price of the options granted under the Plan in the same proportion as used for determining the number of shares of Exchange Stock the holders of the common stock receive in such merger, consolidation, acquisition of property or stock, separation or reorganization. Unless provided otherwise in the Optionee's original individual option agreement, the vesting schedule set forth in the option agreement shall accelerate, and reflect 100% vesting immediately prior to the conversion to an option for the Exchange Stock. As of the date of these financial statements, no corporate action has been taken with regard to the outstanding options by the Company's Board of Directors. In October 1999, management presented the Company with a proposal to exercise all outstanding options in a cashless or net exercise transaction, with subsequent conversion into common shares. The Company has not yet determined the resolution of this proposal, or how the outstanding options will be treated. In compliance with the terms of the PhageTx Plan, the vesting schedule for all remaining outstanding options has been assumed to accelerate and reflect 100% vesting as of the date of the PhageTx Acquisition. [Enlarge/Download Table] ================================================== ================= =================== ================= Shares Weighted Under Average Outstanding Price Exercise Options Per Share Price ---------------- ------------------- ----------------- Balance at December 31, 1998 1,599,000 $ 0.20 - 1.00 $ 0.69 Options granted 100,000 1.00 1.00 Options terminated (224,000) 0.20 - 1.00 0.56 ---------------- ----------------- Balance at December 31, 1999 1,475,000 0.20 - 1.00 0.73 Options granted - - - Options terminated - - - ---------------- ----------------- Balance at March 31, 2001 and December 31, 2000 1,475,000 0.73 ================================================== ================= =================== ================= As of March 31, 2001 all outstanding options were fully vested as a result of the PhageTx Acquisition transaction. No options granted have been exercised as of March 31, 2001. The weighted average contractual life of options outstanding as of March 31, 2001 was 6.6 years. 64
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PHAGE THERAPEUTICS INTERNATIONAL INC. 18 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 7. STOCK OPTIONS (cont'd...) Phage Therapeutics, Inc. (cont'd...) The Company applies United States Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its Plan. Accordingly, no compensation expense has been recognized for incentive stock options issued in accordance with its stock-based compensation plan. Had compensation cost for incentive stock option awards under the Company's Plan been determined based upon the fair value at the grant date consistent with the methodology prescribed under United States Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (SFAS 123) the Company's net loss and loss per share would have been adjusted as follows: =========================================== ================= ================= Three Month Three Month Period Ended Period Ended March 31, March 31, 2001 2000 ----------------- ----------------- Net loss As reported $ (600,769) $ (168,747) ================= ================= Pro-forma $ (600,769) $ (168,747) ================= ================= Basic and diluted loss per share As reported $ (0.06) $ (0.02) ================= ================= Pro-forma $ (0.06) $ (0.02) =========================================== ================= ================= 8. INCOME TAXES The Company's total deferred tax asset is as follows: Net tax benefit resulting from loss carry forward $ 1,953,776 Valuation allowance (1,953,776) ------------------ $ - ================== At December 31, 2000 the Company had net operating loss carryforwards for income tax purposes of approximately $5.7 million that will expire between 2012 and 2021. Since utilization of deferred tax assets resulting from loss carryforwards and temporary differences is dependent on future profits, which is not assured, a valuation allowance equal to the deferred taxes has been provided. Utilization of the Company's tax loss carryforwards may be subject to annual limitations if there is deemed to be a change in control. 65
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PHAGE THERAPEUTICS INTERNATIONAL INC. 19 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 9. RELATED PARTY TRANSACTIONS During the period PhageTx paid or accrued wages of $30,000 (2000 - $Nil) and paid consulting fees of $Nil (2000 - $7,000) to the president and director of the Company. As at March 31, 2001, the Company owed $75,413 (December 31, 2000 - $75,413). During the period PhageTx paid or accrued wages of $21,000 (March 31, 2000 - $Nil) to the treasurer of the Company. On September 1, 1998, the Company entered into a management agreement with Stealth Investment Corp. ("Stealth") to provide day-to-day management services to the Company (the "Management Agreement"). A director and officer of the Company, is the sole shareholder and director of Stealth. The Management Agreement is terminable by either party with two months notice and provides for a base fee of $10,000 per month until October 31, 2000, thereafter increased to $15,000 per month plus related expenses. The Company paid or accrued during the period, management fees of $22,500 (2000 - $15,000), consulting fees of $22,500 (2000 - $15,000), office expenses of $3,000 (2000 - $9,357), office administration of $6,314 (2000 - $2,127) and investor relations of $1,868 (2000 - $2,102). As at March 31, 2001 the Company owed Stealth $58,164 (December 31, 2000 - $68,798). 10. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS ============================== ================= ================= Three Month Three Month Period Ended Period Ended March 31, March 31, 2001 2000 ----------------- ----------------- Cash paid for income taxes $ - $ - ============================== ================= ================= Cash paid for interest $ 12,000 $ - ============================== ================= ================= There were no significant non-cash transactions for the periods ended March 31, 2001 and 2000. 11. COMMITMENTS AND CONTINGENCIES Lease Agreement On November 1, 2000, the Company signed a lease agreement for office and research facilities which expires November 30, 2005. The lease contains an option to renew for an additional 5 years. Minimum future lease payments under this agreement are as follows: March 31 2001 $ 59,377 2002 83,544 2003 86,906 2004 90,373 2005 85,555 ----------------- $ 405,755 ================= 66
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PHAGE THERAPEUTICS INTERNATIONAL INC. 20 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 11. COMMITMENTS AND CONTINGENCIES (cont'd...) Lease Agreement (cont'd...) The Company was required to pay a security deposit of $75,000 as part of its lease agreement. The security deposit is a certificate of deposit at a financial institution in favor of the Company, but is pledged to the lessor if the Company defaults in its lease agreement. Contractual Agreements On September 11, 2000, the Company entered into an agreement with Intelligene Expressions, Inc. ("Intelligene") for contract services to scale up manufacturing for the Company's first bacteriophage product. Intelligene is an Alberta company with a laboratory located in Edmonton, Alberta, Canada. The total amount of the contract was for $520,000. The Company has paid $355,000 and the remaining $165,000 (of which $65,000 is prepaid) is to be paid as follows: Upon completion of Phase 5 $ 55,000 Upon completion of Phase 6 55,000 Upon completion of Phase 7 55,000 ----------------- $ 165,000 ================= The Company has agreed to several research and development contracts with various universities and research institutes. The Company is contracted to pay for this year $306,253, of which $146,649 has been paid and $102,492 is prepaid at March 31, 2001. In addition, the Company has agreed to a total of $549,115 in contracts which are based on performance, controlled by management of the Company, which could be completed more than a year from now. The Company has advanced $178,223 on these contracts and at March 31, 2001, $97,893 is prepaid. Contingencies An individual whom PhageTx engaged on a limited basis to assist with introductions related to raising private equity capital has asserted that certain private placement funds were received by PhageTx as a result of introductions made by that individual. The Company is in the process of determining the validity of the claims asserted. Should the claims be determined valid, PhageTx would be expected to pay approximately $10,000 in cash as a finder's fee, issue 35,000 PhageTx common shares, and issue warrants to purchase an additional 25,000 shares of common stock at $1.00 per share for a term of seven years. As the probability of outcome is not certain, no accrual has been made in the financial statements nor shares reserved in connection with this contingency. Prior to inception of PhageTx, a founder entered into a consulting agreement with an individual to assist with the setup of licensing arrangements between PhageTx and certain research institutions. A dispute has arisen regarding the amount of payment required under the consulting arrangement, which terminated in June 1997. The Company's exposure in relation to this consulting agreement is a cash amount owed of approximately $17,000, which has been accrued in the financial statements, 25,000 PhageTx common shares, and an option for 41,668 additional common shares of PhageTx. As the probability of outcome is not certain, no accrual has been made in the financial statements for the common shares and the option for additional common shares. 67
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PHAGE THERAPEUTICS INTERNATIONAL INC. 21 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 12. SUBSEQUENT EVENTS The following events occurred subsequent to period end: a) On April 1, 2001, the Company granted 670,000 stock options to employees, consultants and advisors. These stock options are exercisable at $0.75 per share until April 1, 2006. The stock options vest over a period from 1 year to 4 years. b) In May 2001, the Company issued 2,142,857 common shares in accordance with Regulation D, Rule 506 of the United States Securities Act of 1933, as amended. These shares relate to the 2,142,857 units the Company issued at $0.70 per unit for total proceeds of $1,500,000. c) In May 2001, the Company issued 4,284,714 warrants relating to the total 4,285,714 units at $0.70 per unit as disclosed in Note 6. For every one and one-half warrants, the holder thereof, is entitled to purchase another common share of the Company at $0.70 per share. The expiry dates of these warrants are: i) 2,142,857 warrants on August 15, 2001; and ii) 2,142,857 warrants on January 15, 2002. 68
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PHAGE THERAPEUTICS INTERNATIONAL INC. (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 TABLE OF CONTENTS Page No. Independent auditors' report 1 Consolidated balance sheets 2 Consolidated statements of operations 3 Consolidated statements of cash flows 4 Consolidated statements of changes in stockholders' equity 6 Notes to the consolidated financial statements 8 to 23 69
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INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Phage Therapeutics International Inc. (A Development Stage Company) We have audited the consolidated balance sheets of Phage Therapeutics International Inc. as at December 31, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended and for the period from inception on December 24, 1996 to December 31, 2000. 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 generally accepted auditing standards in the United States. Those standards require that we plan and perform an 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 audit provides a reasonable basis for our opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2000 and 1999 and the results of its operations and its cash flows for the years then ended and for the period from inception on December 24, 1996 to December 31, 2000 in accordance with generally accepted accounting principles in the United States. The accompanying consolidated financial statements have been prepared assuming that Phage Therapeutics International Inc. will continue as a going concern. As discussed in Note 1 to the financial statements, the Company's loss from operations raises substantial doubt as to the Company's ability to continue as a going concern unless the company attains future profitable operations and/or obtains additional financing. Management's plans in regard to these matters are discussed in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Vancouver, Canada /s/ Davidson & Company /s/ ---------------------------- Chartered Accountants March 14, 2001 70
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[Enlarge/Download Table] PHAGE THERAPEUTICS INTERNATIONAL INC. 2 (A Development Stage Company) CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31 ==================================================================== =============== =============== 2000 1999 -------------------------------------------------------------------- --------------- --------------- ASSETS Current Cash and cash equivalents $ 1,029,134 $ 1,223 Prepaid expenses and other current assets 23,720 8,282 -------------- -------------- Total current assets 1,052,854 9,505 Capital assets (Note 4) 60,523 42,520 Deposit, non-current (Note 11) 75,000 - -------------- -------------- Total assets $ 1,188,377 $ 52,025 ==================================================================== =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Accounts payable $ 222,545 $ 421,953 Accrued liabilities 164,672 177,347 Due to related parties (Note 9) 144,211 362,189 Notes payable to related party (Note 5) 161,407 145,943 -------------- -------------- Total current liabilities 692,835 1,107,432 Minority interest (8,369) (8,369) ------------- ------------- 684,466 1,099,063 -------------- -------------- Stockholders' equity Capital stock (Note 6) Authorized 50,000,000 common shares with a par value of $0.001 Issued and outstanding December 31, 1999 - 6,809,729 December 31, 2000 - 10,895,444 10,895 6,809 Additional paid-in capital 5,877,670 3,021,756 Subscriptions received in advance (Note 6) 10,000 - Non-qualified stock options outstanding (Note 7) 138,943 110,150 Deficit accumulated during the development stage (5,533,597) (4,185,753) ------------- ------------- Total stockholders' equity 503,911 (1,047,038) -------------- ------------- Total liabilities and stockholders' equity $ 1,188,377 $ 52,025 ==================================================================== =============== =============== Nature and continuance of operations (Note 1) Commitments and contingencies (Note 12) Subsequent events (Note 13) The accompanying notes are an integral part of these consolidated financial statements. 71
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[Enlarge/Download Table] PHAGE THERAPEUTICS INTERNATIONAL INC. 3 (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS ============================================================================ =============== ================ ================ Cumulative Amounts From Date of Inception on December 24, 1996 to Year Ended Year Ended December 31, December 31, December 31, 2000 2000 1999 -------------- --------------- --------------- EXPENSES General and administrative $ 3,640,635 $ 815,338 $ 852,238 Research and development 1,587,354 596,692 265,466 -------------- --------------- --------------- Loss from operations (5,227,989) (1,412,030) (1,117,704) ------------- -------------- -------------- OTHER INCOME (EXPENSE) Interest income 37,293 37,293 - Loss on disposal of capital assets (Note 4) (376,392) (6,598) (369,794) ------------- -------------- -------------- (339,099) 30,695 (369,794) ------------- --------------- -------------- Loss before extraordinary item (5,567,088) (1,381,335) (1,487,498) EXTRAORDINARY ITEM Gain on extinguishment of debts, 33,491 33,491 - net of income taxes of $Nil (Note 10) ------------- --------------- -------------- Loss for the period $ (5,533,597) $ (1,347,844) $ (1,487,498) ============================================================================ =============== ================ ================ Basic and diluted loss per share before extraordinary item $ (0.16) $ (0.23) ============================================================================ =============== ================ ================ Basic and diluted loss per share $ (0.16) $ (0.23) ============================================================================ =============== ================ ================ Weighted average number of shares outstanding 8,445,444 6,428,890 ============================================================================ =============== ================ ================ The accompanying notes are an integral part of these consolidated financial statements. 72
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[Enlarge/Download Table] PHAGE THERAPEUTICS INTERNATIONAL INC. 4 (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS =========================================================================== ================ ================ ================ Cumulative Amounts From Date of Inception on December 24, 1996 to Year Ended Year Ended December 31, December 31, December 31, 2000 2000 1999 -------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Loss for the period $ (5,533,597) $ (1,347,844) $ (1,487,498) Adjustments to reconcile net loss to net cash used in operating activities: Amortization 159,429 29,922 55,016 Compensation expense from vesting of non-qualified stock options 138,943 28,793 72,218 Loss on disposal of capital assets 376,392 6,598 369,794 Interest on loan from related party 21,209 15,464 5,745 Consulting 160,000 - 80,000 Change in non-cash working capital items (Increase) decrease in prepaid expenses and other current assets (21,720) (15,438) 6,890 Decrease in deposits - - 13,613 Increase (decrease) in accounts payable 183,527 (199,408) 47,689 Increase (decrease) in accrued liabilities 164,672 (12,675) 125,371 Decrease in deferred rent - - (45,131) Increase (decrease) in due to related parties 144,211 (217,978) 275,189 --------------- -------------- --------------- Net cash used in operating activities (4,206,934) (1,712,566) (481,104) -------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of cash on purchase of subsidiary 173 - 173 Purchases of capital assets (603,625) (54,523) (19,069) Deposit (75,000) (75,000) - -------------- -------------- -------------- Net cash used in investing activities (678,452) (129,523) (18,896) -------------- -------------- -------------- --------------------------------------------------------------------------- ---------------- ---------------- ---------------- - continued - The accompanying notes are an integral part of these consolidated financial statements. 73
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[Enlarge/Download Table] PHAGE THERAPEUTICS INTERNATIONAL INC. 5 (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS =========================================================================== ================ ================ ================ Cumulative Amounts From Date of Inception on December 24, 1996 to Year Ended Year Ended December 31, December 31, December 31, 2000 2000 1999 --------------- --------------- --------------- Continued... CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of capital assets 7,281 - 7,281 Notes payable to related party 140,198 - 140,198 Net proceeds received from stock issuances 5,757,041 2,860,000 352,000 Subscriptions received in advance 10,000 10,000 - --------------- --------------- --------------- Net cash provided by financing activities 5,914,520 2,870,000 499,479 --------------- --------------- --------------- Change in cash position during the period 1,029,134 1,027,911 (521) Cash and cash equivalents, beginning of period - 1,223 1,744 --------------- --------------- --------------- Cash and cash equivalents, end of period $ 1,029,134 $ 1,029,134 $ 1,223 =========================================================================== ================ ================ ================ Supplemental disclosure with respect to cash flows (Note 10) The accompanying notes are an integral part of these consolidated financial statements. 74
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[Enlarge/Download Table] PHAGE THERAPEUTICS INTERNATIONAL INC. 6 (A Development Stage Company) CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ==================================== ========================= ============ ========== ============ ============= ============ Subscrip- Non- Deficit Common Stock tions qualified Accumulated ------------------------- Additional Received Stock During the Number Paid-in In Options Development of Shares Amount Capital Advance Outstanding Stage Total ----------- ----------- ----------- --------- ----------- ----------- ---------- Stock issued for expenses incurred by founder 571,429 $ 571 $ 39,429 $ - $ - $ - $ 40,000 Stock issued for cash - December 1996 1,785,707 1,786 98,214 - - - 100,000 Stock issued for cash - March through July 1997 1,600,000 1,600 638,400 - - - 640,000 Stock issued for cash - August through December 1997 735,000 735 734,265 - - - 735,000 Issuance of non-qualified stock options - - - - 6,494 - 6,494 Loss for the period - - - - - (1,324,750) (1,324,750) ----------- ----------- ----------- --------- ----------- ----------- ---------- Balance at December 31, 1997 4,692,136 4,692 1,510,308 - 6,494 (1,324,750) 196,744 Stock issued for cash - February through March 1998 165,000 165 264,835 - - - 265,000 Stock issued as compensation for bridge loan financing 22,857 23 79,977 - - - 80,000 Stock issued for cash - April through May 1998, net of offering expenses of $66,959 500,000 500 432,541 - - - 433,041 Contribution of capital by shareholders - - 300,000 - - - 300,000 Investment banking fee paid by shareholders - - (300,000) - - - (300,000) Advances on merger letter of intent converted to common stock November 1998 - - 332,000 - - - 332,000 Deferred compensation from non- qualified stock options outstanding - - - - 31,438 - 31,438 Loss for the year - - - - - (1,373,505) (1,373,505) ----------- ----------- ----------- --------- ----------- ----------- ---------- Balance at December 31, 1998 5,379,993 5,380 2,619,661 - 37,932 (2,698,255) (35,282) Advances on merger converted to common stock - February 1999 - - 50,000 - - - 50,000 Assumption of debt by parent converted to common stock, February 1999 - - 150,000 - - - 150,000 Acquisition of parent 2,028,375 2,028 (36,873) - - - (34,845) Minority interest recorded at March 25, 1999 (1,486,852) (1,486) 16,022 - - - 14,536 Shares issued for cash and receivables - April 1999 187,500 188 149,812 - - - 150,000 - continued - The accompanying notes are an integral part of these consolidated financial statements. 75
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[Enlarge/Download Table] PHAGE THERAPEUTICS INTERNATIONAL INC. 7 (A Development Stage Company) CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ==================================== ========================= ============ ========== ============ ============= ============ Subscrip- Non- Deficit Common Stock tions qualified Accumulated ------------------------- Additional Received Stock During the Number Paid-in In Options Development of Shares Amount Capital Advance Outstanding Stage Total ----------- ----------- ----------- --------- ----------- ----------- ---------- Continued... Shares issued for acquisition of additional shares of subsidiary - April 1999 629,284 628 (6,795) - - - (6,167) Shares issued for consulting 71,429 71 79,929 - - - 80,000 Deferred compensation from non- qualified stock options outstanding - - - - 72,218 - 72,218 Loss for the year - - - - - (1,487,498) (1,487,498) ----------- ----------- ----------- --------- ----------- ---------- ---------- Balance at December 31, 1999 6,809,729 6,809 3,021,756 - 110,150 (4,185,753) (1,047,038) Shares issued for cash in March 2000 1,942,858 1,943 1,358,057 - - - 1,360,000 Shares issued for cash in December 2000 2,142,857 2,143 1,497,857 - - - 1,500,000 Deferred compensation from non- qualified stock options outstanding - - - - 28,793 - 28,793 Subscriptions received in advance - - - 10,000 - - 10,000 Loss for the year - - - - - (1,347,844) (1,347,844) ----------- ----------- ----------- --------- ----------- ---------- ---------- Balance at December 31, 2000 10,895,444 $ 10,895 $ 5,877,670 $ 10,000 $ 138,943 $(5,533,597) $ 503,911 ==================================== ============ ============ ============ ========== ============ ============= ============ The accompanying notes are an integral part of these consolidated financial statements. 76
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PHAGE THERAPEUTICS INTERNATIONAL INC. 8 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 1. NATURE AND CONTINUANCE OF OPERATIONS Phage Therapeutics International Inc. ("Phage", or the "Company") is a development stage company focused on the development, manufacturing and marketing of bacteriophage therapeutic agents as pharmaceutical products. The products will be developed specifically for the treatment of antibiotic-resistant and other bacterial infectious agents. The Company was originally incorporated in the State of Florida on July 8, 1997 under the name All Products Distribution Corporation, and changed its name to Phage Therapeutics International Inc. on August 19, 1998. The consolidated Company's date of inception is considered to be December 24, 1996, the date of inception of Phage Therapeutics, Inc. ("PhageTx" or the "Subsidiary"), the Company's legally owned subsidiary. The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As at December 31, 2000 the Company had a working capital of $360,019 and has incurred losses of $5,533,597 from the date of inception , December 24, 1996 to December 31, 2000. The Company anticipates expending approximately $5,000,000 over the next twelve month period in pursuing its anticipated plan of operations. The Company anticipates covering these costs by additional equity financing. During the year, the Company completed two offerings of 4,085,715 units at $0.70 per unit pursuant to Regulation D, Rule 506 of the United States Securities Act of 1933, as amended. The total proceeds of $2,860,000 will help the Company complete its anticipated plan of operations. If the company is unable to complete its further financing requirements, it will then modify its expenditures and plan of operations to coincide with the actual financing completed. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. 2. SIGNIFICANT ACCOUNTING POLICIES In preparing these financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for the year. Actual results in the future periods could be different from these estimates made in the current year. The following is a summary of the significant accounting policies of the Company. Basis of consolidation and presentation The consolidated financial statements include the accounts of Phage Therapeutics International Inc. and its majority- owned subsidiary Phage Therapeutics, Inc., a Washington corporation. As of December 31, 2000, the Company owned approximately 88% of the outstanding common stock of Phage Therapeutics, Inc. All significant inter-company transactions have been eliminated in consolidation. Effective March 25, 1999, the Company acquired 71% of the outstanding common stock of Phage Therapeutics, Inc. through a series of share exchange agreements with certain PhageTx shareholders (see Note 3). Added to the Company's previous share holdings of PhageTx, this transaction increased the Company's interest in PhageTx, to approximately 80%. As a result of this transaction, the former shareholders of PhageTx obtained control of the Company. For accounting purposes, this acquisition has been treated as a recapitalization of the Company. The accounting for this recapitalization is similar to a reverse take-over in which the financial statements presented include the accounts of PhageTx since inception (December 24, 1996) and the accounts of the company since the date of acquisition, March 25, 1999 to December 31, 2000. 77
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PHAGE THERAPEUTICS INTERNATIONAL INC. 9 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Cash and cash equivalents All short-term investments, which consist entirely of bank repurchase agreements and certificates of deposit, with maturities of three months or less at date of purchase are considered to be cash equivalents. The amounts are recorded at cost, which approximates fair market value. Capital assets Capital assets are recorded at cost and are amortized over their useful lives using the straight-line method, which range from three to five years. Research and development expenses Research and development costs are expensed as incurred. Accounting for impairment of long-lived assets and for long-lived assets to be disposed of The Company has adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). In accordance with SFAS No. 121, Long-Lived Assets to be held and used by the Company are reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, the Company bases its evaluation on such impairment indicators as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. In the event that facts and circumstances indicate that the carrying amount of asset may not be recoverable and an estimate of future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss will be recognized. As at December 31, 2000 and 1999, the Company's analysis indicated that there was an impairment of its long-lived assets as outlined in Note 4. Management has estimated that the research and experimentation costs to date are greater than the estimated future undiscounted cash flows. Therefore, research and experimentation costs to date have been expensed during the development stage period. Financial instruments The Company's financial instruments consist of cash and cash equivalents, deposit, non-current, accounts payable, accrued liabilities, due to related parties and notes payable to related party. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximate their carrying values, unless otherwise noted. 78
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PHAGE THERAPEUTICS INTERNATIONAL INC. 10 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Loss per share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under SFAS 128, basic and diluted earnings per share are to be presented. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares outstanding in the year. Diluted earnings per share takes into consideration common shares outstanding (computed under basic earnings per share) and potentially dilutive common shares. The Company is a development stage company and has recorded a loss per share. The weighted average number of shares outstanding for 2000, 8,445,444 and 1999, 6,428,890, do not include the 4,171,429 (1999 - 85,714) warrants outstanding, the stock options of 2,880,000 (1999 - 1,475,000) and the 1,942,858 common shares issued subsequent to December 31, 1999 as their effect would be anti-dilutive. Of the total 4,085,715 shares issued in the year 2000, 1,635,715 shares are included in the weighted average number of 8,445,444 shares outstanding for 2000. Income taxes Income taxes are provided in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Stock-based compensation Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and has adopted the disclosure only provisions of SFAS 123. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee is required to pay for the stock. The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services". 79
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PHAGE THERAPEUTICS INTERNATIONAL INC. 11 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Accounting for derivative instruments and hedging instruments In June 1998, the Financial Accounting Standards Board ("FASB") issued the Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on the derivative designation. The effective date of SFAS 133 was deferred by FASB Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", and further amended by FASB Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Transactions". Since the Company does not have derivative instruments and hedging activities, pursuant to SFAS 133, there would be no impact on its financial position or the results of its operations. Segment Reporting In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. The statement is effective for fiscal years beginning after December 15, 1997. The Company does not have any reporting requirements as defined by SFAS No. 131. 3. RECAPITALIZATION During March 1999 the Company issued 3,393,141 common shares to acquire 71% of the issued and outstanding shares of Phage Therapeutics, Inc. (the "PhageTx Acquisition"). This transaction increased the Company's ownership of PhageTx to approximately 80%. As a result of this transaction the former shareholders of PhageTx acquired control over a majority of shares of the Company. Accordingly, the transaction has been treated for accounting purposes as a recapitalization of the Company and, therefore, these financial statements represent a continuation of the legal subsidiary, PhageTx, not the Company, as the legal parent. In accounting for this transaction: i) PhageTx is deemed to be the purchaser and parent company for accounting purposes. Accordingly, its net assets are included in the consolidated balance sheet at their historical book values; ii) Phage was formed for the sole purpose of seeking a target acquisition candidate and its net assets as of the Effective Date were negative. Accordingly, the acquisition of the Company will be accounted for at the net book value of the net assets of the Company recorded at the date of acquisition. The net assets acquired are as follows: Cash and equivalents $ 173 Account receivable 4,000 Accounts payable (39,018) ------------- Net assets acquired $ (34,845) ============= 80
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PHAGE THERAPEUTICS INTERNATIONAL INC. 12 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 3. RECAPITALIZATION (cont'd...) iii) Historical cost financial statements presented are those of PhageTx, with equity amounts of PhageTx retroactively restated to reflect the number of shares received in the business combination. iv) The consolidated statements of operations and cash flows include PhageTx's results of operations and cash flows from December 24, 1996 (date of inception) and Phage's results of operations from the Effective Date. 4. CAPITAL ASSETS ====================================================================== December 31, December 31, 2000 1999 ---------------------------------- ---------------- ---------------- Research and development equipment $ 33,499 $ 48,894 Computer and office equipment 52,309 84,843 Furniture and fixtures 18,178 26,596 Leasehold improvements 6,341 - ----- - 110,327 160,333 Accumulated amortization (49,804) (117,813) ------- -------- $ 60,523 $ 42,520 ================================== ================ ================ In accordance with SFAS No. 121, Long-Lived Assets to be held and used by the Company, are reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. As at December 31, 2000, the Company's analysis of its capital assets determined an impairment value of $6,598 on research and development equipment, computer and office equipment and furniture and fixtures. The amount of $6,598 was the net book value of $104,529 in capital cost minus accumulated amortization of $97,931. The amount was recorded as a loss on disposal of capital assets. Effective August 25, 1997, PhageTx entered into a contract for construction of a research and development laboratory facility. PhageTx incurred approximately $350,000 of architectural and construction fees related to the project. This amount was recorded as Construction in process. No amortization was recorded in relation to this amount, as the related facility had not yet been completed. During November 1999 PhageTx terminated its lease of the building in which the facility was to be constructed and terminated the construction project. Accordingly, all construction in process amounts previously capitalized were expensed in November 1999 as a loss on disposal of assets. No additional significant costs are expected to be incurred as a result of termination of this construction project. Because PhageTx terminated its facilities lease in November 1999, the leasehold improvement balance at that date and associated accumulated amortization have been expensed in that month as a loss on disposal of assets. 81
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PHAGE THERAPEUTICS INTERNATIONAL INC. 13 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 5. NOTES PAYABLE TO RELATED PARTY ====================================== ================ ================ 2000 1999 -------------------------------------- ---------------- ---------------- Principal amount $ 140,198 $ 140,198 Accrued interest 21,209 5,745 ---------------- ---------------- $ 161,407 $ 145,943 ====================================== ================ ================ In 1999, the Company received several loans from Prostar Limited, a company controlled by a director of the Company, which totaled $140,198. The loans bear interest at 11% per annum and are repayable on demand. 6. CAPITAL STOCK As a result of the PhageTx Acquisition transaction, all historical stockholders' equity amounts have been retroactively restated to reflect the number of shares received in the business combination. Accordingly, the historical equity amounts shown in the Consolidated Statement of Changes in Stockholders' Equity reflect the equity transactions completed by PhageTx, with share amounts restated to reflect the equivalent number of shares of the Company's common stock, issued in exchange for the respective shares of PhageTx stock. Equity transactions are shown as if the Company had acquired 100% of the issued and outstanding shares of PhageTx common stock, an adjustment is recorded to indicate the number of shares of the legal parent outstanding as of the date of the acquisition, and a non-controlling interest is deducted from the total share amount to reflect the number of shares of PhageTx not yet owned by the Company as of the date of the acquisition. At inception of PhageTx, 2,357,136 shares of common stock were issued at an average price of approximately $0.06 per share, as restated. Consideration for issuance of the shares consisted of $100,000 in cash and $40,000 as reimbursement of expenses paid on behalf of PhageTx by a founder. Between April 1997 and July 1997 an additional 1,600,000 shares of common stock were issued for cash consideration at a price of $0.40 per share, as restated. Under the terms of an employment agreement, the President and CEO of PhageTx was granted the right to purchase 100,000 shares of common stock (which is included in the 1,600,000 shares), at a price of $0.40 per share, as restated, representing the market price of the stock at the time employment commenced. Beginning April 1997, a monthly amount of $5,000 was withheld from salary payments as consideration for the stock purchase. All consideration related to this stock purchase had been received by PhageTx as of December 31, 1997. In August 1997 PhageTx initiated a financing round which raised $1.0 million. As of December 31, 1997, 735,000 shares of common stock had been issued in connection with this round at a price of $1.00 per share. Subsequent to December 31, 1997, an additional 265,000 shares of common stock were subscribed to complete the minimum specified in the offering, with 100,000 of these shares purchased by the Company. The amount paid by the Company for these shares is treated as a contribution of capital to PhageTx in the consolidated financial statements. 82
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PHAGE THERAPEUTICS INTERNATIONAL INC. 14 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 6. CAPITAL STOCK (cont'd...) During April and May 1998, PhageTx completed a private placement financing round raising an additional $500,000 to fund PhageTx's short-term operations. PhageTx engaged a placement agent to assist with the financing round. In connection with this financing, the placement agent received approximately 13% of the cash raised in the offering as commission and expense reimbursement and was to receive approximately 85,000 post-consolidated common shares, as restated of the Company. Certain founders of PhageTx transferred to the placement agent, for a total value of $300,000, the 85,000 common shares of PhageTx from their shareholdings. This transaction was recorded as a contribution of capital. Prior to the beginning of the financing round described above, PhageTx completed a bridge debt financing of $200,000 which consisted of promissory notes, each with a term of 40 days, paying interest at 10% per annum. These notes were repaid in April 1998. The note holders also received, as consideration for entering into the note agreements, 22,857 shares of newly issued common stock, as restated, for a total value of $80,000. Between June and October 1998 Phage advanced to PhageTx a total of $332,000 as pre-payment on letters of intent to merge the two entities. Under the terms of the letters of intent, if a merger transaction was not completed within a specified period of time, the advances converted to common stock of PhageTx at a price of $1.00 per share. In November 1998, these advances were converted to PhageTx common stock. Upon restatement for the PhageTx Acquisition transaction effective March 25, 1999, this amount is treated as a contribution of capital to PhageTx by the Company. During February 1999, pursuant to the letters of intent, the advances of $50,000 to PhageTx were converted to common stock of PhageTx. During February 1999, certain shareholder notes payable and expenses paid by shareholders on behalf of PhageTx were assigned by the shareholders to the Company. PhageTx issued to the Company 150,000 shares of PhageTx common stock in satisfaction of the debt of $150,000. Similar to the above transaction, this amount is treated as a contribution of capital to PhageTx by the Company upon restatement for the PhageTx Acquisition transaction. During April 1999 the Company sold an additional 187,500 shares of common stock at a price of $0.80 per share. Under the terms of private placement and investment banking agreements entered into by PhageTx in March 1998, upon the completion of certain placement milestones the placement agent was to receive (1) warrants for 300,000 shares of PhageTx common stock with an exercise price of $1.25 per share for a three-year term beginning at the first public trade of PhageTx stock; and (2) upon a merger with a public company or completion of an initial public offering the placement agent would receive 500,000 shares of PhageTx common stock. These agreements were terminated in June 1998. Based on completion of the PhageTx Acquisition transaction, the former placement agent asserted that the Company was liable under the aforementioned agreements to issue common shares and warrants in satisfaction of the stated terms. During July 1999, in settlement of the liability, the Company issued to the placement agent 71,429 shares of common stock, plus warrants to purchase 85,714 shares of common stock at an exercise price of $1.25 per share until March 25, 2001. Because these shares were issued in settlement of a debt owed by PhageTx, an amount of $80,000, calculated by multiplying the number of common shares issued by a price of $1.119 per share, has been recorded as consulting fees in general and administrative expense. 83
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PHAGE THERAPEUTICS INTERNATIONAL INC. 15 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 6. CAPITAL STOCK (cont'd...) In March 2000, the Company issued pursuant to a private placement 1,942,858 units at $0.70 per unit, for total proceeds of $1,360,000. Each unit consists of one common share of the Company and a warrant, which entitles the holder thereof, to purchase another common share of the Company at $1.25 per share until February 22, 2001 and $2.00 per share until February 22, 2002. Subsequent to year end, on February 12, 2001, these warrants were amended and extended from their expiry dates to June 2, 2001 and June 2, 2002. The private placement was issued in accordance with Regulation D, Rule 506 of the United States Securities Act of 1933, as amended. In October 2000, the Company entered into a securities purchase agreement with seven purchasers to purchase 4,285,714 units at $0.70 per unit for total proceeds of $3,000,000. Each unit consists of one common share of the Company and a warrant. For every one and a half warrants, the holder thereof, is entitled to purchase another common share of the Company at an exercise price of $0.70 per share. The exercise date of the warrants has not yet been determined by the Company, therefore, the warrants have not been issued. The Company has received $1,500,000. As payment for the first part of this agreement, the 2,142,857 common shares associated with this payment have been issued. At December 31, 2000, the Company has received $10,000 of the second payment of $1,500,000. The 2,142,857 common shares were issued in accordance with Regulation D, Rule 506 of the United States Securities Act of 1933, as amended. Warrants ============================================== ================ ================ 2000 1999 ---------------------------------------------- ---------------- ---------------- Balance, beginning of year 85,714 750,000 Issued 1,942,858 85,714 Exercised, prior to acquisition of PhageTx - (250,000) Expired - (500,000) ---------------- ---------------- Balance, end of year 2,028,572 85,714 ============================================== ================ ================ As at December 31, 2000 there were 2,028,572 warrants outstanding that are exercisable into commons shares as follows: ============= ========================================= ==================== Number Exercise of Shares Price Expiry Date ------------- ----------------------------------------- -------------------- 85,714 $1.25 March 25, 2001 1,942,858 1.25 June 2, 2001 if not exercised, then at 2.00 June 2, 2002 ============= ========================================= ==================== 84
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PHAGE THERAPEUTICS INTERNATIONAL INC. 16 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 7. STOCK OPTIONS Phage Therapeutics International Inc. Stock option plan In January 2000, the board of directors modified the existing stock option plan of the Company and adopted an incentive stock option plan providing for the granting of stock options to officers, directors, employees and key consultants of the Company and its subsidiaries or affiliates. Under the modified plan, the Company is authorized to issue options up to a total of 10% of the shares of the common stock of the Company outstanding from time to time. The options under the modified plan are non-assignable (except in the event of death) and are exercisable for a term of five years. Options granted under the modified plan terminate within 30 days, in respect of any optionee, in the event that such optionee ceases to be a full-time employee. The board of directors may, at its sole discretion, determine the time during which options shall vest and the method of vesting, or that no vesting restriction shall exist. SFAS 123, "Accounting for Stock-Based Compensation", encourages but does not require companies to record compensation cost for employee stock-based compensation plans at fair value. The Company has chosen to account for the employee stock-based compensation using APB 25, "Accounting for Stock Issued to Employees". Accordingly, compensation cost for stock options is measured as the excess, if any, of quoted market price of the Company's stock at the date of the grant over the option price. No stock-based compensation has resulted from the use of this standard. Following is a summary of the stock option activity: =========================================== ================ ================ Weighted Average Number Exercise of Shares Price ------------------------------------------- ---------------- ---------------- Outstanding at December 31, 1999 - $ - Granted 1,405,000 0.57 --------- Outstanding at December 31, 2000 1,405,000 $ 0.57 =========================================== ================ ================ The weighted average fair value of options granted to employees, non-employees and consultants during the current year was $0.62 per share. 85
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PHAGE THERAPEUTICS INTERNATIONAL INC. 17 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 7. STOCK OPTIONS (cont'd...) Phage Therapeutics International Inc. (cont'd...) Stock option plan (cont'd...) Had compensation cost been recognized on the basis of fair value pursuant to SFAS 123, net loss and loss per share would have been adjusted as follows: ============================================= ================ ================ Year Ended Year Ended December 31, December 31, 2000 1999 --------------------------------------------- ---------------- ---------------- Net loss As reported before extraordinary item $ (1,381,335) $ (1,487,498) ================ ================ Pro-forma before extraordinary item $ (1,405,544) $ (1,487,498) ================ ================ As reported loss for the year $ (1,347,844) $ (1,487,498) ================ ================ Pro-forma $ (1,372,053) $ (1,487,498) ================ ================ Basic and diluted loss per share As reported before extraordinary item $ (0.16) $ (0.23) ================ ================ Pro-forma before extraordinary item $ (0.16) $ (0.23) ================ ================ As reported loss per share $ (0.16) $ (0.23) ================ ================ Pro-forma $ (0.16) $ (0.23) ================ ================ ============================================= ================ ================ Following is a summary of the status of options outstanding at December 31, 2000: [Enlarge/Download Table] ================================================================================================ Outstanding Options Exercisable Options -------------------------------------------- --------------------------- Weighted Average Weighted Weighted Remaining Average Average Contractual Exercise Exercise Exercise Price Number Life Price Number Price ----------------- -------------- -------------- -------------- -------------- -------------- $0.55 1,280,000 4.0 $ 0.55 - $ - 0.75 125,000 4.6 0.75 - - -------------- ------------- 1,405,000 - ================================================================================================ The Company granted 665,000 options to consultants and non-employees during the year, which are accounted for under SFAS 123 and EITF 96-18. The stock compensation recognized using FASB 123 was $115,517, using the Black-Scholes option-pricing model. The options will be amortized over a two year period which is the expected period that the services will be performed by the consultants and non-employees. The stock compensation expense for the year was $28,793, of which $14,165 was allocated to general and administrative and $14,628 was allocated to research and experimentation. 86
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PHAGE THERAPEUTICS INTERNATIONAL INC. 18 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 7. STOCK OPTIONS Phage Therapeutics International Inc. (cont'd...) Stock option plan (cont'd...) The Company granted 665,000 options to consultants and non-employees during the year, which are accounted for under SFAS 123 and EITF 96-18. The stock compensation recognized using FASB 123 was $115,517, using the Black- Scholes option-pricing model. The options will be amortized over a two year period which is the expected period that the services will be performed by the consultants and non-employees. The stock compensation expense for the year was $28,793, of which $14,165 was allocated to general and administrative and $14,628 was allocated to research and experimentation. The assumptions used in calculating the fair value of options granted during the current year using the Black-Scholes option-pricing model are as follows: Risk free interest rate 6.434% - 6.590% Expected life of the options 2 years Expected volatility 2.18% Expected dividend yield - Phage Therapeutics, Inc. During 1997 PhageTx's Board of Directors adopted a 1997 Stock Option Plan under which an aggregate of 2,000,000 shares of common stock were reserved for grants to employees, advisors and consultants. Shareholder approval of the Plan was granted as of March 30, 1998. Options granted under this plan were designated as incentive or nonqualified at the discretion of the Plan Administrator. Generally, the options vest ratably over three and four-year periods. All options expire no later than ten years from the date of grant. Incentive stock options are exercisable at not less than the fair market value of the stock at the date of grant, and nonqualified stock options are exercisable at prices determined at the discretion of the Plan Administrator, but not less than 85% of the fair market value of the stock at the date of grant. The Plan contains a clause specifying terms of the conversion of options on a stock for stock exchange. Under the Plan, if the shareholders of PhageTx receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of common stock in any transaction involving a merger, all options granted under the Plan shall be converted into options to purchase shares of Exchange Stock unless PhageTx and the corporation issuing the Exchange Stock, in their sole discretion, determine that any or all such options granted under this Plan shall not be converted into options to purchase Exchange Stock, but instead shall terminate. The amount and price of converted options shall be determined by adjusting the amount and price of the options granted under the Plan in the same proportion as used for determining the number of shares of Exchange Stock the holders of the common stock receive in such merger, consolidation, acquisition of property or stock, separation or reorganization. Unless provided otherwise in the Optionee's original individual option agreement, the vesting schedule set forth in the option agreement shall accelerate, and reflect 100% vesting immediately prior to the conversion to an option for the Exchange Stock. 87
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PHAGE THERAPEUTICS INTERNATIONAL INC. 19 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 7. STOCK OPTIONS (cont'd...) Phage Therapeutics, Inc. (cont'd...) As of the date of these financial statements, no corporate action has been taken with regard to the outstanding options by the Company's Board of Directors. In October 1999, management presented the Company with a proposal to exercise all outstanding options in a cashless or net exercise transaction, with subsequent conversion into common shares. The Company has not yet determined the resolution of this proposal, or how the outstanding options will be treated. In compliance with the terms of the PhageTx Plan, the vesting schedule for all remaining outstanding options has been assumed to accelerate and reflect 100% vesting as of the date of the PhageTx Acquisition. ================================== ============ =============== ============ Shares Weighted Under Average Outstanding Price Exercise Options Per Share Price ----------- --------------- ------------ Balance at December 31, 1998 1,599,000 $ 0.20 - 1.00 $ 0.69 Options granted 100,000 1.00 1.00 Options terminated (224,000) 0.20 - 1.00 0.56 ----------- Balance at December 31, 1999 1,475,000 0.20 - 1.00 0.73 Options granted - - - Options terminated - - - ------------ Balance at December 31, 2000 1,475,000 0.73 ================================== ============ =============== ============ As of December 31, 2000 all outstanding options were fully vested as a result of the PhageTx Acquisition transaction. No options granted have been exercised as of December 31, 2000. The weighted average contractual life of options outstanding as of December 31, 2000 was 6.9 years. The Company applies United States Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its Plan. Accordingly, no compensation expense has been recognized for incentive stock options issued in accordance with its stock-based compensation plan. Had compensation cost for incentive stock option awards under the Company's Plan been determined based upon the fair value at the grant date consistent with the methodology prescribed under United States Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (SFAS 123) the Company's net loss and loss per share would have been adjusted as follows: 88
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PHAGE THERAPEUTICS INTERNATIONAL INC. 20 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 7. STOCK OPTIONS (cont'd...) ======================================= ============== =============== 2000 1999 -------------------------------------- -------------- --------------- Net loss As reported $ 1,345,742 $ 1,487,498 ============== =============== Pro-forma $ 1,345,742 $ 1,632,319 ============== =============== Basic and diluted loss per share As reported $ (0.16) $ (0.23) ============== =============== Pro-forma $ (0.16) $ (0.25) ======================================= ============== =============== The Company has granted nonqualified stock options to certain consultants and advisors as compensation for their services. Consistent with the treatment prescribed by SFAS 123 regarding grants of stock options to non-employees, the Company has determined that the fair value of the nonqualified stock options granted was approximately $Nil and $29,000 for the years ended December 31, 2000 and December 31, 1999, respectively. Because the options granted vest over three years, the period over which services are expected to be rendered, the Company has amortized the fair value of the nonqualified options granted on a straight-line basis over the three year service period of each option granted. However, because the vesting of all outstanding options has been accelerated to 100% as a result of the PhageTx Acquisition transaction, all remaining expense was amortized as of March 31, 1999. Accordingly, the Company has recorded in research and development, compensation expense of approximately $Nil and $72,200 for the years ended December 31, 2000 and December 31, 1999, respectively. In arriving at its estimates of fair value for options granted, the Company used the Black-Scholes option pricing model with the following assumptions: ======================================== ============= ============= 2000 1999 ---------------------------------------- ------------- ------------- Expected dividend yield - 0% Expected stock price volatility - 0.001% Risk-free interest rate - 5.10% Expected life of options in years - 7 ======================================== ============= ============= The weighted average fair value at grant date for options granted was $Nil and $0.30 per option for the years ended December 31, 2000 and December 31, 1999, respectively. 89
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PHAGE THERAPEUTICS INTERNATIONAL INC. 21 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 8. INCOME TAXES The Company's total deferred tax asset is as follows: Net tax benefit resulting from loss carry forward $ 1,953,776 Valuation allowance (1,953,776) ------------------ $ - ================= At December 31, 2000 the Company had net operating loss carryforwards for income tax purposes of approximately $5.7 million that will expire between 2012 and 2021. Since utilization of deferred tax assets resulting from loss carryforwards and temporary differences is dependent on future profits, which is not assured, a valuation allowance equal to the deferred taxes has been provided. Utilization of the Company's tax loss carryforwards may be subject to annual limitations if there is deemed to be a change in control. 9. RELATED PARTY TRANSACTIONS During 1998 and in January 1999 certain shareholders of PhageTx advanced funds to PhageTx to cover operating expenses and incurred various additional expenses on behalf of PhageTx. The amount of these expenses and advances totaled approximately $99,000 at December 31, 1998. Additional advances and expenses of $51,000 were incurred in early 1999. During January and February 1999, these shareholder advances and expenses paid by shareholders on behalf of PhageTx were assigned by the shareholders to Phage Therapeutics International Inc. In concurrent transactions, the PhageTx issued to Phage Therapeutics International Inc. 150,000 shares of PhageTx common stock, valued at $1.00 per share, in satisfaction of the debt paid by Phage. During the year PhageTx paid or accrued wages of $20,000 (1999 - $144,000) and paid or accrued consulting fees of $56,000 (1999 - Nil) to the president and director of the Company. As at December 31, 2000, the Company owed $75,413 (1999 - $182,836). During the year PhageTx. paid or accrued wages of $Nil (1999 - $58,815) to a former officer and director of the Company. As at December 31, 2000, the Company owed $Nil (1999 - $86,154). During the year PhageTx paid or accrued wages of $14,000 (1999 - $Nil) to the treasurer of the Company. On September 1, 1998, the Company entered into a management agreement with Stealth Investment Corp. ("Stealth") to provide day-to-day management services to the Company (the "Management Agreement"). A director and officer of the Company, is the sole shareholder and director of Stealth. The Management Agreement is terminable by either party with two months notice and provides for a base fee of $10,000 per month until October 31, 2000, thereafter increased to $15,000 per month plus related expenses. The Company paid or accrued management fees of $65,000 (1999 - $45,000), consulting fees of $65,000 (1999 - $45,000), office rent of $22,484 (1999 - $18,976), office administration of $5,872 (1999 - $8,333) and investor relations of $7,760 (1999 - $1,871). As at December 31, 2000 the Company owed Stealth $68,798 (1999 - $93,199). 10. EXTRAORDINARY ITEM During the year, the Company negotiated a reduced payment of wages accrued to a former director and officer of the Company. This settlement resulted in a gain of $25,500. In addition, the Company settled with various creditors for amounts less than the billed amounts. These settlements resulted in a total gain of $7,991. 90
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PHAGE THERAPEUTICS INTERNATIONAL INC. 22 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 10. EXTRAORDINARY ITEM (cont'd...) These gains were offset by accumulated losses of the Company and therefore, there were no income taxes. 11. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS ============================================= =========== =========== 2000 1999 ----------- ------------ Cash paid for income taxes $ - $ - =========== ============ Cash paid for interest $ - $ - ============================================= =========== =========== The following non-cash investing and financing transactions occurred during the year ended December 31, 1999: a) The Company issued 71,429 common shares at a deemed value of $80,000 for consulting fees. b) As outlined in Note 3, the Company issued 3,393,141 common shares for the acquisition of Phage Therapeutics, Inc. There were no significant non-cash transactions for the year ended December 31, 2000. 12. COMMITMENTS AND CONTINGENCIES Lease Agreement On November 1, 2000, the Company signed a lease agreement for office and research facilities which expires November 30, 2005. The lease contains an option to renew for an additional 5 years. Minimum future lease payments under this agreement are as follows: December 31 2001 $ 80,326 2002 83,544 2003 86,906 2004 90,373 2005 85,555 ----------------- $ 426,704 ================= The Company was required to pay a security deposit of $75,000. The security deposit is a certificate of deposit at a financial institution in favor of the Company, but is pledged to the lessor if the Company defaults in its lease agreement. 91
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PHAGE THERAPEUTICS INTERNATIONAL INC. 23 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 ================================================================================ 12. COMMITMENTS AND CONTINGENCIES (cont'd...) Contractual Agreement On September 11, 2000, the Company entered into an agreement with Intelligene Expressions, Inc. for contract services to scale up manufacturing for the Company's first bacteriophage product. Intelligene is an Alberta company with a laboratory located in Edmonton, Alberta, Canada. The total amount of the contract was for $520,000. The Company has paid $355,000 and the remaining $165,000 is to be paid as follows: Upon completion of Phase 5 $ 55,000 Upon completion of Phase 6 55,000 Upon completion of Phase 7 55,000 ----------------- $ 165,000 ================= Contingencies An individual whom PhageTx engaged on a limited basis to assist with introductions related to raising private equity capital has asserted that certain private placement funds were received by PhageTx as a result of introductions made by that individual. The Company is in the process of determining the validity of the claims asserted. Should the claims be determined valid, PhageTx would be expected to pay approximately $10,000 in cash as a finder's fee, issue 35,000 PhageTx common shares, and issue warrants to purchase an additional 25,000 shares of common stock at $1.00 per share for a term of seven years. As the probability of outcome is not certain, no accrual has been made in the financial statements nor shares reserved in connection with this contingency. Prior to inception of PhageTx, a founder entered into a consulting agreement with an individual to assist with the setup of licensing arrangements between PhageTx and certain research institutions. A dispute has arisen regarding the amount of payment required under the consulting arrangement, which terminated in June 1997. The Company's exposure in relation to this consulting agreement is a cash amount owed of approximately $17,000, which has been accrued in the financial statements, 25,000 PhageTx common shares, and an option for 41,668 additional common shares of PhageTx. As the probability of outcome is not certain, no accrual has been made in the financial statements for the common shares and the option for additional common shares. 13. SUBSEQUENT EVENTS The following events occurred subsequent to year end: a) As outlined in Note 6, on February 12, 2001, the Company extended the expiry date of 1,942,858 warrants from February 22, 2001 and February 22, 2002 to June 2, 2001 and June 2, 2002. b) On March 14, 2001, the Company received $1,420,000 relating to the second issue of 2,142,857 units at $0.70 per unit as outlined in Note 6. c) In March 2001, the Company advanced $50,000 each to two separate research laboratories that were contracted to carry out certain research and development projects for the Company. These two contracts totaled $200,504 and the remaining balance of $100,504 will be paid over the terms of the contracts which will be completed within a year. 92
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ITEM 16. INDEX TO EXHIBITS Item 1 - Index to Exhibits 3.1 Articles of Incorporation and Amendments 3.2 By-laws 10.1 Advisory Agreements 10.2 Confidentiality Agreement 10.3 Employee Agreements 10.4 Management Agreement 10.5 Property Lease Agreement 10.6 Consulting Agreement 10.7 Stock Option Plan 2000 10.8 Securities Purchase Agreement dated as of October 23, 2000 21. List of Subsidiaries, State of Incorporation, and Names under which Subsidiary Does Business 27 Financial Data Schedule Item 2 - Description of Exhibits The Exhibits required by this item are included as set forth in the Exhibit Index. 93
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SIGNATURES In accordance with Section 12 of the Securities Act of 1934, the registrant caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. PHAGE THERAPEUTICS INTERNATIONAL, INC.. (Registrant) by /s/ Darren Pylot /s/ ------------------------------ Darren Pylot Chief Financial Officer & Director Dated: June 4, 2001

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