UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 30, 2003
Webtronics, Inc.
(Exact name of registrant as specified in its charter)
Delaware 333-63474 65-110840
(State or other jurisdiction (Commission IRS Employer
of incorporation or organization) File Number) Identification No.)
420 Lexington Avenue, Suite 601
New York, New York 10170
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 672-9190
(Former name or former address, if changed since last report)
Item 1 Changes in Control of Registrant
On March 10, 2003, as amended on April 4, 2003, we entered into a
merger agreement with Callisto Research Labs, LLC (formerly known as Callisto
Pharmaceuticals, Inc.), or Callisto Research and Synergy Pharmaceuticals, Inc.,
or Synergy, an unaffiliated company under which Callisto Research and Synergy
agreed to merge in a stock for stock transaction and each become our
subsidiaries. On April 30, 2003 the merger closed. In addition it is anticipated
that we will change our name from Webtronics, Inc. to Callisto Pharmaceuticals,
Inc. and re-domesticate from Florida to Delaware by merging into a wholly-owned
subsidiary (the "Webtronics Merger").
Pursuant to the merger agreement we issued 17,318,994 shares of our
common stock to holders of Callisto Research common stock and 4,395,684 shares
to holders of Synergy common stock in exchange for outstanding Callisto Research
and Synergy common stock. As a result of the merger there is a total of
approximately 23,217,578 of our shares outstanding.
Pursuant to the merger agreement, upon the closing of the Webtronics
Merger, it is expected that four of our directors will be nominated to our Board
by the former Callisto Research stockholders and three of our directors will be
nominated to our Board by the former Synergy stockholders. It is anticipated
that Gabriel M. Cerrone and Christoph Bruening will be two of the Callisto
Research directors. It is anticipated that the Synergy directors will be Donald
H. Picker, Ph.D., Edwin Snape and Albert J. Henry.
Pursuant to the merger agreement we assumed the obligations of
Callisto Research with respect to Callisto Research's outstanding 3,510,560
stock options and the stock option plan under which Callisto Research had
granted 2,563,055 of these stock options. The remaining stock options are
non-plan options.
Exhibit 99.1 to this Report is a descriptive memorandum of
Webtronics, Inc. and its business.
Item 2 Acquisition or Disposition of Assets.
See Item 1 above for a description of the material terms of the
merger agreement under which Callisto Research and Synergy became our
subsidiaries.
The terms of the merger agreement, including the relative number of
our shares to be issued in the merger to the holders of Callisto Research and
Synergy capital stock was determined by arms length negotiation between
management of Callisto Research (which until the merger controlled Webtronics)
and Synergy. We intend to continue utilizing the assets of Callisto Research and
Synergy in their respective efforts to develop pharmaceutical products.
2
Pursuant to the merger agreement we also assumed the obligations of
Callisto Research with respect to Callisto Research's outstanding 3,510,560
stock options and the stock option plan under which Callisto Research had
granted 2,563,055 of these stock options. The remaining stock options are
non-plan options.
Item 7 - Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements
(a)(1) Financial Statements of Callisto Research Labs, LLC
(formerly known as Callisto Pharmaceuticals, Inc.)
Audited Financial Statements for the years ended
December 31, 2001 and 2002.
(a)(2) Financial Statements of Synergy Pharmaceuticals Inc.
Audited Consolidated Financial Statements for the years
ended March 31, 2001 and 2002
Unaudited Financial Statements for the nine months
ended December 31, 2001 and 2002
(b) Pro Forma Financial Statements of Webtronics, Inc.
Pro Forma Balance Sheet as of December 31, 2002
Pro Forma Statement of Operations for the year ended
December 31, 2002
(c) Exhibits
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger dated March 10, 2003*
2.2 Amendment to Agreement and Plan of Merger dated April 4, 2003.
4.1 Stock Option Plan
99.1 Descriptive Memorandum of Webtronics, Inc.
* Incorporated by reference to Exhibit 2.1 of Form 8-K filed
March 19, 2003.
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereto duly authorized.
Dated: May 15, 2003
WEBTRONICS, INC.
By: /s/ Christoph Bruening
--------------------------------
Christoph Bruening
President
4
Item 7. CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
DECEMBER 31, 2002 AND 2001
CONTENTS
PAGE
Independent auditors' report F-1
Financial statements:
Balance sheets F-2
Statements of operations F-3
Statements of shareholders' equity (deficiency) F-4
Statements of cash flows F-5
Notes to financial statements F-6--F-12
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Callisto Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Callisto Pharmaceuticals,
Inc. (a development stage company) as of December 31, 2002 and 2001, and the
related statements of operations, shareholders' equity, and cash flows for the
two years then ended, and for the period from June 5, 1996 (inception) to
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Callisto Pharmaceuticals, Inc.
as of December 31, 2002 and 2001, and the results of its operations and its cash
flows for the two years then ended, and from June 5, 1996 (inception) to
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
ARTHUR YORKES & COMPANY LLP
New York, New York
March 7, 2003
F-1
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
BALANCE SHEET
DECEMBER 31,
2002 2001
----------- -----------
ASSETS
Current assets:
Cash $ 2,223,462 $ 3,627,479
Prepaid expenses 28,456 19,660
----------- -----------
2,251,918 3,647,139
----------- -----------
Fixed assets (net of accumulated depreciation of
$10,394 and $3,616 in 2002 and 2001, respectively) 19,781 4,530
----------- -----------
Other assets:
Patent costs (net of accumulated amortization of
$226,273 and $157,933 in 2002 and 2001, respectively) 461,961 520,567
Investment in subsidiaries 400,000 -
----------- -----------
861,961 520,567
----------- -----------
$ 3,133,660 $ 4,172,236
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Miscellaneous liabilities $ 443,266 $ 138,602
----------- -----------
Shareholders' equity (deficit): (Note 7 & 8)
Preferred stock $.0001 par value 10,000,000 shares
authorized, 4,235,299 issued and outstanding
(liquidation preference $6,061,050) 423 423
Common stock: $.0001 par value authorized 60,000,000
shares, 13,083,695 issued and outstanding 1,307 1,307
Additional paid-in-capital 9,753,631 9,753,631
Deficit accumulated during the development stage (7,064,967) (5,721,727)
----------- -----------
2,690,394 4,033,634
----------- -----------
$ 3,133,660 $ 4,172,236
=========== ===========
See notes to financial statements.
F-2
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
June 5, 1996
(Inception) to
December 31,
2002 2001 2002
----------- ----------- --------------
Expenses:
Officers' salary $ 102,885 $ 200,000 $ 1,145,963
Other salaries 236,604 217,074 752,980
Payroll tax expense 21,685 25,810 114,724
Accounting and legal expenses 332,852 224,563 834,632
Amortization and depreciation 75,118 65,447 236,707
Automobile expenses - - 27,970
Consulting fees 12,566 57,559 721,084
Donations 2,000 2,698 4,698
Insurance 37,100 23,140 129,104
Forgiveness of debt - -- 91,770
General and administrative expenses 3,147 5,129 12,291
Interest expense - 2,230 2,230
License access fees - 15,000 29,876
Office expenses 11,819 12,387 64,469
Outside services - - 908,303
Meals and entertainment 6,982 18,365 25,347
Public and investor relations 2,805 31,344 37,089
Rent 51,856 30,659 119,822
Reimbursed expenses 24,989 24,959 65,849
Telephone and web hosting expense 18,981 38,940 78,671
Travel expenses 34,316 103,431 251,260
Research and development 388,545 362,897 1,707,872
----------- ----------- -----------
(1,364,250) (1,461,632) (7,362,711)
Other income (loss):
Interest and dividend income 34,496 182,404 456,832
Unrealized loss on investment - - (30,986)
Realized loss on investment - (91,624) (91,624)
Local taxes (13,487) (11,863) (36,478)
----------- ----------- -----------
Net loss (1,343,241) (1,382,715) $(7,064,967)
===========
Retained earning (deficit), beginning (5,721,727) (4,339,012)
----------- -----------
Retained earnings (deficit), ending $(7,064,968) $(5,721,727)
=========== ===========
See notes to financial statements.
F-3
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Preferred Stock Common stock
--------------------------- --------------------------- Additional
Shares Shares Paid-in
Issued Par Value Issued Par Value Capital Deficit
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 4,235,299 $ 423 13,083,695 $ 1,307 $ 9,753,631 $(4,339,012)
Net loss for the year - - - - - (1,382,715)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 4,235,299 423 13,083,695 1,307 9,753,631 (5,721,727)
Net loss for the year - - - - - (1,343,240)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 4,235,299 $ 423 13,083,695 $ 1,307 $ 9,753,631 $(7,064,967)
=========== =========== =========== =========== =========== ===========
See notes to financial statements.
F-4
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
June 5, 1996
(Inception) to
December 31,
2002 2001 2002
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(1,343,240) $(1,382,715) $(7,064,967)
----------- ----------- -----------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 75,118 65,447 236,667
Unrealized loss on investment - - 30,986
Common and preferred stock
issued for services - - 91,667
Increase in prepaid and other receivable (8,796) (19,266) (27,156)
Increase in miscellaneous liabilities 304,663 81,685 669,611
----------- ----------- -----------
Total adjustments 370,985 127,866 1,001,775
----------- ----------- -----------
Net cash used in operating activities (972,255) (1,254,849) (6,063,192)
----------- ----------- -----------
Cash flows from investing activities:
Patent costs (9,733) (90,505) (688,234)
Acquisition of furniture and fixtures (22,029) - (30,175)
Investment in subsidiaries (400,000) 24,900 (400,100)
Investment in marketable securities - 729,752 (30,986)
----------- ----------- -----------
Net cash provided by
(used in) investing activities (431,762) 664,147 (1,149,495)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common and preferred stock - - 9,436,149
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (1,404,017) (590,702) 2,223,462
Cash and cash equivalent at beginning of year 2,627,479 4,218,181 -
----------- ----------- -----------
Cash and cash equivalent at end of year $ 2,223,462 $ 3,627,479 $ 2,223,462
=========== =========== ===========
Supplementary disclosure of cash flows information:
Cash paid for taxes $ 4,067 $ 24,324 $ 19,294
=========== =========== ===========
See notes to financial statements.
F-5
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
1. Summary of significant accounting policies:
Business activity:
Callisto Pharmaceuticals, Inc. (the Company) is a market-driven
biopharmaceutical company focused on the development of innovative
products for the diagnosis and treatment of infectious disease and their
immunological complications. The Company believes its multidisciplinary
approach will lead to diagnostic and therapeutic products targeting
markets with limited competition and unmet clinical needs. The Company is
currently engaged primarily in research and development operations.
Patents and Research and Development Costs:
The Company capitalizes the cost of acquiring patents on its products and
the cost of patents obtained through acquisition. Patents are being
amortized on a straight-line basis over the estimated useful life of the
patent, generally ten years. The Company charges all research and
development costs to expense as incurred.
Cash and cash equivalents:
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an original maturity of three months
or less to be cash equivalents.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-6
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
2. Investment in subsidiary:
In March 2002, the Company purchased 99.7% of the outstanding common
shares (basically from a shareholder) of a public Company (Webtronics,
Inc.) for $400,000. Webtronics, Inc. was organized on February 2, 2001 and
was inactive at December 31, 2001. The following financial information has
been abstracted from the audited financial statements of Webtronics filed
with form 10KSB as of December 31, 2001.
Cash in bank $2,385
======
Stockholder equity:
Common stock 105
Paid-in-capital 2,720
Accumulated deficit (440)
------
$2,385
======
3. Income taxes:
The Company has available net operating loss carryforwards of
approximately $6,000,000 for tax purposes to offset future taxable income.
Estimated deferred tax assets relating to these net operating losses have
been fully reserved by valuation allowances because of the uncertainty of
realization through future income and the possibility of future changes in
ownership which, under the Internal Revenue Service Code, could limit
these carryforwards.
4. Commitment:
Commencing August 15, 2001, The Company is obligated under a
month-to-month lease of $4,200 a month which includes utilities (inclusive
of furniture, telephones) and other equipment.
F-7
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
5. Stock option agreement:
In 1996, the Company entered into an incentive and non-qualified stock
option plan for employees, consultants and outside directors to purchase
up to 2,000,000 shares of common stock. Options vest at the rate of one
third on each of the first three anniversary dates. The option term is for
ten years from date of granting.
The following represent options outstanding for the years ended December
31, 2002 and 2001 generally to non-employees:
Total
----------
Balance, January 1, 2001 $1,931,505
Year 2001:
Granted 400,000
Exercised -
----------
Balance, December 31, 2001 2,331,505
Year 2002:
Granted -
Exercised -
----------
Balance, December 31, 2002 $2,331,505
==========
Options are exercisable at various prices as follows at December 31, 2002:
Exercise
Price Vested Not Vested Total
---------- ----------- ----------- -----------
$ 0.75 $ 615,839 $ - $ 615,839
2.85 392,838 120,829 513,667
6.75 101,111 10,555 111,666
3.25 97,000 - 97,000
4.90 93,333 100,000 193,333
1.25 400,000 - 400,000
1.95 400,000 - 400,000
---------- ---------- ----------
$2,100,121 $ 231,384 $2,331,505
========== ========== ==========
F-8
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
6. License and research support agreements:
In February 2000, the Company entered into a license and research support
agreement with Rockefeller University (superceding an agreement dated
August 20, 1996) for the exclusive rights to exploit certain core
technology relating to the diagnosis, prevention and treatment of
infectious diseases and related disorders. The agreement is for four years
and provides for the Company to pay certain royalties and other license
consideration. This agreement also provides for royalties to be paid on
the net sales of products. These rates range from 1% to 3%. On any
sublicense agreements the fees approximate .25% to 1%. The agreement also
provides for the Company to fund costs in the future to file, prosecute
and maintain all patent applications. The agreement also calls for certain
milestone payments to be made.
The Company has entered into a Patent License Agreement with the Public
Health Service ("PHS"), under which the Company has a exclusive license to
make, use, sell, lease, import and export and to otherwise commercially
exploit the licensed products. The Company has paid an initial license
issue royalty fee in the amount of $50,000 and will pay minimum annual
royalty fees of $10,000 until the first commercial sales of the product at
which point the minimum annual royalty fee increases to $25,000. Royalty
fees range from 0.5% to 0.75% on net sales of the licensed product and
various others sublicensing fees. The Company will pay PHS $100,000 after
FDA approval of each application for the licensed products.
In April of 2001, the Company entered into a license agreement with
Dartmouth College to research, develop, manufacture and sell the Dartmouth
patent rights technology. Under the license agreement the Company must
make annual expenditures of at least $100,000 towards commercial use of
the licensed products and adhere to certain milestone schedules for
clinical trials and FDA approval. The company must also pay to Dartmouth
fees ranging from $25,000 to $150,000 for each of these scheduled
milestone dates. In addition, the Company is obligated to pay royalties to
the college of 3% of net sales made by the Company and 1.5% of net sales
made by company sublicensees. In any year commencing in 2002 that no
royalties and no milestone payments are made the Company is obligated to
pay to Dartmouth an annual license fee maintenance fee of $10,000 for
2002; $15,000 for 2003 and $25,000 per annum from 2004 and thereafter.
Beginning 10 year after the affective date a minimum royalty of $50,000 is
payable annually.
F-9
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
6. License and research support agreements: (continued)
The agreement will terminate 20 years after the market introduction of the
last introduced licensed product. The Company has the right to terminate
this agreement after 60 days written notice.
In July 2001, the Company entered into a license agreement to research,
develop and sell Rockefeller University licensed patented products. The
Company will pay Rockefeller a $7,500 annual maintenance fee until the
first commercial sale of the product. The Company will pay royalties of 2%
and 0.75% of net sales of product as defined in the agreement and will pay
Rockefeller 15% of any sublicense fee paid by sublicensee. The agreement
will terminate upon the later of (a) expiration of the last to expire or
become abandoned patent right or (b) 20 year after the effective date of
the agreement (July 25, 2001). The Company can terminate this agreement
upon 60 days written notice.
7. Shareholders' equity:
Common shares:
In February 2000, the Board of Directors approved an increase in the
authorized common shares from 35,000,000 shares to 60,000,000 shares and a
one-for-three reverse split of the common stock.
Preferred shares:
During the year 2000, the Board of Directors had authorized the private
placement and sale of a Series A convertible preferred stock at $1.70 per
share on February 17, 2000 and the private placement of a convertible
Series B preferred stock at $1.75 per share on August 15, 2000. In
addition, the Board of Directors authorized the issuance of 750,000 shares
of a Series C convertible preferred stock $0.10 per share to an executive
officer for services rendered in the amount of $75,000 on August 10, 2000.
The holders of all Series of Preferred Stock will have equal voting rights
with the common shareholders. The preferred shareholders shall be entitled
to dividends equal to the amount received by the common shareholders.
F-10
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
7. Shareholders' equity: (continued)
The shares of all Series of convertible Preferred Stock may, at the
election of a holder, be convertible at any time into shares of Common
Stock at a ratio of one share of Common Stock for each share of
Convertible Preferred Stock.
Upon the occurrence of an Initial Public Offering, each share of all
Series of Convertible Preferred Stock shall automatically be converted
into one (1) share of Common Stock.
Upon liquidation:
I. the holders of Series A preferred stock shall have a preference over
the holders of Series B and C preferred stock and common stock in
the amount of 1.70 per share.
II. the holders of the Series B preferred stock shall have a preference
over the holder of the Series C preferred stock and common stock in
the amount of $1.75 per share.
III. the holder of the Series C preferred stock shall have a preference
over the holders of common stock in the amount of $0.10 per share.
The Series A, B and C Convertible Preferred Stock will enjoy standard
anti-dilution rights in the event of sales by the Company of shares of
Common Stock at prices below $1.70, $1.75 and $0.10 per share of Common
Stock, respectively.
Preferred stock issued in 2000:
Included in
Shares Additional
Issued Par Value Paid-in-Capital
---------- --------- ---------------
Series A - $1.70 per share 2,252,441 $225 $3,828,925
Series B - $1.75 per share 1,232,858 123 2,157,377
Series C - $0.10 per share 750,000 75 74,925
--------- ---- ----------
4,235,299 $423 $6,061,227
========= ==== ==========
F-11
CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
8. Subsequent event:
In March 2003, the Company has entered into a merger agreement with
Synergy Pharmaceuticals, Inc. and Webtronics, Inc. (a public company) in a
stock-for-stock transaction. The shareholders of the Company will retain a
73.76% interest in the surviving entity.
F-12
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Consolidated financial statements
Contents Page
Report of independent accountants F-1
Consolidated balance sheet F-2--F-3
Consolidated statements of operations F-4
Consolidated statements of stockholders' equity F-5
Consolidated statements of cash flows F-6
Notes forming part of the financial statements F-7--F-17
Report of independent accountants
To the Board of Directors and Stockholders of Synergy Pharmaceuticals Inc.
We have audited the accompanying consolidated balance sheets of Synergy
Pharmaceuticals Inc. and subsidiaries (the "Company") (a development stage
company) as of March 31, 2001 and 2002 and the related consolidated statements
of operations, stockholders' equity and cash flows for the 15 month period ended
March 31, 2000 and the years ended March 31, 2001 and 2002. 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 the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is a development stage enterprise and has
suffered recurring losses and net cash outflows from operations since inception
that raise substantial doubt about its ability to continue as a going concern.
As such, the Company is dependent upon capital infusions from existing and/or
new investors to fund operations. Management's plans with regard to these
matters are also described in Note 2. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Synergy
Pharmaceuticals Inc. and subsidiaries as of March 31, 2001 and 2002 and the
consolidated results of their operations and their cash flows for the 15 month
period ended March 31, 2000 and for the years ended March 31, 2001 and 2002 in
conformity with generally accepted accounting principles in the United States.
KPMG
Chartered Accountants
Dublin, Ireland
2002
F-1
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Consolidated balance sheets
March 31, March 31,
2001 2002
US$'000 US$'000
--------- ---------
Assets
Current assets
Cash 1,256 371
Prepaid and other current assets 789 74
Loan to director (Note 6) 368 393
----- ---
Total current assets 2,413 838
Property and equipment, net (Note 4) 207 215
----- ---
Total Assets 2,620 1,053
===== =====
Liabilities and stockholders equity
Current liabilities
Notes payable to stockholders (Note 6) 400 -
Accounts payable and accrued expenses 630 464
----- ---
Total liabilities 1,030 464
----- ---
Stockholders' equity
Series A preferred stock ($0.001 par value; 3,700,001 shares authorised,
issued and outstanding at March 31, 2001 and 2002)
(liquidation preference of $6,383,042 at March 31, 2001 and 2002) 4 4
Series B preferred stock ($0.001 par value; 1,874,999 shares authorised;
1,154,065 shares issued and outstanding at March 31, 2001 and 2002)
(liquidation preference of $7,399,980 at March 31, 2001 and 2002) 1 1
Common stock ($0.001 par value; 20,000,000 shares authorised,
2,702,814 shares issued and outstanding at March 31, 2001; 2,929,064
shares issued and outstanding at March 31, 2002) 3 3
Series C preferred stock ($0.001 par value; 3,214,875 shares authorised,
1,453,550 shares issued and outstanding at March 31, 2001 and 2002)
(liquidation preference of $10,174,829 at March 31, 2001 and 2002) 1 1
Series D preferred stock ($0.01 par value: 2,238,363 shares issued and
outstanding at March 31, 2001 and 2002) (liquidation preference
of $5,000,000 at March 31, 2001 and 2002) 2 2
F-2
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Consolidated balance sheets (continued)
March 31, March 31,
2001 2002
$'000 $'000
--------- ---------
Stockholders' equity (continued)
Additional paid-in capital 29,515 29,561
Other comprehensive income (459) (466)
Deficit accumulated during development stage (27,477) (28,517)
------- -------
Total stockholders' equity 1,590 589
------- -------
Total liabilities and stockholders' equity 2,620 1,053
======= =======
The accompanying notes are an integral part of these financial statements.
F-3
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Consolidated statements of operations
February 11,
Period ended Year ended Year ended 1992 (inception)
March 31, March 31, March 31, to March 31,
2000 2001 2002 2002
$'000 $'000 $'000 $'000
------------ ---------- ---------- ----------------
Operating expenses
Research and development (3,603) (1,950) (2,554) (17,189)
General and administrative (3,369) (1,743) (1,192) (14,538)
Reimbursements from UT (Note 1) - 3,245 2,694 5,939
------ ------ ------ -------
Total operating expenses (6,972) (448) (1,052) (25,788)
------ ------ ------ -------
Gain on sale of investments - 30 - 30
Interest income 86 42 30 336
Interest expense (134) (10) (18) (1,387)
Extraordinary item - - - (1,662)
------ ------ ------ -------
Loss before income tax (7,020) (386) (1,040) (28,471)
Income taxes (11) - - (46)
------ ------ ------ -------
Net loss (7,031) (386) (1,040) (28,517)
====== ====== ====== =======
The accompanying notes are an integral part of these financial statements.
F-4
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Consolidated statements of stockholders' equity
(in thousands)
Series B Series A Series C Series D
Convertible Convertible Convertible Convertible
Preferred Preferred Preferred Preferred
Stock Stock Stock Stock
---------------- ------------------ ----------------- -------------------
Share Par Shares Par Shares Par Shares Par
value value value value
----- ----- ------ ------- ------ ----- ------ -----
Balance at December 31, 1998 1,154 1 3,700 4 1,149 1 - -
Reverse non-cash compensation - - - - - - - -
Issuance of Series C convertible
Preferred Stock - - - - 305 - - -
Issuance of Series D convertible
Preferred Stock - - - - - - 2,238 2
Issuance of Common Stock - - - - - - - -
Cumulative translation adjustment - - - - - - - -
Unrealised loss on available for sale
investments - - - - - - - -
Net loss - - - - - - - -
----- ----- ----- ----- ----- ----- ----- -----
Balance at March 31, 2000 1,154 1 3,700 4 1,454 1 2,238 2
Issuance of Common Stock - - - - - - - -
Cumulative translation adjustment - - - - - - - -
Reversal of unrealised loss on
available for sale investments - - - - - - - -
Net loss - - - - - - - -
----- ----- ----- ----- ----- ----- ----- -----
Balance at March 31, 2001 1,154 1 3,700 4 1,454 1 2,238 2
Issuance of Common Stock - - - - - - - -
Cumulative translation adjustment - - - - - - - -
Net loss - - - - - - - -
----- ----- ----- ----- ----- ----- ----- -----
Balance at March 31, 2002 1,154 1 3,700 4 1,454 1 2,238 2
===== ===== ===== ===== ===== ===== ===== =====
(in thousands)
Deficit
Common Other Accumulated
Stock Additional Deferred Comprehensive During Total
Shares Par Paid-in Stock Income Development stockholders
value Capital Compensation (Loss) Stage equity
------ ----- ---------- ------------ ------------- ------------ ------------
Balance at December 31, 1998 1,080 1 22,042 75 (355) (20,060) 1,709
Reverse non-cash compensation - - 75 (75) - - -
Issuance of Series C convertible
Preferred Stock - - 2,132 - - - 2,132
Issuance of Series D convertible
Preferred Stock - - 4,998 - - - 5,000
Issuance of Common Stock 744 1 105 - - - 106
Cumulative translation adjustment - - - - (85) - (85)
Unrealised loss on available for sale
investments - - - - (291) - (291)
Net loss - - - - - (7,031) (7,031)
----- ----- ----- ----- ----- ----- -----
Balance at March 31, 2000 1,824 2 29,352 - (731) (27,091) 1,540
Issuance of Common Stock 879 1 163 - - - 164
Cumulative translation adjustment - - - - (19) - (19)
Reversal of unrealised loss on
available for sale investments - - - - 291 - 291
Net loss - - - - - (386) (386)
----- ----- ----- ----- ----- ----- -----
Balance at March 31, 2001 2,703 3 29,515 - (459) (27,477) 1,590
Issuance of Common Stock 226 - 46 - - - 46
Cumulative translation adjustment - - - - (7) - (7)
Net loss - - - - - (1,040) (1,040)
----- ----- ----- ----- ----- ----- -----
Balance at March 31, 2002 2,929 3 29,561 - (466) (28,517) 589
===== ===== ====== ===== ===== ====== ======
F-5
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Consolidated statements of cash flows
February 11,
Period ended Year ended Year ended 1992 (inception)
March 31, March 31, March 31, to March 31,
2000 2001 2002 2002
$'000 $'000 $'000 $'000
------------ ---------- ---------- ----------------
Cash flows from operating activities:
Net loss (7,031) (386) (1,040) (28,517)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 756 7 9 1,481
Extraordinary loss - - - 1,662
Gain on disposal of property and
equipment - (20) - (2)
Gain on disposal of short-term investments - (30) - (30)
Accrued interest on notes payable to
stockholders - - - 952
Non cash compensation expense 104 - - 551
Non cash stock consideration - 50 - 50
Changes in assets and liabilities:
Prepaid and other current assets (6) (776) 687 (165)
Accounts payable and accrued
expenses 249 (1,004) (168) 690
Income taxes payable 12 (12) - 1
------ ------ ------ ------
Net cash used in operating activities (5,916) (2,171) (512) (23,327)
------ ------ ------ ------
Cash flows from investing activities:
Proceeds from disposal of property
and equipment 1 42 - 110
Purchase of property and equipment (120) (29) (17) (1,924)
Proceeds from disposal of short-term investments - 2,030 - 2,030
------ ------ ------ ------
Net cash (used in)/provided by
investing activities (119) 2,043 (17) 216
------ ------ ------ ------
Cash flows from financing activities:
Proceeds from issuance of notes
payable to stockholders (see Note 6) - 400 - 10,995
Repay notes payable to stockholders (243) - (400) (643)
Proceeds from bridge loans 1,550 - - 1,550
Repay bridge loans (1,425) (125) - (1,550)
Proceeds from issuance of preferred stock 5,132 - - 13,367
Proceeds from issuance of common stock 1 114 46 168
Collection of stock subscription receivable - - - 350
Loan to director - - - (310)
------ ------ ------ ------
Net cash (used in)/provided by
financing activities 5,015 389 (354) 23,927
------ ------ ------ ------
Effect of exchange rates on cash - (2) (2) (445)
------ ------ ------ ------
Net increase (decrease)/increase in cash (1,020) 259 (885) 371
Cash at beginning of period 2,017 997 1,256 -
------ ------ ------ ------
Cash at end of period 997 1,256 371 371
====== ====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-6
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Notes
forming part of the financial statements
1 Organisation and Business
Synergy Pharmaceuticals Inc. (the "Company") was incorporated in the
State of Delaware on February 11, 1992. The Company is a development
stage enterprise developing drugs for the treatment of Hepatitis B and
Hepatitis C, using an iminosuger technology, as well as various cancer
treatments for myeloma, colon cancer, ulcerativecolitis and Crohn's
Disease using proprietary compounds with novel peptide-based
technologies. The Company's strategy is to develop products both
independently and through strategic partnerships with large
pharmaceutical or biotechnology companies, under which the Company will
license its technology to such companies is return for payment of drug
development expenses and clinical trial expenses, milestone payments and
royalties on developed products.
The Company's primary activities since inception have consisted of
research and development and raising capital. The Company relied
primarily on a university to provide the personnel and other resources
necessary to develop technologies through its sponsored research
agreements with the university (see Note 5). The direction of research
at such universities occurs through specific budgets managed by the
Company's executive managers and board of directors.
In 1995, the Company became a wholly-owned subsidiary of a newly-formed
corporation, IgX Limited, which is registered under the laws of the
Republic of Ireland, as a result of a series of transactions in which
the Company's stockholders exchanged their common and preferred stock
for ordinary and preference shares of IgX Limited. In December 1997, as
a condition to receiving an equity infusion from a U.S. investor, the
aforementioned series of transactions was reversed such that IgX Limited
became a wholly-owned subsidiary of the Company. The above transactions
involved the same parties, affected the capital structure of the Company
and IgX Limited in legal form only, and thus have no effect on reported
amounts on a consolidated basis.
From late 1998 the Company has become primarily involved in developing
human therapeutics based on iminosugers. In March 2000, the Company
entered into a corporate collaboration with United Therapeutics
Corporation (UT) whereby UT will cover all development expenses up to a
maximum of $15.2 million for potential drugs to be used in the treatment
of Hepatitis B and Hepatitis C. UT will also pay royalties to the
Company of $44.4 million for successful development of drug candidates
to treat Hepatitis B and Hepatitis C through successful filing of two
new drug applications (NDAs) with the U.S. Food and Drug Administration
(FDA). In November 2000 the Company and UT further agreed that UT would
fund an analog program up to a maximum of $3.3 million in an effort to
achieve related compounds of unproved therapeutic index. In April 2002,
UT filed an Investigational New Drug Application ("IND") with the FDA to
treat Hepatitis C using Synergy's proprietary compound SP231. In May
2002 the Company in-licensed Atiprimod from Anormed. Synergy plans to
initiate a Phase II human clinical trial in myeloma shortly. Atiprimod
was invented by the Company's CEO at a previous place of employment. The
drug has an IND and was used to treat 500 patients for arthritis in a
SmithKline clinical trial.
F-7
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Notes (continued)
2 Basis of preparation
Since inception, the Company has suffered recurring losses and net cash
outflows from operations. The Company expects to continue to incur
substantial additional losses to complete the development and testing of
its drug candidates, and does not expect to complete the development
stage and begin commercialization of its products for the foreseeable
future. Management is actively pursuing various options, which include
entering into strategic partnerships with large pharmaceutical
companies. Certain such agreements for strategic partnerships have been
executed (see Note 5). Since its inception, the Company has funded
operations through issuing debt and equity securities to its principal
investors. It is management's intention to continue to fund the
operations of the Company through additional debt or preferred stock
issuances in order to meet its strategic objectives. Management is also
actively pursuing other financing options, and believes that sufficient
funding will be available to meet its planned business objectives
including anticipated cash needs for working capital, for a reasonable
period of time.
However, there can be no assurance that the Company will be able to
obtain sufficient funds to continue the development of, and if
successful, to commence the manufacture and sale of its drug candidates,
if and when approved by the applicable regulatory agencies. As a result
of the foregoing, there exists substantial doubt about the Company's
ability to continue as a going concern. These financial statements do
not include any adjustments relating to the recoverability of the
carrying amounts of recorded assets or the amount of liabilities that
might result from the outcome of this uncertainty.
3 Summary of significant accounting policies
Use of significant estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Consolidation
These consolidated financial statements include the accounts of the
Company and subsidiaries, IgX Limited, a wholly-owned subsidiary, which
is registered under the laws of the Republic of Ireland and IgX Oxford
Hepatitis Corporation. All intercompany transactions are eliminated on
consolidation.
Property and equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective
assets, as follows: buildings and improvements over 5 years; research
equipment over 5 to 10 years; and office furniture and equipment over 5
years.
F-8
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Notes (continued)
3 Summary of significant accounting policies (continued)
Impairment of long-lived assets
The Company accounts for the impairment and disposition of long-lived
assets in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for the Impairment of long-lived Assets and
for long-lived Assets to Be Disposed Of ("FAS 121"). In accordance with
FAS 121, the Company periodically assesses whether any events or changes
in circumstances have occurred that would indicate that the carrying
amount of a long-lived asset may not be recoverable. If such an event or
change in circumstances occurs, the Company evaluates whether the
carrying amount of such assets is recoverable by comparing the net book
value of the assets to estimated future un-discounted cash flows
attributable to such assets. If it is determined that the carrying
amount may not be recoverable, the Company recognizes an impairment loss
equal to the excess of the net carrying amount of the asset over its
fair value.
Research and development
Research and development costs are expensed as incurred and include,
among other costs, those related to the production of experimental
drugs, including payroll costs, sponsored third party research costs and
costs incurred for conducting clinical trials.
Income taxes
Income taxes are accounted for under the asset and liability method
prescribed by SFAS No. 109, "Accounting for Income Taxes." Deferred
income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax bases of assets and liabilities.
Deferred tax assets and liabilities reflect the tax rates expected to be
in effect for the years in which the differences are expected to
reverse. A valuation allowance is provided if it is more likely than not
that some or all of the deferred tax asset will not be realized.
Foreign currency translation
Assets and liabilities of subsidiaries are translated into U.S. dollars
at the prevailing exchange rates in effect at the end of the reporting
period. Income statement accounts are translated at a weighted average
of exchange rates in effect during the period. Translation adjustments
that arise from translating the foreign subsidiary's financial
statements from local currency to U.S. dollars are recorded in the
cumulative translation adjustment component of stockholders' equity.
Financial instruments
The carrying values of cash, prepayments and other current assets,
accounts payable and accrued expenses approximate their fair values.
Accounting for stock based compensation
The company has elected to use the intrinsic value based method to
account for all of its employee stock option plans. Details of
compensation expense recognised under APB Opinion No. 25, Accounting for
Stock Issued to Employees are disclosed in note 8 to the financial
statements.
F-9
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Notes (continued)
3 Summary of significant accounting policies (continued)
Short term investments - available for sale
The Company has classified short term investments as available for sale
in accordance with the terms of SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". Realised gains and losses
are determined using specific identification. The investments are
reported at fair value, with unrealised gains and losses reported in a
separate component of shareholders' equity. Unrealised losses recognised
during the period to March 31, 2000 amounted to $291,000. All
investments were disposed of during the year ended March 31, 2001 for
proceeds of $2,030,000 resulting in a realised profit of $30,000.
4 Property and equipment
2001 2002
US$'000 US$'000
------- -------
Buildings and improvements 168 166
Research equipment - 27
Office furniture and equipment 60 52
--- ---
228 245
Less: accumulated depreciation (21) (30)
--- ---
Property and equipment, net 207 215
=== ===
5 Sponsored research agreements and strategic partnerships
IgX Oxford Hepatitis Corporation
In August 1998, the Company obtained a majority in a corporation newly
formed, IgX Oxford Hepatitis Corporation. (IgX Oxford) in collaboration
with the Glycobiology Institute of the University of Oxford and Thomas
Jefferson University and Monsanto Corp. (Monsanto) which has, in turn,
obtained an exclusive worldwide license from Monsanto to certain
intellectual property to be used in developing drug candidates for the
treatment of Hepatitis B.
The Company agreed to fund the corporation with up to $2 million to
complete animal studies to determine whether the preparation of an
Investigational New Drug Application ("IND") application to conduct
human clinical trials is appropriate. The Company actually invested
approximately US$10 million in the development of its hepatitis drugs
and UT has also invested substantial funds under the previously
mentioned license.
F-10
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Notes (continued)
5 Sponsored research agreements and strategic partnerships (continued)
Monsanto license agreement
In September 1998, the Company entered into a license agreement with
Monsanto whereby Monsanto received the right of first refusal to a
compound for treatment of Hepatitis B. Monsanto's initial right of first
refusal is exercisable prior to the commencement of a Phase I clinical
trial involving the compound as a treatment for Hepatitis B. If Monsanto
exercises its right of first refusal, any such development and license
agreement with Monsanto would cover the clinical development,
registration and marketing of the drug candidate. Monsanto would then be
obligated to reimburse the Company for all costs incurred in the
development of the drug candidate, and pay a fee equal to the net
present value on commercialisation, if any, of the drug candidate by
Monsanto, together with royalties based upon a percentage of net sales
of the drug candidate. In August 2000 an amendment was made to this
license to eliminate Monsanto's two rights of first refusal for granting
to Monsanto rights to Hepatitis C for 13 countries in the Far East,
including China.
Anormed agreement
In May 2002 the Company agreed to in-license a drug Atiprimod which was
invented by the Company's CEO, Dr. Picker at a place of previous
employment. The Company's research insight into Atiprimod is
consequently extensive based upon clinical data from treatment of 500
patients under a previous SmithKline arthritis clinical trial. The
Company plans to treat myeloma in a Phase II human clinical trial within
six months, which will be the most advanced clinical trial undertaken by
the Company to date
6 Related party transactions
Transactions with director
In November 1998 the Company advanced $310,000 to Mr Donald H Picker, a
director of the Company, evidenced by a secured promissory note. The
loan provides for simple interest at 8% per annum, no instalment
payments and is all due and payable on November 13, 2002. The loan is
secured on certain personal assets of Mr Picker. Personal expenses
totalling $13,000 were also paid by the Company on Mr. Picker's behalf
in 2001. This amount is expected to be reimbursed by Mr. Picker during
the coming year.
The Company made consultancy payments totalling $152,000 (2001 :
$107,000) to Cheryl Picker, wife of one of the directors, for services
provided to the Company on an arms-length basis.
Notes payable to stockholders
On February 16, 2001, the Company obtained an unsecured loan of $400,000
in the form of a promissory note which bears interest at 9% per annum
from Henry Venture II Limited. This loan was repaid on July 5, 2001.
F-11
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Notes (continued)
7 Stockholders' equity
Series A Convertible Preferred Stock
In August 1992, the Company issued 370,000 shares of Series A
Convertible Preferred Stock at $1.00 per share providing proceeds of
$370,000. During September 1993, the Board of Directors of the Company
effected a 10-for-1 stock split of the Series A Preferred. Further, in
August 1996, in consideration for the cancellation of Series B
Redeemable and Series C Redeemable, the Company issued one additional
share of Series A Preferred to an existing holder of Series A Preferred.
After giving effect to the stock split and the issuance of the
additional share, there were a total of 3,700,001 shares of Series A
Preferred issued and outstanding, Each Series A Preferred share can be
converted into common stock, at the option of the holder, at an initial
conversion rate of one to one, subject to adjustment from time to time
based on the consideration paid for additional stock issued and options
granted by the Company. The Series A Preferred are automatically
converted into common stock upon the consummation of a public offering
of the Company's common stock with a per share price as defined in the
certificate of incorporation.
There is no established dividend rate on the Series A Preferred.
However, the holders of Series A Preferred are entitled to receive
preference to a declaration or payment of any dividend on the common
stock of the Company in amounts equal to that paid to other outstanding
shares of the Company. In the event of a voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Company,
the Series A Preferred stockholders are entitled to receive a
liquidation preference equal to $1.23 for each outstanding share of the
Series A Preferred plus a preferential amount equal to 10% of the
original issue price for each twelve month period outstanding from the
date of issuance to date of distribution.
The holders of Series A Preferred are entitled to vote on all matters in
which holders of common stock have the right to vote.
Series B Convertible Preferred Stock
In December 1997, the Company issued 436,672 shares of Series B
Preferred Stock at $6.41 per share providing proceeds of $2,799,984. In
addition, the Company issued 311,910 shares of Series B Preferred to an
existing common stockholder in exchange for the cancellation of a
promissory note due to the common stockholder.
F-12
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Notes (continued)
7 Stockholders' equity (continued)
In May 1998 the Company issued a further 405,483 shares of Series B
Convertible Preferred Stock. Each Series B Preferred share can be
converted into common stock, at the option of the holder, at an initial
conversion rate of one to one, subject to adjustment from time to time
based on the consideration paid for additional stock issued and options
granted by the Company. The holders of Series B Preferred are also
entitled to anti-dilution provisions in the event the Company were to
issue additional shares of common stock for less than specified amounts
and prior to certain dates, as defined in the applicable agreement. The
Series B Preferred will automatically convert into common stock upon the
consummation of a public offering of the Company's common stock with a
per share price as defined in the certificate of incorporation. There is
no established dividend rate on the Series B Preferred. However, the
holders of Series B Preferred are entitled to receive preference to any
declaration or payment of any dividend on the common stock of the
Company in amounts equal to that paid to other outstanding shares of the
Company. In the event of a voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, the Series B
Preferred stockholders are entitled to receive a liquidation preference
equal to the original issue price of $6.41 for each outstanding share of
the Series B Preferred.
The holders of Series B Preferred are entitled to vote on all matters
which holders of common stock have the right to vote.
Series C Preferred Stock
During December 1998, the Board of Directors of the Company authorized
the issuance of 1,453,550 shares of Series C Preferred Stock of the
Company. The Series C Preferred Stock were to be sold in units
consisting of 25 shares of Series C Preferred Stock and 14 warrants to
purchase common stock of the Company (collectively "a Series C Unit") at
a price per unit of $175.
Series C Preferred Stock
Each Series C Preferred share can be converted into common stock, at any
time at the option of the holder, at an initial conversion rate of one
to one. The Series C Preferred Stock will automatically convert into
common stock upon the consummation of a public offering of the Company's
common stock with a per share price as defined in the certificate of
incorporation. There is no established dividend rate on the Series C
Preferred Stock. However, the holders of Series C Preferred Stock are
entitled to receive preference to any declaration or payment of any
dividend on the common stock of the Company in amounts equal to that
paid to other outstanding shares of the Company. The holders of Series C
Preferred Stock are entitled to vote on all matters which holders of
common stock have the right to vote.
The Company issued 16,655 units of Series C Preferred Stock, or 416,375
shares, providing gross proceeds of $2,913,000 during December 1998 and
a further 12,185 units or 304,625 shares, providing gross proceeds of
$2,132,025 in the 15 months to March 2000.
F-13
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Notes (continued)
7 Stockholders' equity (continued)
Series D Preferred Stock
During March 2000, as part of its agreement with United Therapeutics
Corporation ("UT"), the Company issued 2,238,363 shares of Series D
Preference Stock to UT at a price per share of $2.23 for gross proceeds
of $5,000,000, $3,000,000 by way of cash and $2,000,000 by way of 21,978
shares of UT with a fair market value of $91 each at the date of the
agreement. These shares were recorded in current assets as available for
sale investments and the unrealised losses of $291,210 at March 31, 2000
were recorded in other comprehensive income. The shares were disposed of
in September 2000 producing a realized gain of $29,568.
The rights attached to Series D Preferred shares are similar to those
attached to the Series A, B, and C Preferred Shares.
Common Stock
During the period to March 31, 2000 the Company issued 69,500 shares to
employees in lieu of cash compensation. The estimated fair value of the
shares issued of $104,250 was recorded as a compensation expense in the
period.
In October 1999 and February 2000 the Company issued an aggregate
605,000 shares at an estimated fair market value of $0.001 per share to
acquire the remaining shares in IgX Oxford Hepatitis Corporation not
already held by the Company.
In the year to March 31, 2001 the Company issued 878,284 shares which
included 762,674 shares on the exercise of options and warrants. The
fair value of the total consideration of $164,000 included $50,000 in
respect of consultant services rendered. This has been recorded in
general and administrative expenses in the consolidated statement of
operations.
In the year to March 2002 the Company issued 226,250 shares, all on the
exercise of options and warrants for aggregate consideration of $46,000.
8 Stock Options and Warrants
1993 Stock Option Plan
During 1993, the Company implemented its 1993 Stock Option Plan (the
1993 Plan), whereby incentive and nonqualified options to purchase
shares of the Company common stock may be granted to key employees,
officers, directors and consultants. The vesting and exercise periods
for options granted under the 1993 Plan are determined by a committee of
the Board of Directors.
The 1993 Plan stipulates that no option may be exercisable after ten
years from the date of grant. The fair market value of the Company's
common stock is determined by the Board of Directors from time to time.
Options granted under the 1993 Plan generally vest in equal installments
over a period of four years.
F-14
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Notes (continued)
8 Stock Options and Warrants (continued)
1998 Stock Option Plan
In September 1998, the Company adopted its 1998 Stock Incentive Plan
(the "1998 Plan"), whereby incentive and nonqualified stock options to
purchase shares of the Company's common stock may be granted to
employees, outside directors and consultants. The vesting and exercise
periods of options granted under the 1998 Plan are to be determined by a
committee of the Board of Directors.
The 1998 Plan stipulates that the exercise price of incentive stock
options will not be less than the fair market value at the date of grant
or in the case of nonqualified stock options less than 85% of the fair
market value at the date of grant. The exercise period of options
granted shall not exceed 10 years (5 years in the case of incentive
options granted to individuals owning 10% or more of the voting stock of
the Company) from the date of grant and shall vest at a rate specified
from time to time by the Board of Directors.
On a combined basis, the 1993 Plan and the 1998 Plan allow the Company
to issue an aggregate of up to 3,125,857 shares of common stock of the
Company.
The following table summarizes activity regarding stock options and
warrants for the years ended March 31, 2001 and March 31, 2002:
Options Warrants
------- --------
Outstanding at December 31, 1998 1,179,857 632,478
Granted 1,325,000 1,001,110
Rescinded (220,183) -
Exercised - (70,000)
---------- ----------
Outstanding at March 31, 2000 2,284,674 1,563,588
Granted 187,250 2,810,400
Exercised (560,674) (206,200)
---------- ----------
Outstanding at March 31, 2001 1,911,250 4,167,788
Granted - -
Exercised (6,250) (220,000)
---------- ----------
Outstanding at March 31, 2002 1,905,000 3,947,788
========== ==========
F-15
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Notes (continued)
8 Stock Options and Warrants (continued)
With the exception of 40,000 options exercisable at $5 each granted in
1999 and 150,000 options exercisable at $0.23 each granted in 2000, all
options have an exercise price of $0.01 each.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
in accounting for its 1993 Plan. No compensation expense arose in the
period to March 31, 2002.
Had compensation costs for option grants to employees been determined
based upon the fair value at the date of grant for awards under the 1993
Plan consistent with the methodology prescribed under SFAS No. 123,
"Accounting for Stock Based Compensation", the Company's net loss would
not have been affected for any of the periods presented.
The fair value of the options granted to employees during the years
ended March 31, 2002 has been determined on the date of the respective
grant using the Black-Scholes option-pricing model based on the
following weighted average assumptions of no dividend yield, expected
life of 5 years and risk free interest rate of 6%.
9 Income Taxes
The Company has incurred losses since inception which have generated net
losses on a consolidated basis of approximately $28 million at March 31,
2002 which are available to offset future taxable income. The net
operating loss carryforwards will expire in 2007 through 2014. These
loss carryforwards are subject to limitation on future years utilisation
should certain ownership changes occur.
The net operating loss carryforwards and other temporary differences,
arising primarily from depreciation, result in a deferred tax asset at
March 31, 2001 and March 31, 2002 of $2,954,000 and $3,370,000
respectively. In consideration of the Company's accumulated losses and
uncertainty of its ability to utilize this deferred asset in the future,
the Company has recorded a valuation allowance of equal amounts on such
dates to fully offset the net deferred tax asset and bring its carrying
amount to zero for all periods presented.
For the period ended March 31, 2000 and the years ended March 31, 2001
and 2002, the Company's effective tax rate differs from the federal
statutory rate principally due to net operating losses and other
temporary differences for which no benefit was recorded.
The provision for income taxes of $10,986, $Nil and $Nil for the period
ended March 31, 2000 and years ended March 31, 2001 and March 31, 2002
respectively, primarily relates to Irish tax on interest earned on bank
deposits located in the Republic of Ireland.
F-16
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Notes (continued)
10 Bridge Loans
Between August 1999 and February 2000 the Company raised $1.55m in
bridge loans. These loans attracted interest of 20% and had a total of
620,000 warrants to purchase shares of common stock at $0.01 attached.
The warrants are exercisable for a period of three years from the date
of issue. The loans plus accrued interest were repaid in March 2001.
206,200 and 226,200 of the warrants were exercised prior to March 31,
2001 and March 31, 2002 respectively.
F-17
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
December 31,
2001
------------
ASSETS
Current assets:
Cash $ 585,488
Reimbursable from partner 318,155
Loan due from officer 386,914
Rent Deposit 39,146
Prepaid and other current assets 10,989
-----------
Total current assets 1,340,692
Property and equipment, net 218,738
-----------
Total assets 1,559,430
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 687,657
Income taxes payable -
Bridge Loans -
-----------
Total current liabilities 687,657
Long term liabilities 378
-----------
Total liabilities 688,035
-----------
Stockholders' equity
Series B preferred stock ($0.001 par value;
1,154,065 shares issued and outstanding)
(liquidation preference of $7,399,980) 1,154
Series A preferred stock ($0.001 par value;
3,700,001 shares authorized, issued and
outstanding) (liquidation preference of
$6,383,042) 3,700
Common Stock ($0.001 par value; 15,000,000
shares authorized; 2,909,064 shares issued
and outstanding) 2,909
Series C preferred stock ($0.001 par value;
1,453,547 shares issued and outstanding)
(liquidation preference of $10,180,799) 1,454
Series D 2,238,363 shares issued 2,238
Additional paid-in capital 29,510,588
Other Comprehensive Income (458,997)
Deficit accumulated during development stage (28,191,651)
-----------
Total stockholders' equity 871,395
-----------
Total liabilities and stockholders' equity 1,559,430
===========
F-18
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
December 31,
2002
-----------
ASSETS
Current assets:
Cash $ 187,884
Loan due from officer 411,715
Rent Deposit 39,146
Prepaid and other current assets 57,580
-----------
Total current assets 696,325
Property and equipment, net 233,475
-----------
Total assets 929,800
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 417,323
Income taxes payable -
CBC Loan 450,000
-----------
Total current liabilities 867,323
Long term liabilities -
-----------
Total liabilities 867,323
-----------
Stockholders' equity
Series B preferred stock ($0.001 par value:
1,154,065 shares issued
and outstanding)
(liquidation preference of
$7,399,980) 1,154
Series A preferred stock ($0.001 par value;
3,700,001 shares authorized, issued and
outstanding) (liquidation preference of
$6,383,042) 3,700
Common Stock ($0.001 par value; 15,000,000
shares authorized;
2,944,064 shares issued and outstanding ) 2,944
Series C preferred stock ($0.001 par value:
1,453,547 shares issued
and outstanding)
(liquidation preference of $10,180,799) 1,454
Series D 2,238,363 shares issued 2,238
Additional paid-in capital 29,560,570
Other Comprehensive Income (443,343)
Deficit accumulated during development stage (29,066,240)
-----------
Total stockholders' equity 62,477
-----------
Total liabilities and stockholders' equity 929,800
===========
F-19
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
9 Months 9 Months
to to
December 31, December 31,
2001 2002
------------ -------------
(unaudited) (unaudited)
$ $
Operating Expenses
Research and development (2,469,820) (296,239)
General and administrative (989,656) (671,539)
Reimbursements from UT 2,737,994 200,000
---------- ----------
Total operating expenses: (721,482) (767,778)
---------- ----------
Interest income 23,992 18,603
Interest expense (17,478) (22,950)
---------- ----------
Loss before income taxes (714,968) (772,125)
Income Taxes - 223,366
---------- ----------
Net Loss (714,968) (548,759)
========== ==========
F-20
Synergy Pharmaceuticals Inc.
(A Development Stage Company)
Consolidated statements of cash flows
9 months Ended 9 months Ended
December 31, December 31,
2001 2002
Cash flows from operating activities:
Net loss $(714,968) $(548,759)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 11,521 14,106
Changes in assets and liabilities:
Prepaid and other current assets 402,172 (40,950)
Accounts payable and accrued
expenses 57,211 (47,109)
--------- ---------
Net cash used in operating activities (244,064) (622,712)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (25,260) -
--------- ---------
Net cash (used in)/provided by
investing activities (25,260) -
--------- ---------
Cash flows from financing activities:
Repay notes payable to stockholders (399,622) -
Proceeds from bridge loans - 450,000
Adjustments re issuance of common stock (3,605) 150
--------- ---------
Net cash (used in)/provided by
financing activities (403,227) 450,150
--------- ---------
Effect of exchange rates on cash 1,823 (10,885)
--------- ---------
Net increase (decrease)/increase in cash (670,728) (183,447)
Cash at beginning of period 1,256,216 371,331
--------- ---------
Cash at end of period 585,488 187,884
========= =========
F-21
WEBTRONICS, INC.
PRO FORMA UNAUDITED CONDENSED FINANCIAL STATEMENTS
The following entities, which are included in these pro forma unaudited
financial statements, are defined below:
Webtronics, Inc. "Webtronics"
Callisto Pharmaceuticals, Inc. "Callisto"
Synergy Pharmaceuticals, Inc. "Synergy"
All the pro forma unaudited financial statements are as of December 31, 2002 and
for the year then ended and reflect the following transactions all of which
occurred after December 31, 2002.
a) The merger of Callisto and Synergy into Webtronics
b) The conversion of Callisto preferred shares into Callisto
common shares.
c) The 475 to 1 common stock split of the pre-merger Webtronics
common stock.
d) The conversion of Synergy preferred shares Series A, B and C
into Webtronics common shares.
e) The cancellation of Synergy preferred shares Series D and
receipt of $750,000 for in-process research and development.
f) The exercise of Synergy options and warrants.
g) The conversion of Callisto common shares and Synergy common
shares into Webtronics common shares.
The unaudited pro forma condensed balance sheet assumes all of the above
transactions occurred as of December 31, 2002. The unaudited pro forma condensed
statement of operations assumes all of the above transactions had occurred
January 1, 2002.
These pro forma condensed financial statements should be read in conjunction
with the Notes to Pro Forma Unaudited Condensed Financial Statements, and the
financial statements of the separate companies and the related notes thereto.
The pro forma condensed financial statements are not necessarily indicative of
what the actual financial position and results of operations would have been had
the transactions occurred on January 2002 nor do they purport to represent the
future financial condition or future operations of the Company.
F-1
WEBTRONICS, INC.
(A Development Stage Company)
PRO FORMA UNAUDITED CONDENSED BALANCE SHEETS
DECEMBER 31, 2002
ASSETS
Callisto Synergy Pro Forma
Webtronics Pharmaceuticals Pharmaceuticals Adjustments
Inc. Inc. Inc. DB (CR) Total
---------- -------------- --------------- ----------- ------------
Current assets:
Cash and cash equivalents $ 232 $2,223,462 $ 187,884 (350,000) (B) $ 2,838,030
26,452 (E)
750,000 (C)
Loan- officer - 411,715 (411,715) (H)
Prepaid expenses and
other current assets 28,456 96,726 - 125,182
-------- ---------- ----------- ---------- ------------
Total current assets 232 2,251,918 696,325 14,737 2,963,212
Property and equipment - net - 19,781 233,475 253,256
Patent cost - net - 461,961 - 461,961
Investment in subsidiary - 400,000 - (400,000) (D) -
-------- ---------- ----------- ---------- ------------
$ 232 $3,133,660 $ 929,800 (385,263) $ 3,678,429
======== ========== =========== ========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses $ - $ 443,266 $ 417,323 - $ 860,589
Bank loan payable 450,000 100,000 (L)
350,000 (B) -
-------- ----------- ----------- ---------- ------------
Total current liabilities 443,266 867,323 450,000 860,589
-------- ---------- ----------- ---------- ------------
Shareholders' equity:
Preferred stock 423 8,546 423 (A)
2,238 (C)
6,308 (F)
Common stock 105 1,307 2,944 (423) (A) 2,348
(2,645) (E)
(440) (F)
5,589 (F)
1,732 (G)
(1,732) (G)
(26) (I)
105 (J)
(152) (K)
Additional paid-in-capital 2,720 9,753,631 29,560,570 (2,238) (C) 39,834,350
400,000 (D)
(750,000) (C)
(11,457) (F)
(29,974) (I)
(23,807) (E)
(105) (J)
152 (K)
(100,000) (L)
Accumulated deficit
accumulated during the
development stage (2,593) (7,064,967) (29,509,583) 30,000 (I)
411,715 (H) (37,018,858)
-------- ---------- ----------- ---------- ------------
232 2,690,394 62,477 (64,737) 2,817,840
-------- ---------- ----------- ---------- ------------
$ 232 $3,133,660 $ 929,800 $ 385,263 $ 3,678,429
======== ========== =========== ========== ============
See notes to pro forma unaudited condensed financial statements.
F-2
WEBTRONICS, INC.
(A Development Stage Company)
PRO FORMA UNAUDITED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
Callisto Synergy Pro Forma
Webtronics Pharmaceuticals Pharmaceuticals Adjustments
Inc. Inc. Inc. DB (CR) Total
---------- -------------- --------------- ----------- ------------
Revenue $ - $ - $ 967,408 $ - $ 967,408
475,000 (N)
411,715 (P)
30,000 (Q)
Operating expenses 2,153 1,364,249 1,843,854 (297,500) (M) 3,829,471
--------- ----------- ------------ ----------- -----------
Net loss before other income (net) (2,153) (1,364,249) (876,446) 619,215 (2,862,063)
Other income (net) - 21,009 1,857 (22,000) (O) 44,866
--------- ----------- ------------ ----------- -----------
Net loss $ (2,153) $(1,343,240) $ (874,589) $ (597,215) $(2,817,197)
========= =========== ============ =========== ===========
Net loss per share 0.00 (0.12)
==== =====
Weighted average shares outstanding 1,054,500 23,481,319
========= ==========
See notes to pro forma unaudited condensed financial statements.
F-3
WEBTRONICS, INC.
(A Development Stage Company)
NOTES TO PRO FORMA UNAUDITED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2002
The following transactions are reflected in the pro forma adjustment column of
the balance sheet:
A. To record the conversion of a total of 4,235,299 of Callisto
preferred shares Series A, B, C into Callisto common shares at
a ratio of one common share for one share of convertible
preferred stock.
B. To record payment by Synergy of $350,000 of the bridge loan of
$450,000.
C. To record the cancellation of Synergy's 2,238,363 preferred
shares .001 par value Series D and the receipt of $750,000 for
in process research and development.
D. To record the initial investment of $400,000 by Callisto for
99.7% of Webtronics stock as a reduction in paid-in-capital as
a result of the merger.
E. To record the estimated exercise of 1,340,000 Synergy options
and 1,305,238 warrants at $.01 per share into common shares of
Synergy and the resulting receipt of $26,452 by Synergy.
F. To record the conversion of Synergys' preferred shares Series
A, B and C and common shares into common shares of Webtronics.
G. To record the conversion of Callisto 17,318,994 common shares
into 17,318,994 shares of Webtronics.
H. To record the forgiveness of amount due Synergy from an
officer.
I. To record brokerage fee paid by the issuance of 263,741 shares
of common stock of Webtronics and valued at $30,000.
J. To cancel par value of Callisto's shares of Webtronics common
stock purchased in March 2002.
K. To record the 475 to one split of shares held by original
Webtronics common shareholders.
L. To record the conversion of $100,000 of Synergy bridge loan
into common stock.
F-4
WEBTRONICS, INC.
(A Development Stage Company)
NOTES TO PRO FORMA UNAUDITED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 2002
The following transactions are reflected in the pro forma adjustment column of
the statement of operations:
M. To eliminate officers' compensation recorded in 2002 by
Callisto for officers who have resigned.
N. To record annual officers' compensation agreements entered
into in 2003.
O. To eliminate interest expense on $450,000 bridge loan paid in
2003.
P. To record $411,715 forgiveness of debt of officers loan in
2003.
Q. To record $30,000 brokerage fee regarding Synergy merger.
F-5