| As filed with the Securities and Exchange Commission March 26, 2004 | Registration No. 333-_________ |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
________________________________
Chiral
Quest, Inc.
(Name
of small business issuer in its charter)
| Minnesota
(State
or jurisdiction
of
incorporation or organization) |
8731
(Primary
Standard Industrial
Classification
Code Number) |
58-1486040
(I.R.S.
Employer
Identification
No.) |
||
| 7
Deer Park Drive, Suite E, Monmouth Junction, NJ 08852
(Address
and telephone number of principal executive offices and principal place of business) |
||||
| Alan
D. Roth, Ph.D.
President
and CEO
Chiral
Quest, Inc.
7
Deer Park Drive, Suite E, Monmouth Junction, NJ 08852
Telephone:
(732) 274-0399
Facsimile:
(732) 274-0402
(Name,
address and telephone number of agent for service) |
|
Copies
to:
William
M. Mower, Esq.
Christopher
J. Melsha, Esq.
Maslon
Edelman Borman & Brand, LLP
90
South 7th Street, Suite 3300
Minneapolis,
Minnesota 55402
Telephone:
(612) 672-8200
Facsimile:
(612) 672-8397 |
||
Approximate
date of proposed sale to the public: From time to time after the effective date of this Registration Statement,
as shall be determined by the selling shareholders identified herein.
If this
Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the earlier effective registration statement for the
same offering.[ ]
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________________
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________________
If delivery
of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_|
__________________________
CALCULATION OF REGISTRATION FEE
| Title
of each class of
securities
to be registered |
Number
of shares to be registered(1) |
Proposed
maximum offering price per unit |
Proposed
maximum
aggregate
offering
price |
Amount
of
registration
fee |
|||||
| |
|||||||||
|
Common
stock, par value $.01 per share (2) |
4,826,906 |
$1.80 |
$8,688,430.80
|
$1,100.82
|
|||||
| |
|||||||||
| Common
stock, par value $.01 per share (3) |
2,896,135 |
$1.65 |
$4,778,622.75 |
$605.45 |
|||||
| |
|||||||||
| |
|||||||||
|
TOTAL |
7,723,041 |
|
$13,467,053.55 |
$1,706.28 |
|||||
| |
|||||||||
| (1) | There is also being registered hereunder an indeterminate number of shares of common stock as shall be issuable as a result of a stock split, stock dividend, combination or other change in the outstanding shares of common stock. |
| (2) | Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457 of the Securities Act based upon a $1.85 per share average of high and low prices of the Registrant’s common stock on the OTC Bulletin Board on March 24, 2004. |
| (3) | The Offering Price per Share in based upon the exercise price of warrants pursuant to which such shares of common stock are issuable, in accordance with Rule 457(g). |
The Registrant
hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
|
|
||
A
registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities
may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus
shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in
any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities
laws of any such state.
OFFERING
PROSPECTUS
[Chiral
Quest Logo]
Chiral
Quest, Inc.
7,723,041
Shares
Common
Stock
The
selling shareholders identified on pages 35-38 of this prospectus are offering on a resale basis a total of 7,723,041 shares of
our common stock, including 2,896,135 shares issuable upon the exercise of outstanding warrants. We will not receive any proceeds from
the sale of these shares by the selling shareholders.
Our
common stock is quoted on the Over-the-Counter Bulletin Board under the symbol “CQST.” On , 2004, the last sale price
for our common stock as reported on the OTC Bulletin Board was $ .
________________
The
securities offered by this prospectus involve a high degree of risk.
See
“Risk Factors” beginning on page 5.
________________
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined
that this prospectus is truthful or complete. A representation to the contrary is a criminal offense.
The
date of this Prospectus is ,
2004.
|
|
||
Table
of Contents
| |
Page |
|||
| |
||||
|
Prospectus
Summary |
3 |
|||
| Risk
Factors |
5 |
|||
|
Note
Regarding Forward Looking Statements |
13 |
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| Management’s
Discussion and Analysis of Financial Condition
and
Results of Operations |
14 |
|||
|
Our
Company |
21 |
|||
| Management |
28 |
|||
|
Principal
Shareholders |
33 |
|||
| Certain
Transactions and Relationships |
34 |
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|
Market
for Common Equity and Related Shareholder Matters |
34 |
|||
| Use
of Proceeds |
35 |
|||
|
Selling
Shareholders |
35 |
|||
| Plan
of Distribution |
39 |
|||
|
Description
of Capital Stock |
41 |
|||
| Disclosure
Of Commission Position On Indemnification For Securities Act Liabilities |
42 |
|||
|
About
This Prospectus |
42 |
|||
| Where
You Can Find More Information |
43 |
|||
|
Validity
of Common Stock |
43 |
|||
| Experts |
43 |
|||
|
Changes
in Certifying Accountant |
43 |
|||
| Financial
Statements |
F-1 |
|||
| 2 | ||
|
|
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PROSPECTUS
SUMMARY
This
summary provides a brief overview of the key aspects of this offering. Because it is only a summary, it does not contain all of
the detailed information contained elsewhere in this prospectus or in the documents included as exhibits to the registration statement
that contains this prospectus. Accordingly, you are urged to carefully review this prospectus in its entirety.
Our
Company
We are
a research-driven company engaged in the commercial development of asymmetric catalysis products and technology. We have
the rights to certain chemical compounds known as chiral ligands which, with the introduction of a metal, serve as catalysts in
facilitating the production of chiral molecules in such a manner that there is a preferential manufacture of the desired molecule
versus the unwanted mirror-image molecule. We provide pharmaceutical and fine chemical manufacturers and other prospective customers
with broad access to our technologies for testing purposes at a low upfront cost, coupled with the opportunity to gain exclusive
access to such technologies for specific applications for fees, royalties and certain manufacturing and development rights. We also
plan to provide specialized services to pharmaceutical, biotechnology and fine chemical companies relating to the development of
chiral manufacturing processes for their products. We believe that our ligands may also be useful in producing fine chemicals other
than pharmaceuticals. Chiral molecules are used in flavors, fragrances, agrochemicals, animal health, food and feed additives (including
vitamins) and nutraceuticals.
Our
proprietary technology was developed by Dr. Xumu Zhang, Ph.D., a professor at Pennsylvania State University (“Penn State”),
and is owned by the Penn State Research Foundation (the “PSRF”), the technology development arm of Penn State. In October
2000, we obtained from PSRF an exclusive, worldwide license to certain patents based on Dr. Zhang’s research relating to asymmetrical
catalysis. This license gives us the right to, among other things, sub-license technology rights on a non-exclusive basis to customers,
or sell molecule groups, known as ligands, to pharmaceutical and fine chemical company customers for both research and commercial
applications.
Chiral
Quest, Inc., a Minnesota corporation, resulted from the reverse merger of Chiral Quest, LLC, a Pennsylvania limited liability company
that commenced operations in October 2000, and Surg II, Inc., a Minnesota corporation, on February 18, 2003. Our executive offices
are located at Princeton Corporate Plaza, 7 Deer Park Drive, Suite E, Monmouth Junction, New Jersey 08852 and our telephone number
is (732) 274-0399. Our Internet site is www.chiralquest.com.
Recent
Developments
In February
2004, we completed a private placement of 4,826,906 shares of our common stock at a per share price of $1.50. Each investor in the
offering was also entitled to a five-year warrant to purchase one-half of the number of common shares purchased by the investor
at a price of $1.65 per share. Accordingly, in connection with the private placement, we issued warrants to purchase an aggregate
of 2,413,444 shares of common stock. After deducting commissions and other expenses relating to the private placement, we received
aggregate net proceeds of approximately $6.67 million. We also issued to the placement agents engaged in connection with the private
placement 5-year warrants to purchase an aggregate of 482,691 shares of our common stock at a price of $1.65 per share.
Risk
Factors
For
a discussion of some of the risks you should consider before purchasing shares of our common stock, you are urged to carefully review
and consider the section entitled “Risk Factors” beginning on page 5 of this prospectus.
| 3 | ||
|
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The
Offering
The
selling shareholders identified on pages 35-38 of this prospectus are offering on a resale basis a total of 7,723,041 shares of
the following shares of our common stock:
-
4,826,906 shares of our outstanding common stock issued in connection with our February 2004 private placement;
-
2,413,444 shares of our common stock issuable at a price of $1.65 per share upon the exercise of warrants issued to the investors in our February 2004 private placement; and
-
482,691 shares of our common stock issuable at a price of $1.65 per share upon the exercise of warrants issued to the placement agents in connection with our February 2004 private placement.
|
Common
stock offered |
7,723,041
shares |
| Common
stock outstanding before the offering(1) |
17,827,924
shares |
|
Common stock outstanding after
the offering(2) |
20,724,059
shares |
| Common
Stock OTC Bulletin Board symbol |
CQST.OB |
| (1) | Based on the number of shares outstanding as of March 26, 2004, not including 2,841,607 shares issuable upon exercise
of various warrants and options to purchase common stock. |
| (2) | Assumes the issuance of all shares offered hereby that are issuable upon exercise of warrants. |
| 4 | ||
|
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RISK
FACTORS
An investment
in our common stock is very risky. You may lose the entire amount of your investment. Prior to making an investment decision, you
should carefully review this entire prospectus and consider the following risk factors:
Trading
of our common stock is limited.
Trading
of our common stock is conducted on the National Association of Securities Dealers’ Over-the-Counter Bulletin Board, or “OTC
Bulletin Board.” This adversely effects the liquidity of our common stock, not only in terms of the number of shares that can
be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts’
and the media’s coverage of us. This may result in lower prices for our common stock than might otherwise be obtained and could
also result in a larger spread between the bid and asked prices for our common stock.
Because
it is a “penny stock,” it will be more difficult for you to sell shares of our common stock.
In addition, because
our common stock trades on the OTC Bulletin Board and at a price lower than $5.00, it is considered a “penny stock.” Broker-dealers who sell penny stocks must provide purchasers of these stocks with a
standardized risk-disclosure document prepared by the SEC. This document provides information about penny stocks and the nature and
level of risks involved in investing in the penny-stock market. A broker must also give a purchaser, orally or in writing, bid and
offer quotations and information regarding broker and salesperson compensation, make a written determination that the penny stock
is a suitable investment for the purchaser, and obtain the purchaser’s written agreement to the purchase. The penny stock rules
may make it difficult for you to sell your shares of our stock. Because of the rules, there is less trading in penny stocks. Also,
many brokers choose not to participate in penny-stock transactions. Accordingly, you may not always be able to resell shares of our
common stock publicly at times and prices that you feel are appropriate.
A
significant number of shares of our common stock are or will become available for sale and their sale could depress the price of our
common stock.
A substantial
number of shares of our common stock are being offered by this prospectus. We may also issue additional shares in connection with
our business and may grant additional stock options to our employees, officers, directors and consultants or warrants to third parties.
Sales of a substantial number of shares of our common stock in the public market after this offering could adversely affect the market
price for our common stock and make it more difficult for you to sell our shares at times and prices that you feel are appropriate.
Our
stock price is, and we expect it to remain, volatile, which could limit investors’ ability to sell stock at a profit.
The volatile
price of our stock makes it difficult for investors to predict the value of their investment, to sell shares at a profit at any given
time, or to plan purchases and sales in advance. A variety of factors may affect the market price of our common stock. These include,
but are not limited to:
-
announcements of technological innovations or new commercial products by our competitors or us;
-
developments concerning proprietary rights, including patents;
-
regulatory developments in the United States and foreign countries;
-
economic or other crises and other external factors;
-
period-to-period fluctuations in our revenues and other results of operations;
-
changes in financial estimates by securities analysts; and
-
sales of our common stock.
| 5 | ||
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We will
not be able to control many of these factors, and we believe that period-to-period comparisons of our financial results will not necessarily
be indicative of our future performance.
In addition,
the stock market in general, and the market for biotechnology companies in particular, has experienced extreme price and volume fluctuations
that may have been unrelated or disproportionate to the operating performance of individual companies. These broad market and industry
factors may seriously harm the market price of our common stock, regardless of our operating performance.
We
do not expect to pay dividends.
We have
never paid dividends on our capital stock and do not anticipate paying any dividends for the foreseeable future. Accordingly, the
only time that you will realize a return, if any, on your investment in our common stock is when you sell your shares.
Risks
Relating to our Business
Our
future success is highly dependent on the continued availability of Dr. Xumu Zhang and other key employees and consultants.
In connection
with the continued development of our products and services, we are substantially dependent upon on the continued service of its existing
research personnel, including in particular, Xumu Zhang, Ph.D. Dr. Zhang, an associate professor at Penn State, who serves as our Chief
Technology Officer and provides essential services to us pursuant to a consulting agreement. Although we maintain a $2 million key-man insurance
policy with respect to Dr. Zhang and he has entered into a non-compete agreement with us, the loss of his services would have a material
adverse effect on our business. In addition to Dr. Zhang, we employ other research scientists who are also critical to our success.
Although these research scientists have entered into confidentiality agreements, most have not entered into noncompete agreements
with us. The loss of one or more of our research personnel could prevent or delay the ongoing development of our products and services,
which would materially and adversely affect our business.
We
have no meaningful operating history on which to evaluate our business or prospects.
We commenced
operations in October 2000 and, therefore, have only a limited operating history on which you can base an evaluation of our business
and prospects. Accordingly, our business prospects must be considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets,
such as the fine chemical, pharmaceutical and biotechnology markets.
A
small group of persons is able to exert significant control over our company.
Our current
officers and directors beneficially own or control approximately 27% of our common stock. Individually and in the aggregate, these
persons will have significant influence over the management of our business, the election of directors and all matters requiring shareholder
approval. In particular, this concentration of ownership may have the effect of facilitating, delaying, deferring or preventing a
potential acquisition of our company and may adversely affect the market price of our common stock. Additionally, three members of
our Board of Directors are employees of Paramount BioCapital, Inc., or one of its affiliates. Dr. Lindsay A. Rosenwald is the chairman
and sole owner of Paramount BioCapital, Inc. and such affiliates. Dr. Rosenwald beneficially owns 3.6% of our outstanding common stock,
and several trusts for the benefit of Dr. Rosenwald and his family beneficially own 10.7% of our outstanding common stock. Although
Dr. Rosenwald does not have the legal authority to exercise voting power or investment discretion over the shares held by those trusts,
he nevertheless may have the ability to exert significant influence over the Company.
| 6 | ||
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Our
management anticipates incurring losses for the foreseeable future.
For the
year ending December 31, 2003, we had a net loss of $2,018,400 and since our inception in October 2000 through December 31, 2003,
we have incurred an aggregate net loss of $3,411,205. As of December 31, 2003, we had total assets of $1,585,857, of which $659,117
was cash or cash equivalents. We expect operating losses to continue for the foreseeable future and there can be no assurance that
we will ever be able to operate profitably.
We
will require additional financing in order to complete the development of our products and services and otherwise develop our business
operations. Such financing may not be available on acceptable terms, if at all.
Following
the completion of our February 2004 private placement, we anticipate that our current capital will be adequate to fund our operations
at least through December 31, 2004. However, changes may occur that would consume available capital resources before that time. Our
combined capital requirements will depend on numerous factors, including competing technological and market developments; changes
in our existing collaborative relationships; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual
property rights and the outcome of any potentially related litigation or other dispute; the purchase of additional capital equipment;
acquisition of technologies; and the development and regulatory approval progress of our customers’ product candidates into which
our technology will be incorporated.
Additional
capital that may be needed by us in the future may not be available on reasonable terms, or at all. If adequate financing is not available,
we may be required to terminate or significantly curtail our operations, or enter into arrangements with collaborative partners or
others that may require us to relinquish rights to certain of our technologies, or potential markets that we would not otherwise relinquish.
Our
operating results will fluctuate, making it difficult to predict our results of operations in any future period.
As we
develop our business, we expect our revenues and operating results to vary significantly from quarter-to-quarter. As a result, quarter-to-quarter
comparisons of our revenues and operating results may not be meaningful. In addition, due to the fact that we have little or no significant
operating history with our new technology, we cannot predict our future revenues or results of operations accurately. Our current
and future expense levels are based largely on our planned expenditures and estimates of future revenues. Accordingly, we may be unable
to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, and any significant shortfall in revenues
relative to our planned expenditures could have an immediate adverse effect on our business and results of operations.
| 7 | ||
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We
may be unable to develop successful customer relationships.
We intend
to establish relationships with various types of customers and partners, such as pharmaceutical and fine chemical manufacturers. Each
of these relationships will involve negotiation of terms and fees. We cannot be certain that we will be able to negotiate profitable
relationships or that we can successfully fulfill our obligations under development agreements that will allow us to continue these
relationships.
Our
license agreement with Penn State Research Foundation may be terminated if we do not achieve certain milestones.
Our business
is based on technically complex products and services. We do not directly own our proprietary technology, but rather we have the exclusive, worldwide
right to use it pursuant to a license agreement with the Penn State Research Foundation. Currently, our commercial success depends entirely
on this licensed technology. Pursuant to the license agreement, we are required to use our best efforts to achieve “gross revenue”
(as defined in the license agreement) of at least $250,000 in 2004, at least $350,000 in 2005 and at least $500,000 in 2006. In the
event we fail to achieve these milestones, or otherwise materially breach the license agreement, the Penn State Research Foundation may have
the right, but not the obligation, to terminate the license. Unless we subsequently develop our own technology independent of the
Penn State Research Foundation, termination of this license would preclude us from implementing our business plan.
We
may rely heavily on third parties to formulate and manufacture our products.
We currently lack the resources to formulate or manufacture the overwhelming majority of our own products on a commercial scale. If any of our customers require our ligands in commercial quantities in the near term, we may have to rely one or more third-party contractors to manufacture the ligands to satisfy the needs of such customers. Reliance on one or more third-party manufacturers exposes us to certain risks, including the following:
- We may be unable to replace manufacturers on commercially reasonable terms or at all because the number of potential
manufacturers is limited, and the United States Food and Drug Administration (“FDA”), or such similar regulatory
authorities, may have to approve any replacement contractor;
- Third-party manufacturers might be unable to formulate and manufacture our ligands in the volume and of the quality
required to meet customers’ clinical and commercial needs;
- Our existing and future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing
business for the time required to supply our customers to complete their clinical trials or to successfully produce, store and distribute
our products;
- Drug manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding state agencies
to ensure strict compliance with good manufacturing practice and other government regulations and corresponding foreign standards,
which we would be unable to control; and
- If any third-party manufacturer makes improvements in the manufacturing process for our products, we may not own, or may have to share, the intellectual property rights to the innovation.
Each of
these risks could delay the clinical trials conducted by our customers, approvals required by regulatory authorities, and the commercialization
of some of our customers’ product candidates. These risks could also result in higher costs to the customer or could deprive
us of potential product revenues.
| 8 | ||
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We
will need to create and grow our scientific, sales and support operations.
We will
need to create and substantially grow our direct and indirect sales operations, both domestically and internationally, in order to
create and increase market awareness and sales of our products and services. The sale of our products and services will require the
engagement of sophisticated and highly knowledgeable sales personnel. Similarly, the anticipated complexity of our products and services
and the difficulty of customizing them will require us to hire research and development personnel and customer service and support
personnel, highly trained in chiral chemistry and chemical engineering. Competition among our company and others to retain qualified
sales personnel, chemists and chemical engineers is intense due to the limited number of available qualified candidates for such positions.
Many of our competitors are in a financial position to offer potential employees greater compensation and benefits than those which
may be offered by us. Failure to recruit and retain such persons will have a material adverse effect on our business operations.
Our
future success is dependent on the management of our potential growth.
Our future
success depends upon our ability to grow our business. Such growth, if it occurs, will require us to establish management and operating
systems, hire additional technical support and sales personnel, and establish and maintain our own independent office, research and
production facilities. Failure to manage that growth efficiently could have a material adverse effect on our business.
We
currently have no capabilities and no experience in manufacturing our products on a commercial scale.
We do
not currently have the experience or ability to directly manufacture or market most chemical or pharmaceutical products in commercial
quantities that may be developed under our collaborative arrangements. Even though, with the opening of our Princeton, New Jersey
facility, we have the capacity to develop certain of our products on a commercial scale, we most likely will not be able to produce
all of our ligands on a commercial scale at the Princeton facility. In addition, we have not yet developed a cost effective and efficient
commercial manufacturing process for some of our ligands, and may never be able to do so. To the extent we are unable to produce,
directly or indirectly, our ligands in quantities required for commercial use, we will not realize any benefits from our technology.
Further, in the event we decide to establish a manufacturing facility in the future, we may require substantial additional funds,
and will be required to hire and train a significant number of additional personnel, and, in certain circumstances, may need to comply
with the extensive FDA “good manufacturing practice” regulations applicable to such a facility.
Risks
Relating to Our Industry
We
face intense competition.
We compete
directly with the in-house research departments of fine chemical, pharmaceutical and biotechnology companies, as well as contract
research companies, and research and academic institutions. Many of our competitors have greater financial and other resources than
us. As new companies enter the market and as more advanced technologies become available, we expect to face increased competition.
In the future, any one of our competitors may develop technological advances that render obsolete the products or services that we
provide or may provide in the future. While we plan to develop new and better technologies, which will give us competitive advantages,
our competitors plan to do the same. We may not be able to develop the technologies we need to successfully compete in the future,
and our competitors may be able to develop such technologies before we do. Consequently, we may not be able to successfully compete
in the future.
| 9 | ||
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The
fine chemical, pharmaceutical and biotechnology industries involve rapidly changing technologies.
Rapid
technological change and uncertainty due to new and emerging technologies characterize the drug and fine chemical development industries.
We may not be able to develop, integrate and market, on a timely basis, the new and enhanced products and services necessary to keep
pace with competitors. Failure to anticipate or to respond to changing technologies, or significant delays in product development
or introduction, could cause our customers to delay or decide against purchases of our products or services.
Since
many of or customers and potential customers are pharmaceutical and biotechnology companies, we are and will be subject to risks,
uncertainties and trends that affect companies in these industries.
For the
foreseeable future, we will derive a substantial portion of our revenue from pharmaceutical and biotechnology companies. As a result,
we will be subject to risks and uncertainties that affect the pharmaceutical and biotechnology industries and possible reduction and
delays in research and development expenditures by companies in these industries. Our future revenues may also be adversely affected
by mergers and consolidation in the pharmaceutical and biotechnology industries, which will reduce the number of potential customers.
In particular,
pharmaceutical and biotechnology companies face significant regulation by governmental entities in the United States and other countries.
The nature and the extent to which such regulation may apply to our customers will vary depending on the nature of any such customer’s
products. Most of the pharmaceutical products developed by our customers will require regulatory approval by governmental agencies
prior to commercialization. In particular, human pharmaceutical therapeutic products are subject to rigorous preclinical and clinical
testing and other approval procedures by the FDA and by foreign regulatory authorities. Various federal and, in some cases, state
laws also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such pharmaceutical products.
The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations
are time consuming, can cause significant delays in the commercialization of a drug, and often require the expenditure of substantial
resources. To the extent our customers experience significant delays in obtaining the necessary regulatory approvals to market their
pharmaceutical products, or are unable to obtain such approvals at all, these customers will not purchase our proprietary ligands
and other services used in the manufacture of the ultimate pharmaceutical product.
We
may be held liable for harm caused by drugs that our customers develop and test.
Often
times, our ligands will be used by our customers to produce drugs for human use. If any of the drugs cause injuries or illness to
people, we may be required to incur substantial costs in defending against claims and may be required to pay damages arising therefrom.
Although we have liability insurance and will use commercially reasonable efforts to obtain indemnification covenants from our customers
for their use of our products, such protections may not be sufficient to protect us from the cost of such claims. Damages awarded
in a product liability action could be substantial and could have a material adverse effect on our financial condition.
We
may be held liable for contamination or other harm caused by hazardous materials that we use.
Some of
our research and development processes involve the use of hazardous materials and, therefore, we are subject to federal, state and
local regulation governing the use, manufacture, handling, storage and disposal of hazardous materials. We cannot completely eliminate
the risk of contamination or injury resulting from hazardous materials and we may incur liability as a result of any contamination
or injury. We may also incur expenses relating to compliance with environmental laws. Such expenses or liability may have a material
adverse effect on our financial condition.
| 10 | ||
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Risks
Relating to Our Technology
We
may not be able to license technologies that we need to conduct our business.
In addition
to the technologies that we develop, we will rely heavily on technologies that we license from other companies or institutions. We
may not be able to license technologies that we need in the future or we may be unable to license such technologies on a commercially
reasonable basis. Although our license agreement with the Penn State Research Foundation provides that we are entitled to use any “improvements”
subsequently made to the technologies we currently license, the Penn State Research Foundation has no obligation to license any “new”
technologies discovered by Dr. Zhang and researchers at Penn State. If we are unable to license the technologies we need in the future,
or to license or otherwise acquire such technologies on commercially reasonable terms, we may experience increased costs (and, therefore,
reduced profits) or be unable to engage in certain activities that require those technologies. Accordingly, failure to license the
technologies we need in the future or otherwise acquire such technologies on commercially reasonable terms could have a material adverse
effect on our business operations.
Our
success will depend on our ability to protect our proprietary technology.
Our rights
to a substantial portion of our technology are as the exclusive licensee to several United States patents and a number of United States
and foreign pending patent applications held by the Penn State Research Foundation, including the ligands that comprise our Chiral ToolKit.
These patents and patent applications are based primarily upon the work of Dr. Zhang, our chief technology officer, who is also an
associate professor at the Pennsylvania State University. Our success will depend largely on our ability, and the ability of our licensors
and licensees, to obtain patents for their technologies and products, if any, resulting from the application of such technologies,
defend patents once obtained, and maintain trade secrets.
If
we are unable to protect our intellectual property, or incur significant expense in doing so, our business, operating results and
financial condition may be materially adversely affected. Any steps we take to protect our intellectual property may be inadequate,
time consuming and expensive.
Our success
and ability to compete are substantially dependent upon our internally developed products and services, which we currently protect
through the use of United States and foreign patents. To the extent such products and services are not patentable, we will rely on
trade secret protection. As with other knowledge-based products, however, our patent positions rest on complex factual and legal issues
that are not entirely resolved and there can be no assurance that the patents utilized by us will adequately protect our proprietary
products and services. Although we have taken steps to protect our unpatented trade secrets and know-how, in part through the control
of access to such information and through the use of confidentiality agreements with our employees, consultants and certain of our
contractors, customers and potential customers, there can be no assurance that these agreements will not be breached, that we would
have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently developed or
discovered by competitors. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. We anticipate that policing unauthorized use of our products will be difficult, and we
cannot be certain that the steps we intend to take to prevent misappropriation of our technology, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United States, will be successful. Other companies may also
independently develop substantially equivalent information.
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Foreign
laws may not afford us sufficient protection for our intellectual property rights and, in certain cases, we may not seek patent protection
outside the United States.
We believe
that our success will depend, in part, upon our ability to obtain international protection for our intellectual property. We have
existing foreign customers and believe we will have access to large markets oversees. The laws of some foreign countries, however, may not be
as comprehensive as those of the United States and may not be sufficient to protect our proprietary rights abroad. In addition,
in certain cases, we may decide not to pursue patent protection outside the United States, because of cost and confidentiality concerns.
Accordingly, our international competitors could obtain foreign patent protection for, and market overseas, technology for which we
are seeking United States patent protection, though such competitors’ patent protection generally requires such competitors to
make their patent filings prior to information on our relevant inventions becoming sufficiently available under local law as to block
the availability of such competitors’ patent protection.
Our
technology may infringe on the proprietary rights of others.
We anticipate
that other patents that we license or may license in the future will be increasingly subject to infringement claims due to the rapid
development of chiral chemistry and competitors in our industry. In fact, one potential competitor, Solvias, AG, based in Basel, Switzerland,
notified us in July 2002 of its claim that one of the patented ligands we license from the Penn State Research Foundation infringes on a patent
that Solvias licenses from BASF Group, AG. Some of our other competitors or our potential competitors may have filed or intend to
file patent applications that may make claims that conflict with the claims of the patents that we license. We cannot be certain that
these competitors or other third parties will not assert infringement claims against us with respect to our products and technology.
Any infringement claim, regardless of its merit, could be time-consuming and expensive to defend. Such claims may also require us
to enter into royalty or licensing agreements in order to continue using the disputed technology. In the event we could not afford
to defend our company against an infringement claim or are not able to enter into a license or royalty agreement on commercially favorable
terms, or at all, we may be required to abandon the technology that is subject to such claims.
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NOTE
REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements contained in this prospectus that are forward-looking in nature are based on the current beliefs of our management as well
as assumptions made by and information currently available to management, including statements related to the markets for our products,
general trends in our operations or financial results, plans, expectations, estimates and beliefs. In addition, when used in this
prospectus, the words “may,” “could,” “should,” “anticipate,” “believe,” “estimate,”
“expect,” “intend,” “plan,” “predict” and similar expressions and their variants, as they
relate to us or our management, may identify forward-looking statements. These statements reflect our judgment as of the date of this
prospectus with respect to future events, the outcome of which are subject to risks, which may have a significant impact on our business,
operating results or financial condition. You are cautioned that these forward-looking statements are inherently uncertain. Should
one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes
may vary materially from those described herein. We undertake no obligation to update forward-looking statements. The risks identified
under the heading “Risk Factors” in this prospectus, among others, may impact forward-looking statements contained in this
prospectus.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
You should
read the following discussion of our results of operations and financial condition in conjunction with the financial statements contained
in this prospectus beginning at page F-1. This discussion includes “forward-looking” statements that reflect our current
views with respect to future events and financial performance. We use words such as we “expect,” “anticipate,”
“believe,” and “intend” and similar expressions to identify forward-looking statements. Investors should be aware
that actual results may differ materially from our expressed expectations because of risks and uncertainties inherent in future events,
particularly those risks identified in the “Risk Factors” section of this prospectus, and should not unduly rely on these
forward looking statements.
Overview
Since
our inception in October 2000, we have focused our efforts and resources on the development of asymmetric catalysis technology, our
primary intellectual property to which we hold an exclusive worldwide license from the Pennsylvania State Research Foundation (“PSRF”),
the technology development arm of the Pennsylvania State University (“Penn State”). Our license from PSRF covers certain
inventions discovered by our Chief Technology Officer (“CTO”) prior to November 8, 2002.
Since
inception we have incurred a cumulative deficit of $3,411,205 through December 31, 2003. We expect our operating losses to increase
significantly over the next several years, primarily due to expansion of our research and development programs, the hiring of additional
chemists, and the expansion of our manufacturing capabilities.
Our ability
to achieve profitability depends upon, among other things, our ability to discover and develop products (specifically new “ligands”),
and to develop our products on a commercial scale through a cost effective and efficient process. To the extent that we are unable
to produce, directly or indirectly, ligands in quantities required for commercial use, we will not realize any significant revenues
from our technology. Moreover, there can be no assurance that we will ever achieve significant revenues or profitable operations from
the sale of any of our products or technologies. Risks associated with our business are more thoroughly addressed in the section entitled
“Risk Factors.”
Since
our inception, we have generated sales revenue but not yet generated any net profits. Our management believes that our research and
development (“R&D”) and manufacturing capacity will need to grow in order for us to be able to obtain significant licensing
and manufacturing agreements with large fine chemical and pharmaceutical companies. We believe that our manufacturing capacity will
be enhanced with our new office and laboratory space located in Monmouth Junction, New Jersey that was leased in June 2003.
On February
18, 2003, we acquired Surg II, Inc., a Minnesota corporation (“Surg”), in a reverse merger transaction
(the “Merger”). Pursuant to the terms of the Merger, Chiral Quest, LLC merged with and into a wholly-owned subsidiary of
Surg. In exchange for all of the outstanding membership interests of Chiral Quest, LLC, Surg issued to the former members of Chiral
Quest, LLC a number of shares of Surg’s common stock that resulted in the members of Chiral Quest, LLC owning two-thirds of
Surg’s outstanding shares following the Merger. In connection with the Merger, Surg changed its name to Chiral Quest, Inc., a
Minnesota corporation, and adopted the business plan of Chiral Quest, LLC. Accordingly, when we refer to our business or financial
information relating to periods prior to the Merger, we are referring to the business and financial information of Chiral Quest, LLC,
unless the context indicates otherwise.
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Results
of Operations – Years Ended December 31, 2003 vs. 2002
Our revenues
for the year ended December 31, 2003 were $669,036 as compared to $191,613 for the year ended December 31, 2002. For the year ended
December 31, 2003, approximately 20% of total revenue was derived from the amortization of option fee income pertaining to the licensing
of our intellectual property and 80% of total revenue was derived from sales of our ligands, feasibility screening and customized
process development services sold to third parties. For the year ended December 31, 2002, approximately 86% of total revenue was derived
from the amortization of option fee income and 14% of total revenue was comprised of sales or our ligands. It is anticipated that
sales of our ligands, molecular building blocks and customized chiral services will continue to comprise a greater percentage of our
revenues in the future as we expand our manufacturing capabilities.
Cost of
goods sold for the year ended December 31, 2003 was $196,045 as compared to $6,763 during the year ended December 31, 2002. The increase
of Cost of goods sold is attributed to the allocation of direct labor, and overhead expenses to finished goods. These expenses were
allocated from compensation and rent expenses as part of overall general operating expenses.
Management
and consulting expenses for the year ended December 31, 2003 were $361,622 as compared to $231,424 during the year ended December
31, 2002. The overall change for the year ended December 2003 vs. 2002 was primarily caused by an increase in consulting expense.
Consulting expense increased due to the new consultant agreement entered with our CTO at a rate of $10,000 per month effective May
15, 2003. In addition, consulting expense increased from the amortization of stock options issued to consultants, scientific advisory
board members, during the second, third and fourth quarters of 2003.
Our R&D
expenses for the year ended December 31, 2003 were $440,646 as compared to $63,728 during the year ended December 31, 2002. This increase
was primarily caused by increased utilization of the Penn State research resources in connection with the development of new ligands.
The agreement with Penn State requires us to fund services of four post-doctorate fellows who, under the supervision of the CTO, conducted
research and provided research quantities of chiral ligands to us. This agreement has been extended to April 14, 2004. The approximate
obligation payable by us through the end of the agreement dated April 14, 2004, is approximately $96,000. This amount consists principally
of four post-doctorate salaries, fringe benefits, materials and supplies for the stated period. In addition, during the second quarter
of 2003, we opened an additional laboratory facility that enabled us to produce both research and commercial quantities of our ligands.
In connection with the new facility, numerous lab supplies and chemicals were purchased. Accordingly, we incurred significant R&D
expenses in the fourth quarter due to the opening of the New Jersey facility, along with the increased costs of using the facility
and chemists at Penn State.
Selling,
general and administrative (“SG&A”) expenses for the year ended December 31, 2003 were $1,012,182 as compared to $193,449
during the year ended December 31, 2002. This increase in SG&A expenses was due in part to higher legal and accounting fees associated
with our reporting obligations as a public company, increased rent expense for the New Jersey facility, additional spending on advertising
and promotion expenses, increased travel expenses for new business development opportunities and higher administrative expenses associated
with having more employees such as insurance and employer payroll taxes.
Compensation
expense was $601,780 for the year ended December 31, 2003 as compared to $197,596 for the year ended December 31, 2002. This increase
was caused primarily by the new CEO (hired in November 2002) receiving an annual base salary of $205,000 effective at the date of
the Merger with Surg II, Inc., as provided for in his employment agreement. In addition, compensation expense increased due to the
hiring of a vice president of business development, a controller, and several chemists to work at the new laboratory facility in New
Jersey. Compensation expense as it relates to direct labor for ongoing and completed projects, has been capitalized as part of inventory
work in process and finished goods as these cost components relate directly to cost of goods sold.
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Depreciation
and amortization expenses for the year ended December 31, 2003 were $86,325 as compared to $36,631 during the year ended December
31, 2002. This increase was primarily related to fixed asset purchases for office equipment, computer equipment, laboratory equipment
and leasehold improvements for the newly leased facility in New Jersey.
Interest
expense for the year ended December 31, 2003 was $2,809 as compared to $0 during the year ended December 31, 2002. The interest expense
for the year ended December 31, 2003 is attributed to the promissory notes issued between July 2002 through February 2003 owed to
a related party, which were fully paid and discharged in February 2003.
Interest
income for the year ended December 31, 2003 was $13,973 as compared to $0 during the year ended December 31, 2002. The increase in
interest income was caused by significantly higher cash reserves obtained after the Merger on February 18, 2003.
Our net
loss for the year ended December 31, 2003 was $2,018,400 as compared to $537,978 for the year ended December 31, 2002. The increased
net loss for the year ended December 31, 2003 as compared to December 31, 2002 was primarily due to higher R&D expenses incurred
with Penn State, increased legal and accounting expenses in reporting as a public company, along with other SG&A expenses such
as higher payroll expenses associated with having more employees. We expect losses to continue and increase in the next year as we
attempt to expand our laboratory space, purchase more chemicals and raw material compounds, and hire additional employees.
Results
of Operations – Years Ended December 31, 2002 vs. 2001
Our revenues
for the year ended December 31, 2002 were $191,613 as compared to $167,683 for the year ended December 31, 2001. The revenues are
comprised primarily of the licensing of PSRF’s technology. We assume the financial risks related to these revenues by financing
the research and development of PSRF’s technology as well as the defense of PSRF’s patents. The increase of approximately
14% from December 31, 2001 can be attributed to our January 2002 agreement with a pharmaceutical product development customer, granting
the customer a worldwide, non-exclusive, royalty free license to certain of our intellectual property rights for research purposes
only in connection with certain of the customer’s compounds. The customer paid us a nonrefundable license fee of $400,000 in
2002. The fee is being amortized to revenue through September 2005. For the year ended December 31, 2002 approximately 86% of total
revenue was derived from the amortization of option fee income pertaining to the licensing of our intellectual property and 14% of
total revenue was derived from sales of our ligands, feasibility screening and customized process development services sold to third
parties. For the year ended December 31, 2001, approximately 25% of total revenue was derived from the amortization of option fee
income and 75% of total revenue was comprised of sales or our ligands. It is anticipated that sales of our ligands, molecular building
blocks and customized chiral services will continue to comprise a greater percentage of our revenues in the future as we expand our
manufacturing capabilities.
Cost of
goods sold for the year ended December 31, 2002 was $6,763 as compared to $0 during the year ended December 31, 2001. The increase
of cost of goods sold is attributed to allocating material costs to specific projects as part of finished goods during the year ended
December 31, 2002, as compared to expensing materials, laboratory chemicals and supplies as part of operating expenses during the
year ended December 31, 2001.
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Management
and consulting expense fees for the year ended December 31, 2002 were $231,424 as compared to $261,600 during the year ended December
31, 2001. The overall change for the years ended December 2002 vs. 2001 was primarily caused a decrease in utilizing outside consulting
services related to the business operations.
Our R&D
expenses for the year ended December 31, 2002 were $63,728 as compared to $224,592 during the year ended December 31, 2001. This change
was primarily caused by increased laboratory supplies and chemicals purchased during the year ended 2001 in connection with the development
of new ligands.
SG&A
expenses for the year ended December 31, 2002 were $193,449 as compared to $137,371 during the year ended December 31, 2001. SG&A
expenses increased due to having more employees contributing to costs such as insurance, employer payroll taxes, office expenditures
and travel.
Compensation
expense was $197,596 for the year ended December 31, 2002 as compared to $111,706 for the year ended December 31, 2001. This increase
was caused primarily in the hiring of additional chemists to work at our State College, Pennsylvania (at Penn State University) laboratory
facility.
Bad debt expense was $0 for the year ended December 31, 2002 as compared to $50,000 for the year ended December 31, 2001. During the year ended December 31, 2001, we established a reserve for an international client who provided no assurance of collectibility.
Depreciation
and amortization expenses for the year ended December 31, 2002 were $36,631 as compared to $24,611 during the year ended December
31, 2001. This increase was primarily related to fixed asset purchases for office equipment, computer equipment, and laboratory equipment,
for our State College office.
Interest
income for the year ended December 31, 2002 was $0 as compared to $1,804 during the year ended December 31, 2001. The decrease in
interest income in 2002 was caused by lower cash reserves during the year ended December 31, 2002.
Our net
loss for the year ended December 31, 2002 was $537,978 as compared to $640,393 for the year ended December 31, 2001. The higher loss
for the year ended December 31, 2001 as compared to December 31, 2002 was primarily due to higher R&D expenses incurred with the
purchases of laboratory supplies and chemicals, management and consulting fees, along with establishing the reserve for bad debt during
the year ended December 31, 2001.
Liquidity
and Capital Resources
As of
December 31, 2003, we had working capital of $116,359 and cash and cash equivalents of $659,117. If we are unable to significantly
increase our revenues, we will most likely require additional financing by the end of the first quarter of 2005 in order to continue
operations. The most likely source of financing includes private placements of our equity or debt securities or bridge loans to the
Company from third party lenders.
Our
net cash used in operating activities for the year ended 2003 was $1,636,934. Our net loss of $2,018,400 was offset
by an increase of accounts payable and accrued expenses of $161,582 and $112,481 respectively, along with depreciation and amortization of approximately
$324,000.
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Our
net cash used in investing activities for the year ended 2003 was $368,087. Investing activities expenditures consisted of purchases
of property and equipment of $237,222 and payments for intellectual property rights of $130,865.
Our
net cash provided by financing activities for the year ended 2003 was $2,630,618. Financing activities included the repayment of a
note payable to Paramount of $376,625 along with cash received in the merger dated February 18, 2003 in the amount of $3,017,243.
In February
2004, we completed the sale of our securities in a private placement to accredited investors for gross process of approximately $7.2
million. Management believes that the capital resulting from this financing will provide sufficient resources to fund our continued
operational expansion and corporate development for more than the next twelve months. Our long term liquidity is contingent upon achieving
sales and/or obtaining additional financing.
Our working
capital requirements will depend upon numerous factors, including without limitation the progress of our R&D programs, the resources
we devote to developing manufacturing and marketing capabilities, technological advances, the status of competitors, and our ability
to establish sales arrangements with new customers. Working capital will also be affected by the expansion of office and laboratory
space lease agreements that were entered into during the second quarter of 2003 and first quarter of 2004, along with the hiring of
additional employees.
We have
formed two China subsidiaries through which we intend to open a laboratory facility in the People’s Republic of China. We expect
to provide at least $65,000 of capital to the China subsidiary during the second quarter of 2004. Our management believes that by
opening a facility in China to produce non-proprietary chemical building blocks and related compounds, we will be able to significantly
decrease our manufacturing costs and expenses, which will enable us to cost-effectively produce our ligands and end products and make
our products substantially more competitive and even more attractive to current and potential customers. We expect operations
to commence on a limited basis by June 2004.
Critical
Accounting Policies
Impairment
of Intellectual Property Rights
We
evaluate the recoverability of its long-lived assets, where indicators of impairment are present, by reviewing current and projected
profitability or undiscounted cash flows of such assets. Intangible assets that are subject to amortization are reviewed for potential
impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Intangible assets not subject to
amortization are tested for impairment at least annually. For the years ended December 31, 2003 and 2002, we determined that
impairment to our long-lived assets did not occur. Accordingly, no impairment loss was recorded for the years ended December 31, 2003
and 2002.
Revenue
Recognition
Revenues
are comprised principally of four main components: (1) the licensing of PSRF’s technology, (2) the sale of proprietary ligands,
(3) feasibility screening, and (4) custom contract development. Revenues as they relate to the licensing of our rights
to PSRF’s intellectual property are recognized upon over the applicable license periods. We assume the financial risks
related to these revenues by financing the research and development of PSRF’s technology as well as the defense of PSRF’s
patents. Deferred revenue in the accompanying consolidated balance sheets represents amounts prepaid by customers to us for
services to be performed and products to be delivered at a subsequent date. These deferred amounts will be recognized as revenue when
earned. Revenues as they relate to the sale of manufactured proprietary ligands are recognized upon the shipping of the ligands to
the customer. Revenues as they relate to feasibility screening are recognized upon the completion of project reports and investigational
studies. Revenues as they relate to custom contract development are recognized upon the shipment of finished products.
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Accounting
for Stock-Based Compensation
We
account for our employee and director stock option plans in accordance with APB Opinion No. 25, “Accounting
For Stock Issued To Employees,” and related interpretations. We measure compensation expense
for employee and director stock options as the aggregate difference between the market value of its common stock and exercise prices
of the options on the date that both the number of shares the grantee is entitled to receive and the exercise prices are known. Compensation
expense associated with restricted stock grants is equal to the market value of the shares on the date of grant and is recorded pro
rata over vesting period.
Recently
Issued Accounting Standards
In July
2002, the FASB issued SFAS No. 146, “Accounting for Restructuring Costs.”
SFAS No. 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets.
Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities
or personnel. Under SFAS No. 146, we will record a liability for a cost associated with an exit or disposal activity when
that liability is incurred and can be measured at fair value. SFAS No. 146 will require us to disclose information about
our exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements
that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS
No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged.
Under SFAS No. 146, a company cannot restate previously issued financial statements and the new statement grandfathers the
accounting for liabilities that a company had previously recorded under Emerging Issues Task Force Issue 94-3.
In December
2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure
- an amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting
for Stock Based Compensation” and provides alternative methods for accounting for a change by registrants
to the fair value method of accounting for stock-based compensation. Additionally, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require disclosure in the significant accounting policy footnote of both annual and interim financial statements
of the method of accounting for stock based-compensation and the related pro-forma disclosures when the intrinsic value method continues
to be used. SFAS No. 123 is effective for fiscal years beginning after December 15, 2002, and disclosures are effective for the first
fiscal quarter beginning after December 15, 2002.
In May
2003, the FASB issued SFAS No. 150, “Accounting For Certain Financial Instruments with Characteristics of both Liabilities and
Equity.” SFAS No. 150 changes the accounting for certain financial instruments with characteristics of both liabilities and equity
that, under previous pronouncements, issuers could account for as equity. The new accounting guidance contained in SFAS No. 150 requires
that those instruments be classified as liabilities in the balance sheet.
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SFAS No.
150 affects the issuer’s accounting for three types of freestanding financial instruments. One type is mandatorily redeemable
shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type includes put options
and forward purchase contracts, which involves instruments that do or may require the issuer to buy back some of its shares in exchange
for cash or other assets. The third type of instruments that are liabilities under this Statement is obligations that can be settled
with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely
with the value of the issuers’ shares. SFAS No. 150 does not apply to features embedded in a financial instrument that is not
a derivative in its entirety.
Most of
the provisions of SFAS No. 150 are consistent with the existing definition of liabilities in FASB Concepts Statement No. 6, “Elements
of Financial Statements.” The remaining provisions of this Statement are consistent with the FASB’s proposal to revise that
definition to encompass certain obligations that a reporting entity can or must settle by issuing its own shares. This Statement shall
be effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning
of the first interim period beginning after June 15, 2003.
We believe
that the adoption of these pronouncements will not have a material impact on our consolidated financial position or results of operations.
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OUR
COMPANY
Overview
We are a research-driven company engaged in the commercial development of asymmetric products and technology for
the life sciences industry. We have two main lines of products and services – proprietary chiral catalysts and chiral building
blocks or client-defined molecules. We have the rights to certain chemical compounds known as chiral ligands which, with the introduction
of a metal, serve as catalysts in facilitating the production of chiral molecules in such a manner that there is a preferential manufacture
of the desired molecule versus the unwanted mirror-image molecule. We provide pharmaceutical and fine chemical manufacturers and other
prospective clients with broad access to our technologies for testing purposes at a low upfront cost, coupled with the opportunity
to gain access to such technologies for specific applications for fees, royalties and certain manufacturing and development rights.
Our ligands may also find use in producing fine chemicals other than pharmaceuticals; -chiral molecules are used in flavors, fragrances,
agrochemicals, animal health, food and feed additives (including vitamins) and nutraceuticals. In connection with our chiral technology,
we provide specialized services to pharmaceutical, biotechnology and fine chemical companies relating to the development of chiral
manufacturing processes for their products.
Our proprietary technology
was developed by Dr. Xumu Zhang, a professor at Pennsylvania State University (“Penn State”) and is owned by the Penn State
Research Foundation (“PSRF”), the technology development arm of Penn State. In November 2000, we obtained from the PSRF
an exclusive, worldwide license to certain patents based on Dr. Zhang’s research relating to asymmetrical catalysis. This license
gives us the right to, among other things, sub-license technology rights on a non-exclusive basis to clients, or sell molecule groups,
known as ligands, to pharmaceutical and fine chemical company clients for both research and commercial applications.
Chiral
Quest is also engaged in developing and making client-defined building blocks and drug candidate fragments, mainly in the chiral area.
With this process chemistry offering to life sciences companies, we develop new synthetic routes or optimize existing ones and produce
certain quantities of material for further processing at the clients’ needs either for further elaboration, clinical trials or
beyond.
Chiral
Quest, Inc., a Minnesota corporation, resulted from the reverse merger of Chiral Quest, LLC, a Pennsylvania limited liability company
that commenced operations in October 2000, and Surg II, Inc., a Minnesota corporation, on February 18, 2003.
Chiral
Chemistry
Over 50
percent of the 500 top-selling pharmaceutical drugs on the market are comprised of chiral molecules, including drugs used to treat
anxiety, depression, indigestion, heartburn, cancer, arthritis, AIDS and allergies. In 2003, chiral drug sales were over $160 billion,
based on a report in Chemical and Engineering News of the American Chemical Society,
which represents over one third of the complete drug market of over $410 billion. The majority of new drug
candidates under development by pharmaceutical companies consist of chiral chemicals.
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A molecule
is considered “chiral” because it exists in two “enantiomers,” or non-superimposable mirror-like images analogous
to one’s left and right hands. Most drugs interact with biological targets in a specific manner, requiring the drug to be of
a specific shape and orientation. Contaminating “wrong-handed” enantiomers of the active drug molecule will probably not
interact with the biological drug target, or worse, interact with a different biological molecule in an unintended and often toxic
manner. Thalidomide, the morning sickness drug used by pregnant women in the 1960’s, is a notorious example of an impure chiral
drug. One enantiomer of the drug’s chiral molecules treated morning sickness, while its undesired enantiomer impurity caused
birth defects. Pharmaceutical companies are typically required, at great expense, to purify the active mirror-image form of the drug
molecule away from its contaminating or inactive counterpart.
Products
and Services
We offer
offer two business lines, one in products and one in services in order to provide clients with critical solutions for the efficient
manufacturing of chiral products or therapeutic drugs. Our products include bulk chiral catalysts, proprietary building blocks / client-defined
targets and a proprietary “Chiral ToolKit”, comprised of a diverse set of chiral ligands that are combined with transition
metals to catalyze reactions leading to chiral molecules. We also offers a variety of services covering specialized chiral
transformation screening, chiral synthetic or process support and manufacturing solutions to be delivered on a partnership/contract
basis with client firms. Our products and services are applicable throughout the full life cycle of a chiral drug, from early
lead discovery, through development and in commercialization.
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The CQ
Chiral Library depicted below identifies the current portfolio of proprietary ligands from which clients order both the Chiral ToolKit
selection sets for R&D testing as well as bulk quantities for larger scale uses and commercialization.
Chiral
ToolKit. We currently sell products which represent several of the proprietary families of our chiral
ligands to which we have exclusive rights. These ligands are sold in research quantities packaged in convenient Chiral ToolKit
sets for exclusive use in research applications by client companies. These innovative, patent protected ligands are screened by clients
for applications in the manufacture of their chiral molecules. Clients use this screening process to determine which ligands may prove
optimal for their chiral manufacturing needs. The sale of research quantities of ligands allows clients to gain initial access to
our technology and to independently validate the advantages provided by that technology.
Bulk
Ligands. We also sell larger quantities of proprietary chiral ligands to which we have exclusive rights,
including some that are not included in our Chiral ToolKit. These ligands are sold individually to clients in amounts specified
by the client according to its research, development or semi-commercial needs. One of our objectives is to provide clients with their
required ligands and catalysts, either from our own laboratories or through third parties, for research, clinical and commercial purposes.
The use of CQ bulk ligands in commercial drug applications will generally require license fees and/or other related payments to us, subject to negotiation.
| 23 | ||
|
|
||
Screening
Services. We also provide focused screening of client supplied target compounds using our proprietary
ligands. In addition to the select ligands included in the Chiral ToolKit, we have several families of chiral ligands that are used
to screen target compounds. We identify and prepare individual ligands optimized for particular client needs.
Proprietary Building Blocks / Client-Defined Targets. We work with our clients to help optimize the conditions under which our ligands are used and also produce certain molecules of customer interest. This may involve the development of novel manufacturing processes, for which we will derive additional compensation. We may also structure our client agreements to assure the use of our ligands within the manufacturing process, thereby requiring our customers to buy the ligands from us in commercial quantities in order for the client to successfully manufacture its compound. We may also produce and sell certain selected chiral products defined by our clients such as chiral building blocks or intermediates.
Strategy
Our business strategy is focused on exploiting our asymmetric catalysis technology by:
-
Focusing our research group on designing and discovering additional commercially useful ligands and manufacturing processes;
-
Providing screening services necessary to test the selectivity and activity of a broad portfolio of proprietary technologies for client substrates;
-
Granting access to a selection of our ligands through non-exclusive licenses for research and development purposes;
-
Granting compound-specific exclusive rights to clients whose businesses require commercial use of one or more of our ligands;
-
Developing proprietary process methods for producing chirally pure pharmaceutical ingredients, intermediates and building blocks in exchange for fees, milestone payments and royalties; and
-
Assisting clients in the development of chiral drugs, the development of which has been slowed or halted due to manufacturing inefficiencies, which are amenable to improvements through our technology.
Sales
and Marketing
We sell
our products and services directly to clients both in the pharmaceutical and fine chemical areas. In October 2003, we hired a senior
executive who is focused on sales and marketing activities. We intend to hire additional marketing personnel in the near future.
| 24 | ||
|
|
||
In fiscal
2003, we had two customers that accounted for approximately 54 percent and 17 percent of
our revenue, respectively. The loss of these accounts would have a material adverse effect on our business; however, we believe our
relationships with these customers are strong.
Competition
Competition
in the traditional area of separation manufacture of chiral molecules comes from a few distinct sources, including Chiral Technologies
Inc., ChromTech Ltd., NovaSep, Inc. and Advance Separation Technologies Inc. Traditional methods of manufacturing chiral molecules
involve the production of a mixture of both chiral forms of molecules of interest, followed by a process which separates the desired
enantiomer from the undesired enantiomer. This methodology, though still commonly used, is extremely cost-ineffective, as it results
in the loss of greater than 50 percent of the intermediate product at each chiral purification step. We believe we have a competitive
advantage over companies using traditional methods of separation because our technology drives the preferential manufacture of chiral
enantiomers of interest, which can result in 95 to 99 percent yields. This can result in significant cost savings in the manufacturing
process, particularly for chiral molecules that may require several chiral separation steps by traditional methods.
In the
area of chemical catalysts for chiral drug manufacture, we compete with pharmaceutical and fine chemical companies, including our
current and potential clients and collaborators, academic and research institutions. Some of these companies include the Dow Chemical
Company, Degussa AG, Rhodia ChiRex Inc. and Solvias AG. Many of these companies are developing or marketing technologies and services
similar to the ones developed or offered by us. We anticipate continued competition from other manufacturers of chiral catalysts in
the future.
Some of
our competitors, such as Codexis, a wholly owned subsidiary of Maxygen, or Diversa Corporation, attempt to genetically modify biological
enzymes for the purpose of serving as biological catalysts for asymmetric chiral manufacturing. While this approach works in certain
circumstances, it is extremely time-consuming to develop for each individual manufacturing process. We believe our technology has
the competitive advantage of being more broadly applicable to a number of common asymmetric transformations.
Intellectual
Property
License
with the Penn State Research Foundation. We have an exclusive, worldwide license from the PSRF
to certain chiral technologies developed by Dr. Zhang. The license agreement has been amended on five occasions, four of which provide
us with additional rights, including the rights to new patent applications. The PSRF license agreement grants us rights to any conversions,
re-issues, extensions, divisional applications, continuations, continuations in part, and any patents issuing thereon, and any improvements
to the licensed patents. Under the license agreement, PSRF received an equity stake in our company as partial consideration for the
license. The license agreement also obligates us to reimburse PSRF for its patent expenses relating to the licensed technology.
| 25 | ||
|
|
||
The
PSRF license agreement requires us to use our reasonable best efforts to achieve annual gross revenue of
$250,000 in calendar year 2004, $350,000 in calendar year 2005, and $500,000 in calendar year 2006. Should we fail to obtain these
milestones, PSRF has the right, but not the obligation, to terminate the license agreement on the grounds that we failed to use our
best efforts to achieve those milestones.
Additionally,
in accordance with the license agreement, PSRF’s obligation to license to us, at no additional cost, any new technology subsequently
discovered by Dr. Zhang and the other researchers at Penn State expired on November 8, 2002. Accordingly, if Dr. Zhang develops a
new invention that does not constitute an “improvement” on the existing patent rights, then we will have to license the
right to such invention from the Penn State Foundation.
Patents.
We have an exclusive license 13 United States patent applications filed by the PSRF covering
many classes of ligands. The U.S. Patent and Trademark Office ("PTO") has issued seven (7) letters patents in connection with these
applications (i.e., U.S. Pat. Nos. 6,380,392, 6,525,210, 6,521,769, 6,337,406, 6,576,772, 6,534,657 and 6,653,485). In addition, the
PTO has issued notices of allowance on one (1) other application for which we anticipate a patent being issued in 2004. The remaining
five (5) patent applications are still pending. We also have rights to international patent applications based on many of
the US application filings. National Phase Applications have been filed for six (6) international applications (PCT) corresponding
to the originally filed U.S. applications.
Employees
and Consultants
We currently
employ 13 people: Dr. Alan D. Roth, our President, Chief Executive Officer and Chief Financial Officer, Timothy Hurley, our Director
of Operations, Ronald Brandt our VP of Business Development, Brian Lenz, Controller,
and 9 full time chemists. We also engage Dr. Zhang, who serves as our Chief Technology Officer, on a consultancy basis. Additionally,
we fund four post-doctoral fellows, under the supervision of Dr. Zhang, pursuant to an agreement with Penn State. Of the 18 persons
providing services to our company, either as employees or consultants, 10 hold Ph.D. degrees. As we develop our technology and business,
we anticipate the need to hire additional employees, especially employees with expertise in the areas of chemistry and sales and marketing.
Facilities
Our management
believes that our facilities are adequate for our current needs, including the production of research and commercial quantities of
our ligands, and the needs of our company for at least the next 12 months. However, we anticipate leasing or purchasing additional
laboratory facilities as our business matures.
Monmouth
Junction, New Jersey. We lease our principal executive offices located in Monmouth Junction, New Jersey.
This facility consists of 5,000 square feet of mostly laboratory space with some additional office space at which our Controller and
Vice President of Business Development maintain offices. Eventually, we expect that this facility will office our entire senior executive
team. We occupy this facility pursuant a March, 2003 lease agreement, pursuant to which we pay approximately $13,000 per month for
rent, utilities, and maintenance fees. The lease expires in April 2006. We use this facility to produce both research and commercial
quantities of our ligands and finished products. In February 2004, we amended our lease agreement for our Monmouth Junction facility
to add another 1,200 square feet of laboratory space in order to increase our capacity to produce research and commercial quantities
of our ligands. We expect this additional space to be available by April 2004. The additional lease space will increase our monthly
rent by approximately $2,000.
| 26 | ||
|
|
||
State
College, Pennsylvania. We maintain an additional 889 square feet of office
and laboratory space at 1981 Pine Hall Drive in State College, Pennsylvania. We lease this facility pursuant to a lease agreement
with the Penn State Research Foundation pursuant to which we are required to pay annual payments of approximately $15,000. Currently, this
facility is home to our director of operations, Dr. Zhang and two chemists whose efforts are primarily devoted to providing our screening
services. Our lease for this facility expires in January 2005.
New
York, New York. Our President and Chief Executive Officer also maintains an
executive office at 787 Seventh Avenue in New York City within the office of Paramount BioCapital Investments, LLC. We occupy this space
on a month-to-month basis at a cost of $4,000 per month, which also includes general and administrative services provided by Paramount BioCapital Investments, LLC.
The
People’s Republic of China. Pursuant to an agreement with the Science and Technology Bureau of Jiashan
County (“Jiashan”) in Zhejiang Province of the People’s Republic of China, we have agreed to lease a total of 4,000
square meters of laboratory space in an industrial park near Shanghai, 15-20 percent of which we will begin occupying in 2004. Jiashan
is currently building this facility to specifications and we expect to occupy the facility in the third quarter of 2004. Pursuant
to our agreement with Jiashan, although we are not required to pay rent during the initial 3-years of the lease, we will pay a maintenance
fee of up to $4,500 per month. Following the initial 3-year term, we may, at our sole discretion, either continue leasing the space
for annual rent of no more than $60,000 (at approximate conversion rate as of December 31, 2003) or to purchase the facility on commercially
reasonable terms. We were also granted the option to purchase in the next three years approximately 33 acres of land adjacent to the
industrial park. For purposes of entering into the lease, we established a wholly owned subsidiary organized under the laws of Hong
Kong, known as Chiral Quest Ltd., which in turn will be the sole shareholder of a subsidiary in the People’s Republic of China,
Chiral Quest (Jiashan) Ltd.
Legal
Matters
We are
not a party to any material litigation and are not aware of any threatened litigation that would have a material adverse effect on
our business.
| 27 | ||
|
|
||
MANAGEMENT
Our executive
officers and directors are described below. There are no family relationships among
our executive officers or directors.
| Name |
Age |
Positions |
|
| |
|
|
|
| Alan
D. Roth, Ph.D. |
42 |
President,
Chief Executive Officer, Chief Financial Officer and Director |
|
| Xumu
Zhang, Ph.D. |
46 |
Chief
Technology Officer and Director |
|
| Ronald
Brandt |
56 |
Vice
President of Business Development |
|
| Brian Lenz | 31 | Controller and Secretary | |
| Stephen
C. Rocamboli |
32 |
Interim
Chairman |
|
| Michael
Weiser, M.D., Ph.D. |
40 |
Director |
|
| David
M. Tanen |
32 |
Director |
|
| Vincent
Aita, Ph.D. |
30 |
Director |
|
| Kenneth
W. Brimmer |
48 |
Director |
|
| Stephen
A. Roth, Ph.D. |
61 |
Director |
Alan
D. Roth, Ph.D., co-founder of our company, has served as our President and Chief Executive Officer and a member
of our board of directors since November 2002, and Chief Financial Officer since February 2003. From May 2000 to February
2002, Dr. Roth was Director of the Fundamental Analysis Group at Commerzbank Asset Management in London,
and prior to that, from June 1997, served as a Senior Analyst in healthcare
at Frankfurt. From August 1995 until May 1997,
Dr. Roth worked as an independent consultant in the international financial and chemical industries. From 1992 until 1995, he worked
as an associate at McKinsey & Company, Inc. Dr. Roth worked as a Chemist in the New Lead Discovery department of Merck & Co.,
Inc., in 1982-1983. He is also a director in Health Sciences Investment Partners Ltd. Dr. Roth holds a B. A. from Cornell University
and a Ph.D. in chemistry from Columbia University. He was a Postdoctoral Fellow at the University of Oxford, United Kingdom in 1988-1991.
Xumu
Zhang, Ph.D., a co-founder of our company, has been a member
of our board of directors and has served as our Chief Technology Officer and as a consultant since our inception in 2000. Since 1994,
Dr. Zhang has been primarily employed by Pennsylvania State University in State College, Pennsylvania, most recently as a Professor
of Organic Chemistry, and prior to that was an Assistant and Associate Professor of Chemistry. Dr. Zhang holds a Ph.D. in Organic
and Inorganic Chemistry from Stanford University, where he also conducted his postdoctoral work.
Ronald Brandt has been our Vice President of Business Development since October 2003. He was most recently Executive Vice President of Marketing & Sales at Ricerca Biosciences from October 2002 to August 2003. Previous to Ricerca Biosciences, Mr. Brandt held senior Sales and Business Development positions at ISP (International Specialty Products) from October 1997 to July 2002. From November 1972 to January 1997, Mr. Brandt was employed by Lonza Group in the U.S. and Europe, eventually serving as Senior Vice President from June 1988 to January 1997. He holds a Bachelors of Engineering, specializing in Chemical Engineering, from the Cooper Union, NY and an M.B.A. from Rutgers University in New Jersey.
Brian Lenz
has been our Controller since October 2003 and our Secretary since January 2004. Previously, he was Controller of Smiths Detection
from July 2000 to September 2003. Mr. Lenz was a Senior Auditor at KPMG LLP from October 1998 to June 2000. Mr. Lenz is a Certified Public Accountant,
holds a Bachelors of Science in Business Administration from Rider University in New Jersey, and an M.B.A. from Saint Joseph’s University in Pennsylvannia.
Stephen
A. Roth, Ph.D., has served as a member of the board of directors since
February 2003. Dr. Roth is currently President, CEO, and director of Immune Control, Inc. Prior to joining Immune Control, Dr. Roth
co-founded Neose Technologies in 1990, becoming its Chief Executive Officer and Chairman in 1994. Prior to starting Neose, Dr. Roth
was assistant and associate professor of biology at The Johns Hopkins University from 1970-1980. He moved to the University of Pennsylvania
as professor of biology in 1980, and was appointed Department Chairman in 1982, serving in that role until 1987. At Penn, Dr. Roth
helped form its Plant Science Institute. His scholarly interests centered on the roles of complex carbohydrates in embryonic morphogenesis
and in malignancy, topics on which he authored or co-authored nearly 100 articles and one book. He has received several research awards
and prizes, and is an inventor on 18 patents and six patent applications. Dr. Roth received an A.B. degree from Johns Hopkins in 1964,
a Ph.D. from Case Western Reserve University in 1968, and did postdoctoral work in carbohydrate chemistry at Hopkins from 1968-1970.
| 28 | ||
|
|
||
Stephen
C. Rocamboli has served as our Interim Chairman since February 2003, and our Secretary since December 2003.
Since September 1999, Mr. Rocamboli has been deputy general counsel of Paramount BioCapital, Inc. and Paramount BioCapital Investments,
LLC. From November 2002 to December 2003, Mr. Rocamboli served as a director of Ottawa, Ontario based Adherex Technologies, Inc. Mr.
Rocamboli also serves as a member of the board of directors of several privately held development stage biotechnology companies. Prior
to joining Paramount, Mr. Rocamboli practiced law in the health care field. He received his J.D. from Fordham University School of
Law.
Vincent
M. Aita, Ph.D. has been a director of our company since February 2003.
Since February 2004, Dr. Aita has been an analyst for Kilkenny Capital Management, LLC. Prior to that, he was a research analyst for
Paramount Capital Asset Management, Inc. from November 2000 to January 2004. Prior to that, Dr. Aita completed a post-doctoral fellowship
in the Department of Genetics and Development at Columbia University, and concurrently served as a scientific consultant for Research
Assessment Associates, Inc. From August 1995 to December 1999, Dr. Aita attended Columbia University where he received a Ph.D. in
Genetics from the Columbia Genome Center.
Michael
Weiser, M.D., Ph.D., has served as a member of the board of directors since February 2003. Dr. Weiser concurrently
serves as the Director of Research of Paramount BioCapital Asset Management. Since February 2003, Dr. Weiser has also served as director
of Manhattan Pharmaceuticals, Inc. (OTCBB: MHTT), a company engaged in the development of early-stage pharmaceutical technologies.
Dr. Weiser is also a member of Orion Biomedical GP, LLC, and serves on the board of directors of several privately held companies.
Dr. Weiser holds an M.D. from New York University School of Medicine and a Ph.D. in Molecular Neurobiology from Cornell University
Medical College. Dr. Weiser completed a Postdoctoral Fellowship in the Department of Physiology and Neuroscience at New York University
School of Medicine and performed his post-graduate medical training in the Department of Obstetrics and Gynecology and Primary Care
at New York University Medical Center.
David
M. Tanen has served as a member of the board of directors since February
2003. He has been employed primarily as an associate director of Paramount BioCapital, Inc. and Paramount BioCapital Investments, LLC since
1996, where he has assisted in the founding of a number of biotechnology start-up companies. Since January 2002, Mr. Tanen has served
as a director of Manhattan Pharmaceuticals, Inc. (OTCBB: MHTT), a company engaged in the development of early stage pharmaceutical
technologies. Mr. Tanen also serves as a director of several privately held development stage biotechnology companies. Mr. Tanen received
his J.D. from Fordham University School of Law.
Kenneth
W. Brimmer has served as a member of the board of directors since
February 2003. From May 2002 to February 2003 he served as Chairman and Chief Executive Officer of Surg II, Inc., with whom we completed
a reverse merger transaction in February 2003. Mr. Brimmer has been chief manager of Brimmer Company, a private investment company he founded, since
December 2001. Since September 2003, he has been Chief Executive Officer of Sterion, Incorporated, a Minneapolis-based medical products company, and has served as its Chairman since March 2000.
From April 2000 to December 2001 Mr. Brimmer was Chief Executive Officer and Chief
Financial Officer of Minnetonka, Minnesota-based Active IQ Technologies, Inc., (nka Wits Basin Precious Minerals Inc.) and served as its Chairman from April 2000 to June 2003. From May 1995 until April 2000, Mr. Brimmer was an executive officer of Rainforest Café,
Inc., serving as that company’s Treasurer from May 1995 and as its president from April 1997. From 1990 until 1997, Mr. Brimmer
was also engaged in an executive position with Minneapolis-based Grand Casino, Inc. Mr. Brimmer is currently a member and the chairman
of the board of directors of Sterion Incorporated and Entrx Corporation, and is a director of Hypertension Diagnostics, Inc., all publicly-held companies. Mr. Brimmer began his career as a certified public accountant.
| 29 | ||
|
|
||
Code
of Ethics
We currently do not have
a Code of Ethics that applies to our President, Chief Executive Officer & Chief Financial Officer and our Controller.
Our management is currently in the process of developing a policy and expects to present it to our Board of Directors for review and approval during the second quarter of 2004.
Once we have adopted a code, we will provide a copy of the Code of Ethics without charge upon written request directed to Brian Lenz, 7 Deer Park Drive, Suite
E, Monmouth Junction, NJ 08852.
Audit
Committee Financial Expert
We have
an Audit Committee composed of Messrs. Brimmer, Rocamboli and Tanen and have determined that Mr. Brimmer qualifies as an “audit
committee financial expert,” as that term is defined by SEC regulations. As indicated above, Mr. Brimmer has previous experience
as a certified public accountant. Although our common stock is not listed on any of the New York
Stock Exchange, American Stock Exchange or the Nasdaq Stock Market, applicable SEC rules require us to determine whether Mr. Brimmer
is also an “independent director,” as that term is defined by the listing standards of one of the foregoing stock markets.
Mr. Brimmer is also an “independent director,” as that term is defined by Section 121(A) of the listing standards of the
American Stock Exchange.
Compensation
of Executive Officers
The following
table sets forth, for the last three fiscal years, the compensation earned for services rendered in all capacities by our chief executive
officer and the other highest-paid executive officers serving as such at the end of 2003 whose compensation for that fiscal year was
in excess of $100,000. The individuals named in the table will be hereinafter referred to as the “Named Officers.” No other
executive officer of our company received compensation in excess of $100,000 during fiscal year 2003. No executive officer who would
otherwise have been included in this table on the basis of 2003 salary and bonus resigned or terminated employment during that year.
Summary
Compensation Table
| Annual Compensation | Long-Term Compensation Awards |
All Other |
||||||||||||||
| |
|
|||||||||||||||
| Name
and Principal Position |
Year |
Salary($) |
Bonus($) |
Other Annual Compensation ($) |
Securities Underlying Options (#) |
|||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Alan
D. Roth
President,
Chief Executive Officer & Chief Financial Officer |
2003
2002
2001 |
205,000
0
— |
35,000
0
— |
0
0
— |
865,260
0
— |
0
0
— |
||||||||||
| 30 | ||
|
|
||
Options
and Stock Appreciation Rights
The following
table contains information concerning the grant of stock options under our 2003 Stock Option Plan and otherwise to the Named Officer
during the 2003 fiscal year. No stock appreciation rights were granted during the 2003 fiscal year.
Option
Grants in Last Fiscal Year (Individual Grants)
|
Name |
|
Number
of Securities Underlying Options Granted (#) |
|
Percent
of Total Options/SARs Granted to Employees in Fiscal Year(2) |
|
Exercise
or Base Price ($/Share) |
|
Expiration Date |
|
|
|
|
|
|
||||
|
Dr.
Roth |
|
865,260(1) |
|
46% |
|
1.49 |
|
6/25/2013 |
| (1) | Option vests in three equal installments on February 18, 2004, February 18, 2005 and February 18, 2006, respectively. |
| (2) | Based on total option grants to employees of 1,264,760 in 2003. Options to purchase an additional 894,252 shares of common stock were granted to directors and consultants during 2003. |
Option
Exercise and Holdings
The following
table provides information with respect to the Named Officer concerning the exercisability of options during the 2003 fiscal year
and unexercisable options held as of the end of the 2003 fiscal year. No stock appreciation rights were exercised during the 2003
fiscal year, and no stock appreciation rights were outstanding at the end of that fiscal year.
Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
| Name | Shares Acquired on Exercise |
Value Realized |
Securities Underlying Unexercised Options at FY-End (#) |
Value of Unexercised In-the-Money Options at FY-End (Market price of shares at FY-End less exercise price)(1) |
||||||||
|
|
|
|||||||||||
| Exercisable | Unexercisable | Exercisable | Unexercisable | |||||||||
| |
||||||||||||
|
Dr.
Roth |
0 |
— |
0 |
865,260 |
$0 |
$95,179 |
||||||
| (1) | Based on the fair market value of our common stock on December 31, 2003 of $1.60 per share, the closing sales price per share on that date on the OTC Bulletin Board. |
Long Term Incentive Plan Awards
No
long term incentive plan awards were made to the Named Officer during the last fiscal year.
| 31 | ||
|
|
||
Compensation
of Directors
Our directors
receive no monetary fees for serving as directors. Non-employee directors may be granted, at the discretion of the Board, options
to purchase shares of our common stock. Such options shall contain such terms and provisions as the Board determines at the time of
grant. On October 28, 2003, in consideration for their services as directors, each of Drs. Aita, Stephen Roth and Weiser and Messrs.
Brimmer, Rocamboli and Tanen received ten-year options to purchase 12,900 shares of our common stock at an exercise price of $1.98
per share. All of these options vest in three equal installments on each anniversary of the grant date until fully vested. Members
of the Board who are also employees or consultants of our company receive no options for their services as directors.
Employment
Contracts and Termination of Employment and Change of Control Agreements
Upon completion
of the merger transaction between Surg II, Inc. and Chiral Quest, LLC on February 18, 2003, Alan D. Roth, Ph.D., was appointed our President,
Chief Executive Officer and Chief Financial Officer. Dr. Alan Roth’s employment with us is governed by the terms
of an Employment Agreement dated November 5, 2002, which we assumed following the merger. Dr. Roth’s employment agreement
was subsequently amended as of October 1, 2003. The employment agreement provides for a term of 3 years at an annual salary
of $205,000 during the first year and $240,000 thereafter. In addition, Dr. Roth was entitled to, and received, a bonus of $35,000
following completion of the Surg II – Chiral Quest, LLC merger. He is also entitled to an annual bonus of $35,000, as well as
an annual discretionary bonus, as the Board of Directors may determine. In October 2003, the employment agreement was amended to provide
for additional bonus payments, as follows: (i) $3,500 upon such time as we execute a commercial contract providing for gross revenue
to us in excess of $50,000, which bonus has been paid to Dr. Roth; (ii) a one time bonus of approximately $160,000 upon such time
as the closing bid price of our common stock is at or above $5.00 for five consecutive trading days; and (iii) a one time bonus of
approximately $160,000 upon such time as the closing bid price of our common stock is at or above $8.00 for five consecutive trading
days. If not already paid to Dr. Roth, the bonuses described in clauses (ii) and (iii) are payable in the event of a “Change
of Control” (as defined in the agreement), provided that the per share price at which the change of control was effected was
at or above the price milestones referenced in such clauses.
Pursuant
to the terms of his employment agreement, Dr. Roth also received a ten-year option to purchase an aggregate of 865,260 shares of our
common stock at an exercise price of $1.49 per share. The options vest in three equal annual installments commencing February 18,
2004 and each anniversary thereafter until fully vested.
In the
event Dr. Roth’s employment is terminated for “cause” (as defined in the agreement), he is not entitled
to any severance or other compensation beyond the date of such discharge. In the event Dr. Roth’s employment is terminated as
a result of a “change of control” (as defined in the agreement) in which the Company’s shareholders receive aggregate
consideration of at least $50 million, then Dr. Roth is entitled to receive his base salary for a period of one year and all of his
unvested options shall vest immediately and be exercisable for a period of 180 days thereafter. The agreement also includes non-competition
and non-solicitation covenants prohibiting him from competing with us or soliciting our employees for a period of 18 months following the date his employment is terminated.
| 32 | ||
|
|
||
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial ownership of the our common stock as of March 26, 2004, by (i) each person known by us to be the beneficial owner of more than 5 percent of the outstanding common stock, (ii) each director, (iii) each executive officer, and (iv) all executive officers and directors as a group. Unless otherwise indicated, the address of each of the following persons is 787 Seventh Avenue, 48th Floor, New York, New York 10019.
The number
of shares beneficially owned is determined under rules promulgated by the SEC, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under those rules, beneficial ownership includes any shares as to which the individual
has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days
of March 26, 2004, through the exercise or conversion of any stock option, convertible security, warrant or other right. Including
those shares in the tables does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial
owner of those shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power
(or shares that power with that person’s spouse) with respect to all shares of capital stock listed as owned by that person or
entity.
| Name
and Address |
Number
of Shares
Beneficially
Owned (1) |
Percentage
of
Class |
||
|
|
|
|||
| Vincent
M. Aita, Ph.D. |
229,474 |
1.3 |
||
| Kenneth
W. Brimmer |
150,000 |
(2) | * |
|
| Stephen
C. Rocamboli |
107,699 |
* |
||
| Alan
D. Roth, Ph.D. |
1,100,604 |
(3) | 6.1 |
|
| Stephen
A. Roth, Ph.D. |
16,667 |
(4) | * |
|
| David
M. Tanen |
107,699 |
* |
||
| Michael
Weiser, M.D., Ph.D. |
413,053 |
2.3 |
||
| Xumu
Zhang, Ph.D. |
2,780,775 |
15.5 |
||
| All
Executive Officers and Directors as a group (8 persons) |
4,889,304 |
26.5 |
||
| J.
Jay Lobell
365
West End Avenue
New
York, NY 10024 |
2,179,818 |
(5) | 12.2 |
|
| * Less than 1%. | |
| (1) | Assumes in each case that the shareholder exercised all options available to the person that have vested or will
vest within 60 days of March 26, 2004. Accordingly, this table does not reflect: (i) options to purchase 12,900 shares of common
stock (at a price of $1.91 per share) that have been granted to each of Dr. Aita, Mr. Brimmer, Mr. Rocamboli, Mr. Tanen, Dr.
Weiser and Dr. Stephen Roth, all of which vest in 3 equal annual installments commencing October 28, 2004; (ii) 33,333 shares
issuable upon exercise (at a price of $1.50 per share) of an option granted to Dr. Stephen Roth, which shares vest in equal
installments on February 14, 2005 and February 14, 2006; (iii) 576,840 shares issuable upon exercise (at a price of $1.49 per
share) of an option granted to Dr. Alan Roth, which shares vest in equal installments on February 18, 2005 and February 18,
2006; and (iv) 487,539 shares issuable upon exercise of an option held by Dr. Zhang, 487,539 of which vest on three equal installments
on each of May 15, 2005, May 15, 2006 and May 15, 2007. |
| (2) | Includes 7,500 shares which are owned by Mr. Brimmer’s Individual Retirement Account, 2,500 shares which
are owned by the Individual Retirement Account of Mr. Brimmer’s spouse (to which he disclaims any beneficial interest),
and 100,000 vested options. |
| (3) | Includes 288,420 shares issuable upon exercise (at a price of $1.49 per share) of an option, a portion of which
vested February 18, 2004 and 40,000 shares issuable upon exercise (at a price of $1.65 per share) of a warrant. |
| (4) | Represents shares issuable upon exercise (at a price of $1.70 per share) of an option, a portion of which vested
February 14, 2004. |
| (5) | Based on Schedule 13G filed with the SEC on February 17, 2004. Includes 1,277,025 shares owned equally by five separate established trusts for the benefit of the children of Dr. Lindsay A. Rosenwald and 638,511 shares owned by three trusts established for the benefit of Dr. Rosenwald, which Mr. Lobell is the trustee/investment manager, and over which he has voting control and investment power. |
| 33 | ||
|
|
||
CERTAIN
TRANSACTIONS AND RELATIONSHIPS
Dr. Weiser
and Messrs. Rocamboli and Tanen, all of whom are directors of our company, are employees of Paramount BioCapital, Inc. or
its affiliates, a corporation of which Dr. Lindsay A. Rosenwald is the chairman and sole shareholder. Our treasurer, John Knox, is also an employee of Paramount. Dr. Rosenwald beneficially owns approximately 3.6 percent of our outstanding
common stock and various trusts for the benefit of Dr. Rosenwald or members of his immediate family beneficially own approximately
10.7 percent of our outstanding common stock. Dr. Weiser and Messrs. Rocamboli, Tanen and Knox collectively own approximately
3.5 percent of our outstanding common stock. We currently pay $4,000 per month to an affiliate of Paramount BioCapital for the use of
office space in New York City, as well as for general and administrative services. Additionally, Paramount BioCapital participated as
a placement agent in connection with our February 2004 private placement, for which it received aggregate commissions of approximately
$300,000.
MARKET
FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Since
February 18, 2003, our common stock has traded on the on the OTC Bulletin Board under the symbol “CQST.OB.” From October
4, 2002, our common stock traded under the symbol “SURG.OB” and prior to that under the symbol “SUGR.OB.” The
following table lists the high and low bid price for our common stock as quoted, in U.S. dollars, by the OTC Bulletin Board, as applicable,
during each quarter within the last fiscal year. These quotations reflect inter-dealer prices, without retail mark-up, markdown, or
commission and may not represent actual transactions. These quotations have been adjusted to reflect a 1-for-40 reverse split of our
common stock effected October 4, 2002. Trading on our common stock has been sporadic, exemplified by the low trading volume and many
days upon which no trades occurred.
| 2003 | 2002 | |||||||||||
| Quarter Ended | High | Low | High | Low | ||||||||
|
|
||||||||||||
|
March
31 |
$ |
1.65 |
$ |
1.62 |
$ |
12.00 |
$ |
1.60 |
||||
|
June
30 |
2.50 |
1.55 |
8.80 |
2.80 |
||||||||
|
September
30 |
2.23 |
2.00 |
4.80 |
2.00 |
||||||||
|
December
31 |
1.83 |
1.50 |
4.00 |
0.65 |
||||||||
Record
Holders
The
number of holders of record of our common stock as of March 22, 2004 was 1,717.
Dividends
We have
not paid or declared any dividends on our common stock and we do not anticipate paying dividends on our common stock in the foreseeable
future.
| 34 | ||
|
|
||
USE
OF PROCEEDS
We will
not receive any proceeds from the resale of any of the shares offered by this prospectus by the selling shareholders.
SELLING
SHAREHOLDERS
The
following table sets forth the number of shares of the common stock owned by the selling stockholders as of March 26, 2004, and after
giving effect to this offering.
| Name
|
|
Shares
beneficially
owned before offering |
|
Number
of
outstanding shares
offered
by selling shareholder |
|
Number
of shares offered by selling shareholder issuable upon exercise of warrants |
|
Percentage
beneficial
ownership after offering |
| |
|
|
|
|
||||
| Ross
D. Ain |
|
24,000 |
|
16,000 |
|
8,000 |
|
— |
| Fred
J. Allegrezza |
|
25,500 |
|
17,000 |
|
8,500 |
|
— |
| Balanced
Investment LLC |
|
300,000 |
|
200,000 |
|
100,000 |
|
— |
| Thomas
J. Banholzer |
|
10,500 |
|
7,000 |
|
3,500 |
|
— |
| Bryan
Becker |
|
37,498 |
|
24,999 |
|
12,499 |
|
— |
| David
Becker |
|
37,500 |
|
25,000 |
|
12,500 |
|
— |
| Benjamin
Partners Inc. Savings Plan FBO
Jeffrey
Benison |
|
51,000 |
|
34,000 |
|
17,000 |
|
— |
| Paul
Bennett |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
| Alexander
Bernt |
|
12,000 |
|
8,000 |
|
4,000 |
|
— |
| Stefanie
Bernt |
|
12,000 |
|
8,000 |
|
4,000 |
|
— |
| David
J. Bershad |
|
90,000 |
|
60,000 |
|
30,000 |
|
— |
| Daniel
Bettencourt |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
| William
H. Bland |
|
6,000 |
|
4,000 |
|
2,000 |
|
— |
| Rocco
J. Brescia Jr. |
|
75,000 |
|
50,000 |
|
25,000 |
|
— |
| Brino
Investment Ltd |
|
49,999 |
|
33,333 |
|
16,666 |
|
— |
| Benito
Bucay |
|
50,025 |
|
33,350 |
|
16,675 |
|
— |
| William
B. Buchanan, Jr. |
|
49,999 |
|
33,333 |
|
16,666 |
|
— |
| Richard
& Grace Caldwell |
|
6,000 |
|
4,000 |
|
2,000 |
|
— |
| Keith
D. Camp |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
| Devron
H. and Valerie C. Char |
|
22,500 |
|
15,000 |
|
7,500 |
|
— |
| Elliot
A. and Jean E. Cobb, JTWROS |
|
30,000 |
|
20,000 |
|
10,000 |
|
— |
| Roger
& Margaret Coleman Jt Ten |
|
49,999 |
|
33,333 |
|
16,666 |
|
— |
| Concordia
Partners L.P. |
|
1,000,005 |
|
666,670 |
|
333,335 |
|
— |
| Compact
LLC |
|
99,999 |
|
66,666 |
|
33,333 |
|
— |
| Paul
Michael Coplan |
|
25,500 |
|
17,000 |
|
8,500 |
|
— |
| George
T. Corrigan Jr. |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
| David
B. Cowles |
|
25,500 |
|
17,000 |
|
8,500 |
|
— |
| John
Cowles |
|
25,000 |
|
16,666 |
|
8,333 |
|
— |
| Kevin
T. Crofton |
|
25,500 |
|
17,000 |
|
8,500 |
|
— |
| Ronald
Gerald Danielak |
|
10,500 |
|
7,000 |
|
3,500 |
|
— |
| Greg
Dawe |
|
57,000 |
|
38,000 |
|
19,000 |
|
— |
| Andrew
G. Denka |
|
60,000 |
|
40,000 |
|
20,000 |
|
— |
| Denno
Family Ltd. Partnership |
|
30,000 |
|
20,000 |
|
10,000 |
|
— |
| Robert
P. Deysher Living Trust |
|
10,500 |
|
7,000 |
|
3,500 |
|
— |
| Patrick
R. Discepola |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
| Rene
Dominguez |
|
10,050 |
|
6,700 |
|
3,350 |
|
— |
| Scott
Doughman |
|
10,500 |
|
7,000 |
|
3,500 |
|
— |
| |
||
| 35 |
||
|
|
||
|
Name
|
|
Shares
beneficially
owned before offering |
|
Number
of
outstanding shares
offered
by selling shareholder |
|
Number
of shares offered by selling shareholder issuable upon exercise of warrants |
|
Percentage
beneficial
ownership after offering |
|
|
|
|
|
|
||||
|
E&M
RP Trust |
|
150,000 |
|
100,000 |
|
50,000 |
|
— |
|
Mark
S. Eason |
|
12,000 |
|
8,000 |
|
4,000 |
|
— |
|
Ellis
Family Limited Partnership |
|
60,000 |
|
40,000 |
|
20,000 |
|
— |
|
Enivia
PTE Ltd. |
|
99,999 |
|
66,666 |
|
33,333 |
|
— |
|
Luis
Alfredo Farache |
|
49,999 |
|
33,333 |
|
16,666 |
|
— |
|
Theodore
H. Feller |
|
10,500 |
|
7,000 |
|
3,500 |
|
— |
|
Peter
Fink |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
|
Christopher
Fischler |
|
6,000 |
|
4,000 |
|
2,000 |
|
— |
|
Thomas
E. Fisk |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
|
Marc
Florin IRA |
|
49,999 |
|
33,333 |
|
16,666 |
|
— |
|
Scott
Frederichsen |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
|
Dwight
E. French |
|
21,000 |
|
14,000 |
|
7,000 |
|
— |
|
Albert
Fried, Jr. |
|
150,000 |
|
100,000 |
|
50,000 |
|
— |
|
William
J. Garner |
|
10,050 |
|
6,700 |
|
3,350 |
|
— |
|
Alejandro
Garza Garza |
|
24,999 |
|
16,666 |
|
8,333 |
|
— |
|
Johan
Magnusson Gedda |
|
52,500 |
|
35,000 |
|
17,500 |
|
— |
|
Joel
Good |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
|
Peter
Grabler |
|
49,999 |
|
33,333 |
|
16,666 |
|
— |
|
Brett
A. Granet |
|
22,500 |
|
15,000 |
|
7,500 |
|
— |
|
Murray
& Ujjaini Grigg |
|
60,000 |
|
40,000 |
|
20,000 |
|
— |
|
Manish
Gupta |
|
6,000 |
|
4,000 |
|
2,000 |
|
— |
|
Curtis
and Teresa Hagerty |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
|
David
Hallberg |
|
6,000 |
|
4,000 |
|
2,000 |
|
— |
|
William
M. and Deborah Haskell |
|
6,000 |
|
4,000 |
|
2,000 |
|
— |
|
Steven
Heggelke |
|
10,500 |
|
7,000 |
|
3,500 |
|
— |
|
Gregory
C. Herr |
|
6,000 |
|
4,000 |
|
2,000 |
|
— |
|
Garry
Higdem |
|
75,000 |
|
50,000 |
|
25,000 |
|
— |
|
Gerald
& Cynthia Hohman |
|
10,500 |
|
7,000 |
|
3,500 |
|
— |
|
Larry
D. Hunter |
|
6,000 |
|
4,000 |
|
2,000 |
|
— |
|
John
Igoe |
|
22,500 |
|
15,000 |
|
7,500 |
|
— |
|
JR
Construction Management Services, Inc. |
|
24,999 |
|
16,666 |
|
8,333 |
|
— |
|
Richard
A. Jacoby |
|
49,999 |
|
33,333 |
|
16,666 |
|
— |
|
Patrick
M. Kane |
|
49,999 |
|
33,333 |
|
16,666 |
|
— |
|
Robert
Kantor |
|
74,998 |
|
49,999 |
|
24,999 |
|
— |
|
Brian
Karasawa |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
|
Keys
Foundation |
|
900,000 |
|
600,000 |
|
300,000 |
|
— |
|
Kevin
P. Klett |
|
6,000 |
|
4,000 |
|
2,000 |
|
— |
|
Brian
Kugelman |
|
10,500 |
|
7,000 |
|
3,500 |
|
— |
|
Jos.
Kump & Joan Kump |
|
51,000 |
|
34,000 |
|
17,000 |
|
— |
|
Michael
D. Lachance |
|
10,500 |
|
7,000 |
|
3,500 |
|
— |
|
Lisa
Lanzarini |
|
2,700 |
|
1,800 |
|
900 |
|
— |
|
Daniel
E. Larson |
|
30,000 |
|
20,000 |
|
10,000 |
|
— |
|
Gary
W. Lefelar |
|
10,500 |
|
7,000 |
|
3,500 |
|
— |
|
Ari
Leman |
|
10,500 |
|
7,000 |
|
3,500 |
|
— |
|
David
D. Le Norman |
|
25,500 |
|
17,000 |
|
8,500 |
|
— |
|
Michael
Lusk |
|
10,500 |
|
7,000 |
|
3,500 |
|
— |
|
Philip
W. Madow |
|
21,000 |
|
14,000 |
|
7,000 |
|
— |
|
George
R. Martin |
|
6,000 |
|
4,000 |
|
2,000 |
|
— |
|
|
||
| |
36 |
|
|
|
||
|
Name
|
|
Shares
beneficially
owned before offering |
|
Number
of
outstanding shares
offered
by selling shareholder |
|
Number
of shares offered by selling shareholder issuable upon exercise of warrants |
|
Percentage
beneficial
ownership after offering |
|
|
|
|
|
|
||||
|
Eric
D. Mathias |
|
27,000 |
|
18,000 |
|
9,000 |
|
— |
|
A.J.
Matyczynski |
|
6,000 |
|
4,000 |
|
2,000 |
|
— |
|
MB
Partnership |
|
30,000 |
|
20,000 |
|
10,000 |
|
— |
|
Marc
C. McGeever |
|
6,000 |
|
4,000 |
|
2,000 |
|
— |
|
Brian
E. & Mary S. McGovern |
|
4,999 |
|
3,333 |
|
1,666 |
|
— |
|
Gary
R. Meteer |
|
10,500 |
|
7,000 |
|
3,500 |
|
— |
|
Gerald
L. Meyr |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
|
Arthur
P. Mitchell |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
|
Michael
Mohr |
|
30,000 |
|
20,000 |
|
10,000 |
|
— |
|
David
Murcian |
|
97,500 |
|
65,000 |
|
32,500 |
|
— |
|
Gregory
Wayne & Judy Chumley Nelson |
|
22,500 |
|
15,000 |
|
7,500 |
|
— |
|
Brent
Olson |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
|
John
S. Osterweis, as ttee FBO The Osterweis Revocable Trust
|
|
49,999 |
|
33,333 |
|
16,666 |
|
— |
|
H.
David Overbeeke |
|
36,000 |
|
24,000 |
|
12,000 |
|
— |
|
Mario
Pasquel & Begona Miranda |
|
27,225 |
|
18,150 |
|
9,075 |
|
— |
|
Suman
T. and Shobhana S. Patel |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
|
Perkins
Capital Management, Inc. Profit Sharing Plan U/A dtd 2/15/86
|
|
45,000 |
|
30,000 |
|
15,000 |
|
— |
|
Perkins
Foundation |
|
22,500 |
|
15,000 |
|
7,500 |
|
— |
|
Richard
W. Perkins Trustee U/A dtd 6/14/78 FBO Richard W. Perkins
|
|
52,500 |
|
35,000 |
|
17,500 |
|
— |
|
Martin
Jay Perl |
|
6,000 |
|
4,000 |
|
2,000 |
|
— |
|
Josef
Pickenhahn |
|
15,000 |
|
10,000 |
|
5,000 |
|
— |
|
Porlana
Capital Corp. PTE Ltd. |
|
97,500 |
|
65,000 |
|
32,500 |
|
— |
|
Premero
Investments Ltd. |
|
14,971 |
|
9,981 |
|
4,990 |
|
— |
|
Pyramid
Partners, L.P. |
|
150,000 |
|
100,000 |
|
50,000 |
|
— |
|
UBS
Financial Custodian for Rod J. Ragan |
|
6,000 |
|
4,000 |
|
2,000 |
|
— |
|
Govin
T. Rajan |
|
24,000 |
|
16,000 |
|
8,000 |
|
— |
|
Elke
R. de Ramirez |
|
14,469 |
|
9,646 |
|
4,823 |
|
— |
|
Stephen
A. Raymond |
|
7,500 |
|
5,000 |
|
2,500 |
|
— |
|
Stephen
A. Raymond, Trustee Pauline S. Johnson Trust U/A/D 2/10/86
|
|
10,500 |
|
7,000 |
|
3,500 |
|
— |
|
John
P Ritchie and Marianne Ritchie JTWROS |
|
7,500 |
|
5,000 |
|
2,500 |
|
— |
|
James
W. Robertson |
|
10,500 |
|
7,000 |
|
3,500 |
|
— |
|
Richard
Rodick |
|
6,300 |
|
4,200 |
|
2,100 |
|
— |
|
Joseph
P. & Julie A. Rogers |
|
19,500 |
|
13,000 |
|
6,500 |
|
— |
|
Harold
Roitenberg, Trustee FBO Harold Roitenberg Trust U/A dtd 4/13/92
|
|
30,000 |
|
20,000 |
|
10,000 |
|
— |
|
John
F. Rooney |
|
37,500 |
|
25,000 |
|
12,500 |
|
— |
|
Alan
D. Roth (1) |
|
1,100,604 |
(2) |
80,000 |
|
40,000 |
|
4.8 |
|
Matthew
J. Rund |
|
6,000 |
|
4,000 |
|
2,000 |
|
— |
|
David
J. Rupert |
|
45,000 |
|
30,000 |
|
15,000 |
|
— |
|
David
W. Ruttenberg |
|
24,999 |
|
16,667 |
|
8,333 |
|
— |
|
Wayne
Saker |
|
60,000 |
|
40,000 |
|
20,000 |
|
— |
|
Russell
B. Scaffede |
|
18,750 |
|
12,500 |
|
6,250 |
|
— |
|
Michael
H. Schwartz Profit Sharing Plan |
|
49,999 |
|
33,333 |
|
16,666 |
|
— |
|
Francis
P. Sears III |
|
24,900 |
|
16,600 |
|
8,300 |
|
— |
|
Gabriel
A. Segovia |
|
40,500 |
|
27,000 |
|
13,500 |
|
— |
| 37 | ||
|
|
||
| Name
|
|
Shares
beneficially
owned before offering |
|
Number
of
outstanding shares
offered
by selling shareholder |
|
Number of shares offered by selling shareholder issuable upon exercise of warrants |
|
Percentage
beneficial
ownership after offering |
| |
|
|
|
|
||||
| Robert
Segovia |
27,570 |
18,380 |
9,190 |
— |
||||
| Joseph E. Simmons, Kathleen K. Casey JTWROS |
6,000 |
4,000 |
2,000 |
— |
||||
| Hargopal
Singh |
24,000 |
16,000 |
8,000 |
— |
||||
| Source
One |
100,500 |
67,000 |
33,500 |
— |
||||
| Spectra
Capital Management, LLC |
99,999 |
66,666 |
33,333 |
— |
||||
| Douglas
W. & Audrey J. Stephens |
15,000 |
10,000 |
5,000 |
— |
||||
| S.
Michael Stinson |
6,000 |
4,000 |
2,000 |
— |
||||
| Surucun
Ltd |
180,000 |
120,000 |
60,000 |
— |
||||
| Scott
Swix |
10,500 |
7,000 |
3,500 |
— |
||||
| Wayne
F. Tackabury IRA |
15,000 |
10,000 |
5,000 |
— |
||||
| Myron
M. Teitelbaum MD |
24,999 |
16,666 |
8,333 |
— |
||||
| Tisu
Investment Ltd. |
49,999 |
33,333 |
16,666 |
— |
||||
| Tokenhouse
Trading S.P. |
199,999 |
133,333 |
66,666 |
— |
||||
| Victor
M. Tolomei |
15,000 |
10,000 |
5,000 |
— |
||||
| Seckin
Unlu |
51,000 |
34,000 |
17,000 |
— |
||||
| Michael
Unsworth |
14,959 |
9,973 |
4,986 |
— |
||||
| Roger
S. Vincent |
25,500 |
17,000 |
8,500 |
— |
||||
| Richard
L. Webb |
9,000 |
6,000 |
3,000 |
— |
||||
| Thomas
Webber |
6,000 |
4,000 |
2,000 |
— |
||||
| David
Weidner |
6,000 |
4,000 |
2,000 |
— |
||||
| Melvyn
J. Weiss |
150,000 |
100,000 |
50,000 |
— |
||||
| Christopher
J. Whyman – IRA |
24,900 |
16,600 |
8,300 |
— |
||||
| Gary
L. Willoughby & Sarah R. Willoughby |
21,000 |
14,000 |
7,000 |
— |
||||
| Tracie
Winbigler |
15,000 |
10,000 |
5,000 |
— |
||||
| ThinkEquity
Partners LLC |
73,680 |
— |
73,680 |
— |
||||
| Richard Sands | 60,000 | — | 60,000 | — | ||||
| Wayde Walkr | 15,000 | — | 15,000 | — | ||||
| Kevin Wilson | 7,500 | — | 7,500 | — | ||||
| Richard Brewster | 2,500 | — | 2,500 | — | ||||
| Rafael Vasquez | 2,500 | — | 2,500 | — | ||||
| Matthew Eitner | 2,500 | — | 2,500 | — | ||||
| Matthew McGovern | 40,185 | — | 40,185 | — | ||||
| Nate Clay | 1,500 | — | 1,500 | — | ||||
| William Poon | 1,800 | — | 1,800 | — | ||||
| Joseph Faskowitz | 1,500 | — | 1,500 | — | ||||
| Richard Michalski | 500 | — | 500 | — | ||||
| Brian Smith | 500 | — | 500 | — | ||||
| James Ahern | 500 | — | 500 | — | ||||
| Scott Steele | 200 | — | 200 | — | ||||
| Anthony Miller | 100 | — | 100 | — | ||||
| Charles Savage | 1500 | — | 1500 | — | ||||
| David Bloom | 100 | — | 100 | — | ||||
| Matthew Donohue | 100 | — | 100 | — | ||||
| David Roth | 750 | — | 750 | — | ||||
| Tom Gaito | 750 | — | 750 | — | ||||
| Eli Pinchovsky | 300 | — | 300 | — | ||||
| Kent Mitchell | 100 | — | 100 | — | ||||
| Ian Rupert | 200 | — | 200 | — | ||||
| Lindsay A. Rosenwald | 743,677 | — | 102,870 | 3.1 |
||||
| William Corcoran | 4,228 | — | 4,228 | — |
||||
| Scott Katzmann | 64,811 | — | 64,811 | — |
||||
| Bernard Gross | 36,630 | — | 36,630 | — |
||||
| Stephen C. Rocamboli (3) | 107,699 | — | 5,000 | * |
||||
| David M. Tanen (4) | 107,699 | — | 5,000 | * |
||||
| John Knox (5) | 27,175 | — | 4,228 | * |
||||
| Basil Christakos | 16,286 | — | 5,000 | * |
||||
| John Papadimitropoulos | 27,175 | — | 4,228 | * |
||||
| Michael Rosenman | 2,000 | — | 2,000 | * |
||||
| Benjamin Bernstein | 25,947 | — | 3,000 | * |
||||
| Karl Ruggeberg | 31,428 | — | 31,428 | — |
||||
| Totals |
|
4,826,906 |
2,896,135 |
|
| * | Denotes less than 1 percent. |
| (1) | Dr. Roth is our President, Chief Executive Officer and Chief Financial Officer, and a member of our board of directors. |
| (2) | Includes 288,420 shares issuable upon the exercise of the vested portion of an option. |
| (3) | Mr. Rocamboli is our Interim Chairman of the Board of Directors. |
| (4) | Mr. Tanen is a director of our company. |
| (5) | Mr. Knox is our Treasurer. |
| 38 | ||
|
|
||
PLAN
OF DISTRIBUTION
We are
registering the shares offered by this prospectus on behalf of the selling shareholders. The selling shareholders, which as used herein
includes donees, pledgees, transferees or other successors-in-interest selling shares of common stock or interests in shares of common
stock received after the date of this prospectus from a selling shareholder as a gift, pledge, partnership distribution or other transfer,
may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of
common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions
may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying
prices determined at the time of sale, or at negotiated prices.
The selling
shareholders may use any one or more of the following methods when disposing of shares or interests therein:
-
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
-
block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;
-
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
-
an exchange distribution in accordance with the rules of the applicable exchange;
-
privately negotiated transactions;
-
short sales;
-
through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
-
broker-dealers may agree with the selling shareholders to sell a specified number of such shares at a stipulated price per share;
-
a combination of any such methods of sale; and
-
any other method permitted pursuant to applicable law.
The selling
shareholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them
and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares
of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act amending the list of selling shareholders to include the pledgee, transferee or other successors
in interest as selling shareholders under this prospectus. The selling shareholders also may transfer the shares of common stock in
other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners
for purposes of this prospectus.
In connection
with the sale of our common stock or interests therein, the selling shareholders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions
they assume. The selling shareholders may also sell shares of our common stock short and deliver these securities to close out their
short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling shareholders
may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus,
which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction).
| 39 | ||
|
|
||
The aggregate
proceeds to the selling shareholders from the sale of the common stock offered by them will be the purchase price of the common stock
less discounts or commissions, if any. Each of the selling shareholders reserves the right to accept and, together with their agents
from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents. We
will not receive any of the proceeds from this offering. Upon any exercise of the warrants by payment of cash, however, we will receive
the exercise price of the warrants.
The selling
shareholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities
Act of 1933, provided that they meet the criteria and conform to the requirements of that rule.
The selling shareholders and any broker-dealers
that act in connection with the sale of securities might be deemed to be “underwriters” within the meaning of Section 2(11)
of the Securities Act, and any commissions received by such broker-dealers and any profit on the resale of the securities sold by
them while acting as principals might be deemed to be underwriting discounts or commissions under the Securities Act.
To the
extent required, the shares of our common stock to be sold, the names of the selling shareholders, the respective purchase prices
and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to
a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the
registration statement that includes this prospectus.
In order
to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through
registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered
or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.
We have
advised the selling shareholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares
in the market and to the activities of the selling shareholders and their affiliates. In addition, we will make copies of this prospectus
(as it may be supplemented or amended from time to time) available to the selling shareholders for the purpose of satisfying the prospectus
delivery requirements of the Securities Act. The selling shareholders may indemnify any broker-dealer that participates in transactions
involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.
We have
agreed to indemnify the selling shareholders against liabilities, including liabilities under the Securities Act and state securities
laws, relating to the registration of the shares offered by this prospectus.
We have
agreed with the selling shareholders to keep the registration statement that includes this prospectus effective until
the earlier of (1) such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with
the registration statement or (2) the date on which the shares may be sold pursuant to Rule 144(k) of the Securities Act.
Shares
Eligible For Future Sale
Upon completion of this offering and assuming the issuance of all of the shares covered by this prospectus
that are issuable upon the exercise or conversion of convertible securities, there will be 20,724,059 shares of our common stock issued
and outstanding. The shares purchased in this offering will be freely tradable without registration or other restriction under the
Securities Act, except for any shares purchased by an “affiliate” of our company (as defined in the Securities Act).
| 40 | ||
|
|
||
Our
currently outstanding shares that were issued in reliance upon the “private placement” exemptions provided by the Securities Act are
deemed “restricted securities” within the meaning of Rule 144. Restricted securities may not be sold unless they are registered
under the Securities Act or are sold pursuant to an applicable exemption from registration, including an exemption under Rule 144
of the Securities Act. The 8,652,301 restricted shares of our common stock that were issued in connection with the February 2003 merger transaction
between Surg II, Inc. and Chiral Quest, LLC became eligible for resale on February 18, 2004, subject to the satisfaction of the other
requirements of Rule 144.
In general,
under Rule 144 as currently in effect, any person (or persons whose shares are aggregated) including persons deemed to be affiliates,
whose restricted securities have been fully paid for and held for at least one year from the later of the date of issuance by us or
acquisition from an affiliate, may sell such securities in broker’s transactions or directly to market makers, provided that
the number of shares sold in any three month period may not exceed the greater of 1 percent of the then-outstanding shares of our
common stock or the average weekly trading volume of our shares of common stock in the over-the-counter market during the four calendar
weeks preceding the sale. Sales under Rule 144 are also subject to certain notice requirements and the availability of current public
information about our company. After two years have elapsed from the later of the issuance of restricted securities by us or their
acquisition from an affiliate, such securities may be sold without limitation by persons who are not affiliates under the rule.
Following
the date of this prospectus, we cannot predict the effect, if any, that sales of our common stock or the availability of our common
stock for sale will have on the market price prevailing from time to time. Nevertheless, sales by existing shareholders of substantial
amounts of our common stock could adversely affect prevailing market prices for our stock.
DESCRIPTION
OF CAPITAL STOCK
General
Our articles
of incorporation, as amended to date, authorizes us to issue up to 50,000,000 shares of capital stock. Unless designated otherwise
by our board of directors, all shares are designated as common stock. We have no shares of preferred stock authorized or outstanding.
As of March 26, 2004, we had 17,827,924 shares of common stock issued and outstanding and no other shares of capital stock outstanding.
The transfer agent and registrar for our common stock is Wells Fargo Bank Minnesota, N.A., St. Paul, Minnesota.
Common
Stock
Holders
of our common stock are entitled to one vote for each share on all matters to be voted on by our shareholders. Holders of our common
stock do not have any cumulative voting rights. Common shareholders are entitled to share ratably in any dividends that may be declared
from time to time on the common stock by our board of directors from funds legally available for dividends. Holders of common stock
do not have any preemptive right to purchase shares of common stock. There are no conversion rights or sinking fund provisions for
our common stock.
| 41 | ||
|
|
||
DISCLOSURE
OF COMMISSION POSITION ON
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Minnesota
Statutes Section 302A.521 provides that a corporation shall indemnify any person made or threatened to be made a party to any proceeding
by reason of the former or present official capacity of such person against judgments, penalties, fines, including, without limitation,
excise taxes assessed against such person with respect to an employee benefit plan, settlements, and reasonable expenses, including
attorney’s fees and disbursements, incurred by such person in connection with the proceeding, if, with respect to the acts or
omissions of such person complained of in the proceeding, such person has not been indemnified by another organization or employee
benefit plan for the same expenses with respect to the same acts or omissions; acted in good faith; received no improper personal
benefit and Section 302A.255, if applicable, has been satisfied; in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful; and in the case of acts or omissions by persons in their official capacity for the corporation,
reasonably believed that the conduct was in the best interests of the corporation, or in the case of acts or omissions by persons
in their capacity for other organizations, reasonably believed that the conduct was not opposed to the best interests of the corporation.
Subdivision 4 of Section 302A.521 of the Minnesota Statutes provides that a corporation’s articles of incorporation or by-laws
may prohibit such indemnification or place limits upon the same. Our articles and by-laws do not include any such prohibition or limitation.
As a result, we are bound by the indemnification provisions set forth in Section 302A.521 of the Minnesota Statutes. As permitted
by Section 302A.251 of the Minnesota Statutes, the Articles of Incorporation of the Company provide that a director shall, to the
fullest extent permitted by law, have no personal liability to us and our shareholders for breach of fiduciary duty as a director.
To the
extent that indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling
our company pursuant to the foregoing provisions, we have been informed that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. If a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of
our company in the successful defense of any action, suit or proceeding) is asserted by any of our directors, officers or controlling
persons in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against
public policy as expressed in the Securities Act and will be governed by the final adjudication of that issue.
ABOUT
THIS PROSPECTUS
This prospectus
is not an offer or solicitation in respect to these securities in any jurisdiction in which such offer or solicitation would be unlawful.
This prospectus is part of a registration statement that we filed with the Securities and Exchange Commission. The registration statement
that contains this prospectus (including the exhibits to the registration statement) contains additional information about our company
and the securities offered under this prospectus. That registration statement can be read at the SEC web site or at the SEC’s
offices mentioned under the heading “Where You Can Find More Information.” We have not authorized anyone else to provide
you with different information or additional information. You should not assume that the information in this prospectus, or any supplement
or amendment to this prospectus, is accurate at any date other than the date indicated on the cover page of such documents.
| 42 | ||
|
|
||
WHERE
YOU CAN FIND MORE INFORMATION
Federal
securities law requires us to file information with the SEC concerning our business and operations. Accordingly, we file annual, quarterly,
and special reports, proxy statements and other information with the SEC. You can inspect and copy this information at the Public
Reference Facility maintained by the SEC at Judiciary Plaza, 450 5th Street, N.W., Room 1024, Washington, D.C. 20549. You can receive
additional information about the operation of the SEC’s Public Reference Facilities by calling the SEC at 1-800-SEC-0330. The
SEC also maintains a web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding companies that, like us, file information electronically with the
SEC.
VALIDITY
OF COMMON STOCK
Legal
matters in connection with the validity of the shares offered by this prospectus will be passed upon by Maslon Edelman Borman &
Brand, LLP, Minneapolis, Minnesota.
EXPERTS
The consolidated
financial statements of Chiral Quest, Inc. as of December 31, 2003, and for the year then ended, included in this prospectus, have
been included herein in reliance on the report of J.H. Cohn LLP, independent public accountants, given on the authority of that firm
as experts in accounting and auditing.
The consolidated
financial statements of Chiral Quest, LLC as of and for the year ended December 31, 2002, included in this prospectus, have been included
herein in reliance on the report, which includes an explanatory paragraph relating to the Company’s ability to continue as a
going concern, of Weinberg & Company, P.A., independent public accountants, given on the authority of that firm as experts in
accounting and auditing.
CHANGES
IN CERTIFYING ACCOUNTANT
Change
from Weinberg & Company, P.A. to J.H. Cohn LLP
On December
9, 2003, we dismissed Weinberg & Company, P.A. as our independent public accountants. Our Audit Committee participated in and
approved the decision to change independent public accountants. The report of Weinberg & Company, P.A on our financial statements
for the most recent fiscal year contained no adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope, or accounting principle. In connection with its audit for the most recent fiscal year and through December 9, 2003, there
had been no disagreements with Weinberg & Company, P.A on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Weinberg & Company, P.A
would have caused them to make reference thereto in its report on the financial statements for such years. During the most recent
fiscal year and through December 9, 2003, none of the events specified in Item 304(a)(iv)(B) of Regulation S-B have occurred. Weinberg
& Company, P.A furnished us with a letter addressed to the SEC stating that it agrees with the above statements. A copy of such
letter, dated December 30, 2003, was attached as Exhibit 16.1 to our Current Report on Form 8-K/A filed with the Commission on January
5, 2004.
On December
12, 2003, we retained J.H. Cohn LLP to be our principal independent public accountants. During the two most recent fiscal years and
through December 12, 2003, we had not consulted with J.H. Cohn LLP regarding either (i) the application of accounting principles to
a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our financial statements,
and either a written report was provided to us or oral advice was provided that J.H. Cohn LLP concluded was an important factor considered
by us in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was the subject
of a disagreement and required to be reported under Item 304(a)(1)(iv) of Regulation S-B and the related instructions thereto.
| 43 | ||
|
|
||
Change
from Virchow Krause & Co. LLP to Weinberg & Company, P.A.
Prior
to the February 2003 merger transaction between Surg II, Inc. and Chiral Quest, LLC, the Surg II, our predecessor, had engaged Virchow
Krause & Company as its independent public accountants. On April 21, 2003, following completion of the merger transaction, we
dismissed Virchow, Krause & Company, LLP. Surg II’s Board of Directors participated in and approved the decision to change
public accountants. The report of Virchow, Krause & Company, LLP on the financial statements of Surg II, Inc. for the most recent
fiscal year contained no adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope,
or accounting principle. In connection with its audit for the fiscal year ended December 31, 2002 and through April 21, 2003, there
had been no disagreements with Virchow, Krause & Company, LLP on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Virchow, Krause & Company,
LLP would have caused them to make reference thereto in its report on the financial statements for such year. During the fiscal year
ended December 31, 2002 and through April 21, 2003, none of the events specified in Item 304(a)(iv)(B) of Regulation S-B occurred.
Virchow, Krause & Company, LLP furnished us with a letter addressed to the SEC stating whether or not it agreed with the above
statements. A copy of such letter, dated April 21, 2003, was attached as Exhibit 16.1 to our Current Report on Form 8-K filed with
the SEC on April 25, 2003.
On April
21, 2003, we retained Weinberg & Company, P.A. to be our principal independent public accountants. Previous to the February 2003
merger transaction between Surg II, Inc. and Chiral Quest, LLC, Weinberg & Company, P.A. had been engaged as the independent public
accounts of Chiral Quest, LLC. During the two fiscal years ended December 31, 2002 and through April 21, 2003, Chiral Quest, Inc.,
the successor to Surg II, Inc., had not consulted with Weinberg & Company, P.A. regarding either (i) the application of accounting
principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on Chiral
Quest, Inc’s financial statements, and either a written report was provided to Chrial Quest, Inc. or oral advice was provided
that Weinberg & Company, P.A. concluded was an important factor considered by Chiral Quest, Inc. in reaching a decision as to
the accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a disagreement and required to be
reported under Item 304(a)(1)(iv) of Regulation S-B and the related instructions thereto.
| 44 | ||
|
|
||
Index to Consolidated Financial Statements
|
|
Page |
|
| |
|
Report of J.H. Cohn LLP |
F-2 |
|
Report of Weinberg & Company, P.A. |
F-3 |
|
Consolidated Balance Sheets as of December 31, 2003 and 2002 |
F-4 |
|
Consolidated Statements of Operations for the Years Ended December 31, 2003 and 2002 |
F-5 |
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficiency) for the Years Ended December 31,
2003 and 2002 |
F-6 |
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003 and 2002 |
F-7 |
|
Notes to Consolidated Financial Statements |
F-8
to F-20 |
F-1
|
| ||
Report of Independent Public Accountants
To the Board of Directors and Stockholders
Chiral Quest, Inc.
We
have audited the accompanying consolidated balance sheet of Chiral Quest, Inc. and Subsidiary as of December 31, 2003, and the related
consolidated statements of operations, changes in stockholders’ equity (deficiency) and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chiral Quest, Inc. and Subsidiary as of December 31, 2003, and their results of operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ J.H. Cohn LLP
Roseland, New Jersey
February 6, 2004, except for Notes 10 and 11,
which are as of February 25, 2004
| F-2 | ||
|
| ||
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors of
Chiral Quest, LLC
We have
audited the accompanying balance sheet of Chiral Quest, LLC (the “Company”), as of December 31, 2002 and the related statements
of operation, changes in stockholders’ deficiency and cash flows for the year then ended. 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 audit.
We conducted our audit 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 misstatements. 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, the financial statements referred to above, present fairly, in all material respects, the financial position of Chiral
Quest, LLC as of December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ WEINBERG
& COMPANY, P.A.
Boca Raton, Florida
March 15, 2003
| F-3 | ||
|
| ||
CHIRAL QUEST, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND DECEMBER 31, 2002
|
|
December 31, 2003 |
December 31, 2002 |
|||||
|
|
|
||||||
|
ASSETS |
|
|
|||||
|
CURRENT ASSETS |
|
|
|||||
|
Cash and cash equivalents |
$ |
659,117 |
$ |
33,520 |
|||
|
Accounts receivable, net of allowance for doubtful accounts of $11,490 at December 31, 2003 and $50,000 at December 31, 2002 |
51,705 |
12,456 |
|||||
|
Inventory |
76,892 |
28,422 |
|||||
|
Prepaid expenses |
50,052 |
- |
|||||
|
|
|
||||||
|
Total Current Assets |
837,766 |
74,398 |
|||||
|
PROPERTY AND EQUIPMENT, NET |
254,649 |
67,011 |
|||||
|
SECURITY DEPOSITS |
31,000 |
- |
|||||
|
DEFERRED FINANCING COSTS |
50,000 |
- |
|||||
|
|
|
|
|||||
|
INTELLECTUAL PROPERTY RIGHTS, NET |
412,442 |
318,320 |
|||||
|
|
|
||||||
|
TOTAL ASSETS |
$ |
1,585,857 |
$ |
459,729 |
|||
|
|
|
||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY) |
|||||||
|
CURRENT LIABILITIES |
|
|
|||||
|
Accounts payable |
$ |
273,414 |
$ |
111,832 |
|||
|
Accrued expenses |
226,200 |
105,377 |
|||||
|
Due to related party |
1,201 |
- |
|||||
|
Notes payable |
- |
336,625 |
|||||
|
Deferred revenue, current portion |
220,592 |
133,967 |
|||||
|
|
|
||||||
|
Total Current Liabilities |
721,407 | 687,801 | |||||
|
LONG-TERM LIABILITIES |
|
|
|||||
|
Deferred revenue, long-term portion |
39,116 |
173,083 |
|||||
|
|
|
||||||
|
TOTAL LIABILITIES |
760,523 |
860,884 |
|||||
|
|
|
||||||
|
COMMITMENTS AND CONTINGENCIES |
|
|
|||||
|
STOCKHOLDERS’ EQUITY (DEFICIENCY) |
|
|
|||||
|
Common stock, $.01 par value, 50,000,000 shares authorized, 13,001,018 shares issued and outstanding at December 31, 2003 |
130,010 |
- |
|||||
|
Equity units, 11,500,000 units issued and outstanding at December 31, 2002 |
- |
1,213,000 |
|||||
|
Additional paid-in capital |
4,865,353 |
- |
|||||
|
Additional members’ equity |
- |
135,050 |
|||||
|
Deferred expenses |
(758,824 |
) |
(356,400 |
) | |||
|
Accumulated deficit |
(3,411,205 |
) |
(1,392,805 |
) | |||
|
|
|
||||||
|
Total Stockholders’ Equity (Deficiency) |
825,334 |
(401,155 |
) | ||||
|
|
|
||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY) |
$ |
1,585,857 |
$ |
459,729 |
|||
|
|
|
||||||
See accompanying notes to consolidated financial statements
| F-4 | ||
|
| ||
CHIRAL QUEST, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
|
|
Year Ended December 31, 2003 |
Year Ended December 31, 2002 |
|||||
|
|
|
||||||
|
|
|
|
|||||
|
REVENUE |
$ |
669,036 |
$ |
191,613 |
|||
|
|
|
|
|||||
|
COST OF GOODS SOLD |
196,045 |
6,763 |
|||||
|
|
|
||||||
|
|
|
|
|||||
|
GROSS PROFIT |
472,991 |
184,850 |
|||||
|
|
|
||||||
|
OPERATING EXPENSES |
|
|
|||||
|
Management and consulting expenses |
361,622 |
231,424 |
|||||
|
Research and development |
440,646 |
63,728 |
|||||
|
Selling, general and administrative |
1,012,182 |
193,449 |
|||||
|
Compensation |
601,780 |
197,596 |
|||||
|
Depreciation and amortization |
86,325 |
36,631 |
|||||
|
|
|
||||||
|
Total Operating Expenses |
2,502,555 |
722,828 |
|||||
|
|
|
||||||
|
LOSS FROM OPERATIONS |
(2,029,564 |
) |
(537,978 |
) | |||
|
|
|
|
|||||
|
INTEREST EXPENSE |
(2,809 |
) |
- |
||||
|
|
|
|
|||||
|
INTEREST INCOME |
13,973 |
- |
|||||
|
|
|
||||||
|
NET LOSS |
$ |
(2,018,400 |
) |
$ |
(537,978 |
) | |
|
|
|
||||||
|
NET LOSS PER COMMON SHARE – BASIC AND DILUTED |
$ |
(.16 |
) |
|
|||
|
|
|||||||
|
WEIGHTED AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED |
12,476,789 |
|
|||||
|
|
|||||||
|
PRO FORMA: |
|
|
|||||
|
|
|
|
|||||
|
NET LOSS PER COMMON SHARE – BASIC AND DILUTED |
|
$ |
(.06 |
) | |||
|
|
|||||||
|
WEIGHTED AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED |
|
8,932,119 |
|||||
|
|
|||||||
See accompanying notes to consolidated financial statements
| F-5 | ||
|
| ||
CHIRAL QUEST, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
|
|
|
Equity Units |
|
Common Stock |
|
|
|
| ||||||||||||||||||||
|
|
|
|
Units |
|
|
Amount |
|
|
Additional Members’ Equity |
|
|
Shares |
|
|
Amount |
|
|
Additional Paid-In Capital |
|
|
Deferred Expenses |
|
|
Accumulated Deficit |
|
|
Total Equity (Deficiency |
) |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Balance, January 1, 2002 |
10,750,000 |
$ |
1,205,500 |
$ |
135,050 |
- |
$ |
- |
$ |
- |
$ |
(486,000 |
) |
$ |
(854,827 |
) |
$ |
(277 |
) | |||||||||
|
Exercise of unit options |
750,000 |
7,500 |
- |
- |
- |
|
|
|
7,500 |
|||||||||||||||||||
|
Amortization of deferred expenses |
- |
- |
- |
- |
- |
|
129,600 |
- |
129,600 |
|||||||||||||||||||
|
Net loss |
- |
- |
- |
- |
- |
|
|
(537,978 |
) |
(537,978 |
) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Balance, December 31, 2002 |
11,500,000 |
1,213,000 |
135,050 |
|
|
|
(356,400 |
) |
(1,392,805 |
) |
(401,155 |
) | ||||||||||||||||
|
Conversion of Chiral Quest, LLC member units to Chiral Quest, Inc. common stock at 2/18/03 based upon a factor of .752374 (See Note 1 (B)) |
(11,500,000 |
) |
(1,213,000 |
) |
(135,050 |
) |
8,652,298 |
86,523 |
1,261,527 |
|
|
- |
||||||||||||||||
|
Recapitalization of the Company (See Note 1(B)) |
|
|
|
4,348,720 |
|
43,487 |
2,964,211 |
|
|
3,007,698 |
||||||||||||||||||
|
Options issued for services and rent |
|
|
|
|
|
639,615 |
(639,615 |
) |
|
- |
||||||||||||||||||
|
Amortization of deferred expenses |
|
|
|
|
|
|
237,191 |
|
237,191 |
|||||||||||||||||||
|
Net loss |
|
|
|
|
|
|
|
(2,018,400 |
) |
(2,018,400 |
) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Balance, December 31, 2003 |
- |
$ |
- |
$ |
- |
13,001,018 |
$ |
130,010 |
$ |
4,865,353 |
$ |
(758,824 |
) |
$ |
(3,411,205 |
) |
$ |
825,334 |
||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
See accompanying notes to consolidated financial statements
| F-6 | ||
|
| ||
CHIRAL QUEST, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
| |
|
2003 |
|
2002 |
| |
|
|||
| CASH
FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
| Net
loss |
$ |
(2,018,400) |
$ |
(537,978) |
| Adjustments
to reconcile net loss to net cash used in operating activities: |
|
|
|
|
| Depreciation
and amortization |
|
86,325 |
|
36,631 |
| Amortization
of deferred expenses |
|
237,191 |
|
129,600 |
| Changes
in operating assets and liabilities: |
|
|
|
|
| (Increase)
decrease in accounts receivable |
|
(39,249) |
|
1,086 |
| (Increase)
decrease in other current assets |
|
- |
|
1,817 |
| (Increase)
decrease in inventory |
|
(48,470) |
|
(21,975) |
| (Increase)
decrease in prepaid expenses |
|
(50,052) |
|
- |
| (Increase)
decrease in security deposits |
|
(31,000) |
|
- |
| Increase
(decrease) in accounts payable |
|
161,582 |
|
(13,878) |
| Increase
(decrease) in accrued expenses and due to related party |
|
112,481 |
|
(20,961) |
| Increase
(decrease) in deferred revenue |
|
(47,342) |
|
307,050 |
| |
|
|||
| Net
Cash Used In Operating Activities |
|
(1,636,934) |
|
(118,608) |
| |
|
|||
| CASH
FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
| Proceeds
from sale of equipment |
|
- |
|
8,684 |
| Payments
for purchased property, plant and equipment |
|
(237,222) |
|
(318) |
| Payments
for intellectual property rights |
|
(130,865) |
|
(195,371) |
| |
|
|||
| Net
Cash Used In Investing Activities |
|
(368,087) |
|
(187,005) |
| |
|
|||
| CASH
FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
| Proceeds
from notes payable |
|
40,000 |
|
336,625 |
| Payment
of note payable |
|
(376,625) |
|
- |
| Payment
of loan payable |
|
- |
|
(50,000) |
| Exercise
of unit options |
|
- |
|
7,500 |
| Cash
received in merger and recapitalization |
|
3,017,243 |
|
- |
| Payments
for deferred financing costs |
|
(50,000) |
|
- |
| |
|
|||
| Net
Cash Provided By Financing Activities |
|
2,630,618 |
|
294,125 |
| |
|
|||
| NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
625,597 |
|
(11,488) |
| |
|
|
|
|
| CASH
AND CASH EQUIVALENTS – BEGINNING OF YEAR |
|
33,520 |
|
45,008 |
| |
|
|||
| CASH
AND CASH EQUIVALENTS - END OF YEAR |
$ |
659,117 |
$ |
33,520 |
| |
|
See accompanying notes to consolidated financial statements
| F-7 | ||
|
| ||
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(A) Nature of Operations and Liquidity
Chiral Quest, Inc. provides chiral products and services such as feasibility screening and process development work to the pharmaceutical and fine chemical industries. Chiral Quest, Inc. develops chemical catalysts used in the synthesis of desired isomers of chiral molecules using asymmetrical catalysis technology (the ”Technology”) owned by the Pennsylvania State University Research Foundation (“PSRF”), the technology arm of The Pennsylvania State University (“Penn State”). Chiral Quest, Inc. has a worldwide, exclusive license from PSRF for the inventions covered by the license. The original license agreement was entered into on November 8, 2000 (See Note 5).
Since the Company’s inception, it has generated sales revenue but not yet generated any net profits. Management believes that the Company’s research and development (“R&D”) and manufacturing capacity will need to grow in order for the Company to be able to obtain significant licensing and manufacturing agreements with large fine chemical and pharmaceutical companies. Management believes that the Company’s manufacturing capacity will be enhanced with its new office and laboratory space located in Monmouth Junction, New Jersey that was leased in June 2003.
Since inception the Company has incurred a cumulative deficit of $3,411,205 through December 31, 2003. For the year ended December 31, 2003 the Company had a net loss of $2,018,400. Management expects the Company’s operating losses to increase significantly over the next several years, primarily due to expansion of its research and development programs, the hiring of additional chemists, and the expansion of its manufacturing capabilities. There can be no assurance that the Company will ever be able to operate profitably.
As of December 31, 2003, the Company had working capital of $116,359 and cash and cash equivalents of $659,117. If the Company is unable to significantly increase its revenues, it will most likely require additional financing by the end of the first quarter of 2005 in order to continue operations. The most likely sources of financing include private placements of the Company’s equity or debt securities or bridge loans to the Company from third party lenders.
The Company’s net cash used in operating activities for the year ended 2003 was $1,636,934. The Company’s net loss of $2,018,400 was offset by an increase of accounts payable and accrued expenses of $161,582 and $112,481 respectively, along with amortization of approximately $324,000.
The Company’s net cash used in investing activities for the year ended 2003 was $368,087. Investing activities expenditures consisted of purchases of property and equipment of $237,222 and payments for intellectual property rights of $130,865.
The Company’s net cash provided by financing activities for the year ended 2003 was $2,630,618. Financing activities included the repayment of a note payable to Paramount Capital LLC of $376,625, along with cash received in the merger dated February 18, 2003 in the amount of $3,017,243.
| F-8 | ||
|
| ||
|
CHIRAL QUEST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 | ||
Management anticipates that the Company’s capital resources (See Note 11) will be adequate to fund its operations through December 31, 2004. However, changes may occur that would consume available capital resources before that time. The Company’s combined capital requirements will depend on numerous factors, including: competing technological and market developments, changes in our existing collaborative relationships, the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights and the outcome of any potentially related litigation or other dispute, the purchase of additional capital equipment, acquisition of technologies, and the development and regulatory approval progress of its customers’ product candidates into which the Company’s technology will be incorporated.
Additional capital that may be needed by the Company in the future may not be available on reasonable terms, or at all. If adequate financing is not available, the Company may be required to terminate or significantly curtail its operations, or enter into arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, or potential markets that the Company would not otherwise relinquish.
The Company’s ability to achieve profitability depends upon, among other things, its ability to discover and develop products (specifically new “ligands”), and to develop its products on a commercial scale through a cost effective and efficient process. To the extent that the Company is unable to produce, directly or indirectly, ligands in quantities required for commercial use, it will not realize any significant revenues from its technology. Moreover, there can be no assurance that it will ever achieve significant revenues or profitable operations from the sale of any of its products or technologies.
(B) Merger
On
February 18, 2003, Chiral Quest, LLC merged (the “Merger”) with and into CQ Acquisition, Inc., a wholly owned subsidiary
of Surg II, Inc. (“Surg”), a reporting public corporation with no current operations. Each member equity unit of Chiral
Quest, LLC issued and outstanding on February 18, 2003 (“Effective Date”) was automatically converted into 0.752374 shares
of Surg common stock. There were 4,348,720 shares of Surg common stock issued and outstanding and options to purchase an additional
682,875 shares immediately prior to the Effective Date. At the Effective Date, Chiral Quest, LLC had 11,500,000 member equity units
outstanding. Accordingly, as a result of the Merger, Surg issued 8,652,298 shares of its common stock to the former members of Chiral
Quest, LLC. In addition, immediately prior to the Effective Date, there were non-vested contingent options and warrants outstanding
to purchase an aggregate of up to 1,210,000 of Chiral Quest LLC’s member equity units, which following the Merger represented
the right to purchase an aggregate of up to 910,374 shares of Surg common stock at $1.49 per share. In connection with the Merger,
Surg changed its name to Chiral Quest, Inc., formerly Chiral Quest, LLC (together with its subsidiary, the “Company” or
“Chiral Quest”). Subsequent to the Merger on February 18, 2003, Chiral Quest, Inc., formerly Chiral Quest, LLC, reports
its results of operations on a consolidated basis.
Generally accepted accounting principles in the United States of America require that the company whose equity holders retain a majority interest in a business combination, maintain the majority of board memberships and hold key management positions to be treated as the acquiror for accounting purposes. Since, following the Merger, the former members of Chiral Quest, LLC held approximately two-thirds of the outstanding common stock of the Company and these members comprise the majority of the Board of Directors along with holding key management positions, the
| F-9 | ||
|
| ||
|
CHIRAL QUEST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 | ||
Merger was accounted for as a reverse acquisition with Chiral Quest, LLC as the accounting acquiror (legal acquiree) and Surg as the accounting acquiree (legal acquiror).
If the Merger occurred between Surg II and Chiral Quest, Inc. as of January 1, 2002 pro forma results for revenues, net loss, and net loss per share would be as illustrated in the following table for the years ended December 31, 2003 and 2002:
|
|
Pro Forma |
Pro Forma | |||||
|
|
Year Ended |
Year Ended | |||||
|
|
December
31, 2003 |
December
31, 2002 | |||||
|
|
|
||||||
|
REVENUES |
$ |
669,036 |
$ |
256,991 |
|||
|
|
|
||||||
|
NET LOSS |
$ |
(2,074,531 |
)
|
$ |
(594,109 |
) | |
|
|
|
||||||
|
BASIC AND DILUTED LOSS PER COMMON SHARE |
$ |
(0.16 |
) |
$ |
(0.05 |
) | |
|
|
|
||||||
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED |
13,001,018 |
12,718,878 |
|||||
|
|
|
||||||
The above pro forma financial information is not necessarily indicative of what the Company’s results of operations would have been had the Merger occurred on January 1, 2002.
(C) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Chiral Quest,
Inc. and its subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
(D) Cash and Cash Equivalents
The Company considers all highly-liquid investments with an original maturity of three months or less when acquired to be cash equivalents.
(E) Fair Value of Financial Instruments
The carrying value of financial instruments including cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the relatively short maturity of these instruments. The carrying value of the note payable approximates fair value based on the incremental borrowing rates currently available to the Company for financing with similar terms and maturities.
(F) Allowance for Doubtful Accounts
The Company establishes an allowance for uncollectible accounts receivable based on historical collection experience and management’s evaluation of collectibility of outstanding accounts receivable.
| F-10 | ||
|
| ||
|
CHIRAL QUEST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 | ||
(G) Inventory
Inventory consists of raw materials, work in process and finished goods which are stated at the lower of cost (first-in, first-out) or market. Raw materials consist of chemical compounds. Work in process and finished goods, referred to as proprietary ligands, consist of material, direct labor and manufacturing overhead allocations.
(H) Property and Equipment
Property and equipment is recorded at cost and depreciated over the estimated useful lives of the assets, principally using the straight-line method. For tax purposes, accelerated methods are used. The estimated useful lives used for depreciation and amortization were three, five and seven years for leasehold improvements, laboratory/computer equipment and office equipment, respectively (See Note 3).
(I) Intellectual Property Rights
Intellectual property rights are being amortized over the lives of the
underlying patents, which generally are seventeen years. Amortization expense
recorded for the years ended December 31, 2003 and 2002 was $36,792 and
$13,918, respectively. Amortization expense for each of the five years subsequent to the year ended December 31, 2003, is approximately $25,000 per year.
(J) Revenue Recognition
Revenues are comprised principally of four main components: (1) the licensing of PSRF’s Technology, (2) the sale of proprietary ligands, (3) feasibility screening, and (4) custom contract development. Revenues as they relate to the licensing of the Company’s rights to PSRF’s intellectual property are recognized over the applicable license periods. The Company assumes the financial risks related to these revenues by financing the research and development of PSRF’s technology as well as the defense of PSRF’s patents. Deferred revenue in the accompanying consolidated balance sheets represents amounts prepaid by customers to the Company for services to be performed and products to be delivered at a subsequent date. These deferred and unearned amounts will be recognized as revenue when earned. Revenues as they relate to the sale of manufacture
d proprietary
ligands are recognized upon the shipping of the ligands to the customer. Revenues as they relate to feasibility screening are recognized upon the completion of project reports and investigational studies. Revenues as they relate to custom contract development are recognized upon the shipment of finished products. However, revenue is not recognized unless collectibility is reasonably assured.
(K) Income Taxes
From inception in October 2000 through September 30, 2002, the Company elected to be treated as a partnership for federal and state income tax purposes. As such, the Company did not pay income taxes, as any income or loss through September 30, 2002 was included in the tax returns of the individual members. Accordingly, no provision was made for income taxes in the accompanying consolidated financial statements through September 30, 2002.
| F-11 | ||
|
| ||
|
CHIRAL QUEST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 | ||
As of October 1, 2002, the Company elected to be treated as a “C” corporation for income tax purposes and has adopted SFAS No. 109 “Accounting for Income Taxes.” Under Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances
are established when realization of deferred tax assets is not considered more likely than not.
If the Company were classified as a “C” corporation since inception, there would be no pro forma effect on income taxes because of the Company’s recurring losses.
(L) Stock-Based Compensation
The Company accounts for its employee and director stock option plans using the intrinsic value method in accordance with APB Opinion No. 25, “Accounting For Stock Issued To Employees,” and related interpretations. The Company measures compensation expense for employee and director stock options as the aggregate difference between the market value of its common stock and exercise prices of the options on the date that both the number of shares the grantee is entitled to receive and the exercise prices are known. The Company values options issuances using the Black-Scholes option pricing model, with the following assumptions: risk-free interest rate of 2% to 4%, volatility of 70% to 130%, lives of 5 to 10 years, and an assumed dividend yield of 0%. If the Company had
elected to recognize compensation cost for all outstanding options granted by the Company to employees by applying the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation, net loss and loss per share would have been increased to the pro forma amounts indicated below:
|
|
2003 |
|||
|
|
||||
|
Net loss as reported |
$ |
(2,018,400 |
) | |
|
Total stock-based employee compensation expense using the fair value based method for all awards, net of related tax effects |
(165,272 |
) | ||
|
|
||||
|
Pro forma |
$ |
(2,183,672 |
) | |
|
|
||||
|
Basic and diluted net loss per common share: |
|
|||
|
As reported |
$ |
(0.16 |
) | |
|
Pro forma |
$ |
(0.18 |
) | |
For the year ended December 31, 2002, there were no stock options issued or outstanding.
In addition, options are issued to non-employees such as consultants, scientific advisory board members and directors. Any options issued to non-employees are recorded in the consolidated financial statements in deferred expenses in the stockholders’ equity section using the fair value method and then amortized to expense over the applicable service periods. See Note 6 for more discussion on the Company’s stock-based compensation.
| F-12 | ||
|
| ||
|
CHIRAL QUEST, INC. AND SUBSIDIARY | ||
(M) Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
(N) Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets, where indicators of impairment are present, by reviewing current and projected profitability or undiscounted cash flows of such assets. Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Intangible assets not subject to amortization are tested for impairment at least annually. For the years ended December 31, 2003, and 2002, the Company determined that an impairment charge on its long-lived assets was not required.
(O) Research and Development Expense
R&D costs are expensed as incurred. These expenses include the cost of the Company’s proprietary R&D efforts, as well as costs incurred in connection with the Company’s third-party collaboration efforts.
(P) Advertising
The Company expenses the cost of advertising and promotions as incurred. Advertising costs charged to operations amount to $174,514 and $1,794 for the years ended December 31, 2003, and 2002, respectively.
(Q) Loss Per Share
Basic and diluted net loss per common share for all periods presented is computed based on the weighted average common shares outstanding during the year as required by Statement of Financial Accounting Standards No. 128, “Earnings Per Share.” The effects of potentially dilutive securities were not considered since the effect would be anti-dilutive.
Basic net loss per share is calculated by dividing net loss by the weighted-average number of shares outstanding for the period. Diluted net loss per share is the same as basic net loss per share, since potentially dilutive securities from stock options and stock warrants would have an antidilutive effect because the Company incurred a net loss during each period presented. The amount of potentially dilutive securities excluded from the calculation was 2,841,607 at December 31, 2003. There were no potentially dilutive securities at December 31, 2002.
| F-13 | ||
|
| ||
|
CHIRAL QUEST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 | ||
NOTE 2 INVENTORY
The principal components of inventory are as follows:
|
|
December 31, |
December 31, |
|||||
|
|
2003 |
2002 |
|||||
|
|
|
||||||
|
Raw material compounds |
$ |
25,796 |
$ |
28,422 |
|||
|
Work in process |
42,251 |
- |
|||||
|
Finished goods |
8,845 |
- |
|||||
|
|
|
||||||
|
Total
Inventory |
$ |
76,892 |
$ |
28,422 |
|||
|
|
|
||||||
NOTE 3 PROPERTY AND EQUIPMENT, NET
The cost of the major classes of property and equipment are as follows:
|
|
December 31, |
December 31, |
|||||
|
|
2003 |
2002 | |||||
|
|
|
||||||
|
Laboratory equipment |
$ |
272,713 |
$ |
112,044 |
|||
|
Office equipment |
4,780 |
2,291 |
|||||
|
Computer equipment |
26,131 |
- |
|||||
|
Leasehold improvements |
47,932 |
- |
|||||
|
|
|
||||||
|
Totals |
$ |
351,556 |
$ |
114,335 |
|||
|
|
|
||||||
Depreciation and amortization expense for property and equipment for the years ended December 31, 2003 and 2002 was $49,583 and $22,713, respectively. Accumulated depreciation and amortization of property and equipment as of December 31, 2003 and 2002 was $96,907 and $47,324, respectively.
NOTE 4 INCOME TAXES
A deferred tax asset of approximately $912,000 as of December 31, 2003, consisting primarily of the tax effect of net operating loss carryforwards of approximately $2,280,000, has been fully offset by a valuation allowance because it is management’s belief that realization of such amount is not considered more likely than not. Accordingly, the Company recognized no tax benefit for its pre-tax loss in 2003. The net operating loss carryforwards, if not used, will expire through 2023.
NOTE 5 RIGHTS TO INTELLECTUAL PROPERTY
The Company’s exclusive right to certain PSRF patents are of material importance to the Company’s success. These PSRF patents result from inventions by the Company’s Chief Technology Officer (“CTO”), who is also an employee at Pennsylvania State University. The PSRF patents cover chemical formulations, processes for or intermediates useful in the manufacture of products and the uses of products. Protection for PSRF’s individual products extends for varying periods in accordance with the date of grant and the legal life of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent and its scope of coverage. The Company is financially responsible for all aspects of these PSRF inventions, including legal and R&D expens
es
associated with the chemical developments. The Company is no longer obligated to license future inventions by the CTO to the Company.
| F-14 | ||
|
| ||
|
CHIRAL QUEST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 | ||
For the year ended 2003, the Company has not recognized any impairment charges to its patents, as management believes that the Company’s patents have useful lives equivalent to its estimated amortization period of seventeen years.
NOTE 6 STOCKHOLDERS’ EQUITY
In connection with two 5-year consulting agreements entered into by the Company in 2000, the Company issued 5,400,000 member equity units which converted into 4,062,820 shares of common stock. The deferred expense recorded in 2000
is being amortized over the terms of the agreements.
During 2002, the Company granted options to purchase 1,150,000 membership units or the equivalent of 865,230 shares of its common stock at a conversion rate of .752374 (see Note 1 (B)) to its CEO as required by his employment agreement with the Company. The options vest equally over a three-year period commencing with the date of the Merger (See Note 1), are exercisable at $1.49 per share, the fair market value at the date of grant, and are for services to be rendered to the Company over the vesting period.
In connection with the Merger (see Note 1), the Company issued approximately
731,000 member equity units which converted into 550,000 share of common stock with an exercise price of $1.25, to an independent consultant for services related to the Merger.
During May 2003, the Company issued options to purchase an aggregate of 20,000 shares of common stock to the landlord of new office space that the Company is leasing in New Jersey. The option issuance resulted in a charge to deferred expenses in stockholders’ equity of $9,845 for the value of the shares and is being amortized to rent expense over the term of the lease beginning in July 2003.
In June 2003, the Company issued options to purchase an aggregate of 740,052 shares of common stock at exercise prices ranging between $1.49 and $1.50 per share to two consultants (including 650,052 options issued to the CTO) and two members of the Company’s Scientific Advisory Board. The total value of the option issuances of $619,864 was valued using the Black-Scholes option pricing model with the following assumptions: a risk-free interest rate of approximately 2.4%, volatility of approximately 87%, lives of five years and an assumed dividend yield of 0%. The option issuances were charged to deferred expense in stockholders’ equity and are being amortized to consulting expense over the applicable service periods.
In October 2003, a consultant for the Company received options to purchase 4,300 shares of common stock at an exercise price of $1.96 per share. These options have fully vested on February 14, 2004. The total value of the option issuance
resulted in a charge to deferred expenses in stockholders’ equity of $6,263 was valued using the Black-Scholes option pricing model with the following assumptions: a risk-free rate of 3%, volatility of 128%, estimated lives of three years and an assumed dividend yield of 0%.
| F-15 | ||
|
| ||
|
CHIRAL QUEST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 | ||
In
November 2003, a consultant for the Company received options to purchase 2,500 shares of common stock at an exercise price of $1.96
per share. These options will vest within six months of the date of grant. The total value of option issuance resulted in a charge
to deferred expenses in stockholders’ equity of $3,643 was valued using the Black-Scholes option
pricing model with the following assumptions: a risk-free rate of 3%, volatility of 128%, estimated lives of three years and an
assumed dividend yield of 0%.
The following table is a breakdown of the total number of shares outstanding, shares issued to non-employees, directors, consultants, scientific advisory board members and options that have expired:
|
|
2003 |
2002 |
|||||||||||
|
|
|
|
|
||||||||||
|
|
Shares |
|
|
Weighted averageexercise
price |
|
|
Membership Units |
|
|
Weighted AveragePrice |
|||
|
|
|
|
|
||||||||||
|
Outstanding at |
|
|
|
|
|||||||||
|
beginning of year |
998,105¹ |
$ |
1.48 |
- |
- |
||||||||
|
Granted |
1,843,752 |
1.47 |
1,326,608 |
$ |
1.48 |
||||||||
|
Exercised |
- |
|
- |
- |
|||||||||
|
Cancelled |
(250 |
) |
2.80 |
- |
- |
||||||||
|
|
|
|
|||||||||||
|
Outstanding at end |
|
|
|
|
|||||||||
|
of year |
2,841,607 |
$ |
1.47 |
1,326,608 |
$ |
1.48 |
|||||||
|
|
|
|
|
||||||||||
|
Options exercisable |
|
|
|
|
|||||||||
|
at year-end |
1,114,755 |
|
- |
|
|||||||||
|
|
|
||||||||||||
|
Weighted-average |
|
|
|
|
|||||||||
|
fair value of |
|
|
|
|
|||||||||
|
options granted |
|
|
|
|
|||||||||
|
during the year |
$ |
0.63 |
|
$ |
1.48 |
|
|||||||
|
|
|
||||||||||||
1The member equity units issued during the year ended December 31, 2002 have been converted to common shares as of the
Merger date (See Note 1(B)) based upon a conversion factor of .752374 per membership unit.
| F-16 | ||
|
| ||
CHIRAL QUEST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
The following table summarizes the information about Plan stock options outstanding at December 31, 2003:
|
EXERCISE PRICE
|
|
|
NUMBER OUTSTANDING
|
|
|
REMAINING CONTRACTURAL LIFE (YEARS)
|
|
|
NUMBER OF OPTIONS EXERCISABLE
|
|
|
|
|
|
||||||||
|
$ 1.25
|
100,000
|
5.81
|
100,000
|
|||||||
|
$ 1.25
|
550,000
|
4.13
|
550,000
|
|||||||
|
$ 1.25
|
25,000
|
5.81
|
25,000
|
|||||||
|
$ 1.49
|
865,230
|
4.12
|
252,356
|
|||||||
|
$ 1.49
|
650,052
|
4.49
|
88,028
|
|||||||
|
$ 1.50
|
20,000
|
4.35
|
2,667
|
|||||||
|
$ 1.50
|
25,000
|
9.49
|
4,167
|
|||||||
|
$ 1.50
|
10,000
|
9.46
|
1,083
|
|||||||
|
$ 1.50
|
50,000
|
9.31
|
7,083
|
|||||||
|
$ 1.50
|
97,500
|
9.29
|
26,563
|
|||||||
|
$ 1.50
|
5,000
|
4.49
|
5,000
|
|||||||
|
$ 1.50
|
20,000
|
9.29
|
2,833
|
|||||||
|
$ 1.50
|
60,000
|
9.49
|
10,000
|
|||||||
|
$ 1.50
|
20,000
|
9.46
|
2,167
|
|||||||
|
$ 1.60
|
4,500
|
3.06
|
4,500
|
|||||||
|
$ 1.67
|
175,000
|
9.77
|
14,583
|
|||||||
|
$ 1.67
|
15,000
|
9.77
|
1,250
|
|||||||
|
$ 1.70
|
50,000
|
9.57
|
6,944
|
|||||||
|
$ 1.79
|
10,000
|
9.92
|
167
|
|||||||
|
$ 1.79
|
2,000
|
9.92
|
63
|
|||||||
|
$ 1.96
|
12,900
|
9.83
|
717
|
|||||||
|
$ 1.96
|
12,900
|
9.83
|
717
|
|||||||
|
$ 1.96
|
4,300
|
9.83
|
2,457
|
|||||||
|
$ 1.96
|
12,900
|
9.83
|
717
|
|||||||
|
$ 1.96
|
12,900
|
9.83
|
717
|
|||||||
|
$ 1.96
|
12,900
|
9.83
|
717
|
|||||||
|
$ 1.96
|
12,900
|
9.83
|
717
|
|||||||
|
$ 2.05
|
2,500
|
0.33
|
417
|
|||||||
|
$ 3.20
|
250
|
2.62
|
250
|
|||||||
|
$ 3.20
|
375
|
2.62
|
375
|
|||||||
|
$ 3.20
|
250
|
2.62
|
250
|
|||||||
|
$ 6.80
|
1,625
|
1.42
|
1,625
|
|||||||
|
$ 6.80
|
375
|
1.42
|
375
|
|||||||
|
$ 11.20
|
250
|
0.00
|
250
|
|||||||
|
|
|
|
|
|||||||
|
|
2,841,607
|
|
1,114,755
|
|||||||
|
|
|
|
||||||||
NOTE 7 AGREEMENTS
Pursuant to a January 2002 agreement between the Company and a pharmaceutical product development customer, the Company granted the customer a worldwide, non-exclusive, royalty free license to certain of the Company’s Intellectual Property Rights for research purposes only in connection with certain of the customer’s compounds. The customer paid the Company a nonrefundable license fee of $400,000 in 2002. The fee is being amortized to revenue through September 2005 when the agreement terminates. For the years ended December 31, 2003 and 2002, the Company has recognized income of $114,241 and $112,676, respectively, related to this agreement.
| F-17 | ||
|
| ||
|
CHIRAL QUEST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 | ||
In August 2002, the Company entered into a one-year scientific research agreement with another pharmaceutical product development customer to assist in the completion of a feasibility screening program and report. In consideration for the experimental activity, the customer paid a fee of $30,000. The fee has been amortized to revenue through August 2003. For the years ended December 31, 2003 and 2002, the Company recognized income of $19,726 and $10,274, respectively.
In May 2003, the Company entered into a four-year consulting agreement with the CTO at an annual rate of $120,000 per year. In addition, the CTO received an option to purchase 650,052 shares of common stock at $1.49 per share as mentioned in Note 5.
In May 2003, the Company entered into an option agreement with the Science and Technology Bureau of Jiashan County in Zhejiang, Province of the People’s Republic of China, China (“Jiashan”), whereby the Company has an option to acquire a laboratory facility in an industrial park near Shanghai. Jiashan is currently building 4,000 square meters of laboratory space to the Company’s specifications. The Company will not pay rent for the initial 3 years of the lease, following which the Company, at its sole option, may rent the space for annual rent of no more than $60,000. In addition, the Company will have the option to purchase the lab on commercially reasonable terms. Should the Company wish to occupy the laboratory after its estimated completion in the third quarter of 2004; it will begin to pay a maintenance fee of $4,500 per month. For purpos
es of
entering into the lease, the Company established a wholly owned subsidiary in Hong Kong, Chiral Quest Ltd., which in turn will be the sole shareholder of a subsidiary in the People’s Republic of China (the “China Sub”). The Company intends to provide at least $65,000 of capital to the China Sub by the end of the second quarter of 2004. In addition, the Company was also granted the option to purchase for $750,000 approximately 33 acres of land adjacent to the industrial park where the lab will be established.
Pursuant to an October 2002 agreement with Penn State, the Company funded the services of four post-doctorate fellows who, under the supervision of the CTO, conducted research and provided research quantities of chiral ligands to the Company. The agreement expires on April 14, 2004. The approximate obligation payable by the Company through April 14, 2004 is approximately $96,000. This amount consists principally of four post-doctorate salaries, fringe benefits, materials and supplies for the stated period.
NOTE 8 BUSINESS AND CREDIT CONCENTRATIONS
The Company had two customers which accounted for approximately 54% and 17%, respectively, of revenue for the year ended December 31, 2003. The Company had two customers who accounted for approximately 58% and 14%, respectively, of revenue for the year ended December 31, 2002.
The Company had two customers who accounted for approximately 52% and 39%, respectively, of net customer accounts receivable as of December 31, 2003. The Company had two customers who accounted for approximately 80% and 10%, respectively, of net accounts receivable as of December 31, 2002.
NOTE 9 COMMITMENTS AND CONTINGENCIES
Upon completion of the merger transaction between Surg II, Inc. and Chiral Quest, LLC on February 18, 2003, Alan D. Roth, Ph.D. was appointed President, Chief Executive Officer and Chief Financial Officer of the Company. Dr. Alan Roth’s employment with the Company is governed by the terms of an Employment Agreement dated November 5, 2002, which the Company assumed following the merger. Dr. Roth’s employment agreement was subsequently amended as of October 1, 2003. Dr. Roth’s employment agreement provides for a term of 3 years at an annual salary of $205,000 during the first year and $240,000 thereafter. In addition, Dr. Roth was entitled to, and received, a bonus of $35,000 following completion of the Surg II – Chiral Quest, LLC merger and he is entitled to annual discretionary bonuses, as the Board of Directors may determine. In October 2003,
the employment agreement was amended to provide for additional bonus payments, as follows: (i) $3,500 upon such time as we execute a commercial contract providing for gross revenue to us in excess of $50,000, which bonus has been paid to Dr. Roth; (ii) a one time bonus of approximately $160,000 upon such time as the closing bid price of our common stock is at or above $5.00 for five consecutive trading days; and (iii) a one time bonus of approximately $160,000 upon such time as the closing bid price of our common stock is at or above $8.00 for five consecutive trading days. If not already paid to Dr. Roth, the bonuses described in clauses (ii) and (iii) are payable in the event of a “Change of Control” (as defined in the agreement), provided that the per share price at which the change of control was effected was at or above the price milestones referenced in such clauses.
| F-18 | ||
|
| ||
|
CHIRAL QUEST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 | ||
Pursuant to the terms of his employment agreement, Dr. Roth also received a ten-year option to purchase an aggregate of 865,260 shares of the Company’s common stock at an exercise price of $1.49 per share. The options vest in three equal annual installments commencing February 18, 2004, and each anniversary thereafter until fully vested.
In the event Dr. Roth’s employment with the Company is terminated for “cause” (as defined in the agreement), he is not entitled to any severance or other compensation beyond the date of such discharge. In the event Dr. Roth’s employment is terminated as a result of a “change of control” (as defined in the agreement) in which the Company’s shareholders receive aggregate consideration of at least $50 million, then Dr. Roth is entitled to receive his base salary for a period of one year and all of his unvested options shall vest immediately and be exercisable for a period of 180 days thereafter.
In May 2003, the Company entered into an agreement to lease laboratory and office space located in Monmouth Junction, New Jersey. The lease commenced effective June 1, 2003 and is for a three-year term with a total rent, utilities and maintenance fees of approximately $468,000 to be paid in monthly installments that increase each year. Due to the escalation clause in the lease, the Company is straight-lining the expense of the lease over the term of the lease. The Company also issued the landlord options to purchase 20,000 shares of common stock, as described in Note 6. The options issued to the landlord are amortized over the term of the option agreement and included in rent expense. The future minimum lease payments under this lease are as follows: $136,730 for 2004, $148,550 for 2005, and $62,750 for 2006.
Total rent expense (which includes base rent, utilities, and operating escalations for both the New Jersey and Pennsylvania locations) for the Company for the year ended December 31, 2003 was approximately $70,000. This amount reflects cost allocations to work in process, finished goods and cost of sales of approximately $31,000.
The State College, Pennsylvania office maintains laboratory space for a yearly renewable lease at a monthly expense of approximately $1,300. Total rent expense for the years ended December 31, 2003 and 2002 for the State College, Pennsylvania office was approximately $15,000 each year.
Paramount BioCapital, LLC provides an office and general and administrative
services in New York, New York for the Company’s president and chief executive officer for an approximate monthly fee of $4,000. This arrangement is renewable upon a yearly basis.
| F-19 | ||
|
| ||
|
CHIRAL QUEST, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 | ||
In July 2002, the Company received a cease and desist letter from a competitor apprising the Company of the existence of a U.S. Patent. In October 2002, the Company and such competitor entered into a mutual confidentiality agreement in which each party agreed to exchange technology information in order to more fully evaluate whether either is infringing upon the rights of the other.
Also, in October 2002, the Company received an additional patent notification letter from another competitor apprising them of the existence of another U.S. Patent. To the Company’s knowledge, no legal proceedings have been initiated with respect to any of the matters discussed in such letters.
NOTE 10 RELATED PARTY TRANSACTIONS
Paramount
BioCapital Investments, LLC, a related party, has been performing certain administrative functions for the Company since July 12, 2002, and financed the Company through loans for working capital evidenced by a series of promissory notes (the “Notes”) aggregating $376,625. The Notes bore interest at 5% and were repaid including interest in full on February 28, 2003, and subsequently cancelled.
Additionally, since September 1, 2002, the Company has been paying $4,000 per month to Paramount
BioCapital Investments, LLC, for administrative services. For the years ended December 31, 2003 and 2002, this resulted in charges to operations of $48,000 and $16,000, respectively. As of December 31, 2003, the Company owed $1,201 to Paramount
BioCapital Investments, LLC.
On February 25, 2004, the Company completed the sale of its securities in a private placement to accredited investors for gross proceeds of approximately $7.2 million. Paramount
BioCapital, Inc. participated as one of three placement agents for this transaction, for which it received approximately $300,000 in commissions.
NOTE 11 SUBSEQUENT EVENTS
On February 25, 2004, the Company completed the sale of its securities in a private placement to accredited investors for gross proceeds of approximately $7.2 million. Investors in the private placement purchased an aggregate of approximately 4.8 million shares of Chiral Quest’s common stock at a price per share of $1.50. Additionally, investors received 5-year warrants to purchase one share of common stock at $1.65 per share for every two common shares purchased in the offering. ThinkEquity Partners LLC, Paramount
BioCapital, Inc. and Casimir Capital L.P. acted as the placement agents for this offering and received fees of approximately $500,000 of which Paramount
BioCapital, Inc., a related party, received $300,000. Net proceeds to the Company, after deducting commissions and other expenses relating to the private placement, were approximately $6.7 million.
In February 2004, the Company amended the lease agreement in Monmouth Junction, NJ for additional laboratory space effective April 1, 2004. This additional laboratory space of 1,200 square footage increases rent expense for the year ending December 31, 2004 by approximately $21,000, and annual rent expense thereafter of approximately $28,000.
| F-20 | ||
|
| ||
7,723,041
Shares
Common
Stock
Chiral
Quest, Inc.
______________________
PROSPECTUS
______________________
, 2004
|
|
||
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
24. Indemnification of Directors and Officers.
The Company
is governed by Minnesota Statutes Chapter 302A. Minnesota Statutes Section 302A.521 provides that a corporation shall indemnify any
person made or threatened to be made a party to any proceeding by reason of the former or present official capacity of such person
against judgments, penalties, fines, including, without limitation, excise taxes assessed against such person with respect to an employee
benefit plan, settlements, and reasonable expenses, including attorney’s fees and disbursements, incurred by such person in connection
with the proceeding, if, with respect to the acts or omissions of such person complained of in the proceeding, such person has not
been indemnified by another organization or employee benefit plan for the same expenses with respect to the same acts or omissions;
acted in good faith; received no improper personal benefit and Section 302A.255, if applicable, has been satisfied; in the case of
a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and in the case of acts or omissions by persons
in their official capacity for the corporation, reasonably believed that the conduct was in the best interests of the corporation,
or in the case of acts or omissions by persons in their capacity for other organizations, reasonably believed that the conduct was
not opposed to the best interests of the corporation. Subdivision 4 of Section 302A.521 of the Minnesota Statutes provides that a
company’s articles of incorporation or by-laws may prohibit such indemnification or place limits upon the same. The Company’s
articles and by-laws do not include any such prohibition or limitation. As a result, the Company is bound by the indemnification provisions
set forth in Section 302A.521 of the Minnesota Statutes.
As permitted
by Section 302A.251 of the Minnesota Statutes, the Articles of Incorporation of the Company provide that a director shall have no
personal liability to the Company and its shareholders for breach of his fiduciary duty as a director, to the fullest extent permitted
by law.
Item
25. Other Expenses Of Issuance And Distribution.
The
Registrant estimates that expenses payable by the Registrant is connection with the offering described in this Registration Statement
will be as follows:
| SEC
registration fee |
$ |
1,700 |
||
| Legal
fees and expenses |
25,000 |
|||
| Accounting
fees and expenses |
20,000 |
|||
| Printing
and engraving expenses |
5,000 |
|||
| Miscellaneous
|
5,000 |
|||
| |
||||
| Total
|
$ |
56,700 |
||
| |
||||
Item
26. Recent Sales of Unregistered Securities.
February
2004 Private Placement
On February
25, 2004, the Registrant sold an aggregate of 4,826,906 shares of its common stock at a price of $1.50 per share, to 134 purchasers.
Each purchaser also received a warrant to purchase at a price of $1.65 per share an additional number of shares of common stock equal
to one-half of the shares purchased. In connection with this sale, the Registrant engaged ThinkEquity Partners, LLC , Paramount BioCapital,
Inc., and indirectly, Casimir Capital, L.P., to serve as placement agents. As partial compensation for their services, the Registrant
issued to the placement agents warrants to purchase an aggregate of 482,691 shares of common stock at a price of $1.65 per share.
The Registrant relied on the exemption from federal registration under Section 4(2) of the Securities Act based on (i) its belief
that the sale did not involve a public offering, (ii) each purchaser was an accredited investors, and (iii) no general solicitation
was involved.
| II-1 | ||
|
|
||
Issuance
of Options to Landlord
In May
2003, the Company issued options to purchase an aggregate of 20,000 shares of its common stock to its New Jersey landlord as partial
consideration for office space that the Company leases. The Company relied on the exemption from federal registration under Section 4(2)
of the Securities Act of 1933, as amended, based on its belief that the issuance of the options did not involve a public offering
and that landlord is an accredited investor.
February
2003 Merger with Surg II
In
connection with the February 2003 merger between Surg II, Inc. and Chiral Quest, LLC, effective as of February 18, 2003, we issued
an aggregate of 8,652,298 shares of our common stock to the former members of Chiral Quest, LLC in exchange for all their membership
units in Chiral Quest, LLC. In addition, at the time of the merger, Chiral Quest had outstanding options, warrants, and other rights
to purchase up to an aggregate of 1,210,000 membership units, which automatically converted into rights to purchase up to an aggregate
of 910,374 shares of our common stock. We relied on the exemption from federal registration under Section 4(2) of the Securities
Act of 1933, as amended, based on our belief that the issuance of such securities did not involve a public offering, as there were
fewer than 35 “non-accredited” investors, all of whom, either alone or through a purchaser representative, had such knowledge
and experience in financial and business matters so that each was capable of evaluating the risks of the investment.
Also
in connection with the merger, we issued Key West Associates, LLC a warrant to purchase 550,000 shares of our common stock at a price
of $1.25 per share. The warrant was issued pursuant to a letter agreement with Key West Associates in consideration of Key West Associates’
efforts introducing the Company to Chiral Quest, LLC. The Company relied on the exemption from federal registration under Section 4(2)
of the Securities Act based on its belief that the issuance of the warrant did not involve a public offering and that Key West Associates
is an accredited investor.
September
2002 Sale to Entrx Corp.
On September
25, 2002, the Registrant sold 357,142 shares of common stock for aggregate consideration of $300,000 to Entrx Corporation. The Registrant
relied on the exemption from federal registration under Section 4(2) of the Securities Act based on (i) its belief that the sale did
not involve a public offering, (ii) Entrx Corp. was an accredited investor, and (iii) no general solicitation was involved.
May
2002 Sale to Entrx Corp.
On May
30, 2002, the Registrant sold 3,625,000 shares of common stock for aggregate consideration of $3,000,000 to Entrx Corporation. In
connection with the sale of shares to Entrx Corp., the Registrant also issued 55,000 shares of common stock to Equity Securities Trading,
Inc., which acted as finder in connection with the sale of shares to Entrx. The services were valued at $45,320. The Registrant relied
on the exemption from federal registration under Section 4(2) of the Securities Act based on (i) its belief that the sale did not
involve a public offering, (ii) the purchasers were accredited investors, and (iii) no general solicitation was involved.
May
2002 Exchange of Series A Preferred Stock
On May
23, 2002, the Registrant exchanged 1,600,000 shares of Series A preferred stock held by 26 shareholders for an aggregate of 80,000
shares of common stock. The Registrant relied on the exemption provided by Section 3(a)(9) of the Securities Act. No commission or
other remuneration was paid or given directly or indirectly for soliciting the exchange.
May
2002 Issuances to Officers
On May
23, 2002, the Registrant sold an aggregate of 35,000 shares of common stock to two former executive officers and directors of the
Registrant in exchange for services valued at $28,840. The Registrant relied on the exemption from federal registration under Section
4(2) of the Securities Act based on (i) its belief that the sale did not involve a public offering, (ii) the purchasers were accredited
investors, and (iii) no general solicitation was involved.
| II-2 | ||
|
|
||
May
2002 Issuance for Legal Services
On May
23, 2002, the Registrant sold an aggregate of 10,500 shares of common stock to an individual who performed legal services for the
Registrant and such individual’s law firm. The legal services rendered were valued at $8,652. The Registrant relied on the exemption
from federal registration under Section 4(2) of the Securities Act based on (i) its belief that the sale did not involve a public
offering, (ii) the purchasers were both accredited investors, and (iii) no general solicitation was involved.
Item
27. Exhibits.
The following
exhibits are filed as part of this Registration Statement:
| Exhibit No. | Description | |
| 2.1 | Merger Agreement dated November 12, 2002, by and among the Registrant, CQ Acquisition, Inc. and Chiral Quest, LLC (incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K filed November 27, 2002). | |
| 3.1 | Articles of Incorporation, as amended to date (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-KSB for the year ended December 31, 2003). | |
| 3.2 | Bylaws, as amended to date (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 10-KSB for the year ended December 31, 2003). | |
| 4.1 | Common Stock Purchase Warrant dated as of February 18, 2003 issued to Key West Associates, LLC (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 10-QSB for the period ended March 31, 2003). | |
| 4.2 | Option Agreement No. LL-1 dated May 6, 2003 issued to Princeton Corporate Plaza, LLC. (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 10-QSB for the period ended June 30, 2003). | |
| 4.3 | Form of Option Agreement dated May 6, 2003 issued to Princeton Corporate Plaza, LLC (incorporated by reference to Exhibit 4.2 to the Registrant’s Form 10-QSB for the period ended June 30, 2003). | |
| 4.4 | Schedule of Options substantially identical to Exhibit 4.3 (incorporated by reference to Exhibit 4.3 to the Registrant’s Form 10-QSB for the period ended June 30, 2003). | |
| 4.5 | Form of Common Stock Purchase Warrant issued in connection with February 2004 private placement. | |
| 5.1 | Legal opinion of Maslon Edelman Borman & Brand, LLP. |
| II-3 | ||
|
|
||
| Exhibit No. | Description | |
| 10.1 | Employment Agreement dated November 8, 2002 between the Registrant and Alan D. Roth (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-QSB for the period ended March 31, 2003) | |
| 10.2 | License Agreement dated on or about October 27, 2000, as amended, between Chiral Quest, LLC and The Penn State Research Foundation (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-QSB for the period ended March 31, 2003). | |
| 10.3 | Consulting Agreement dated May 15, 2003 between the Registrant and Xumu Zhang, Ph.D. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-QSB for the period ended June 30, 2003). | |
| 10.4 | 2003 Stock Option Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-KSB for the year ended December 31, 2003). | |
| 10.5 | Supplement to Employment Agreement dated October 1, 2003 between the Registrant and Alan D. Roth (incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-KSB for the year ended December 31, 2003). | |
| 16.1 | Letter regarding change in independent accountants (incorporated by reference to Exhibit 16.1 to the Registrant’s Form 8-K/A filed January 5, 2004). | |
| 16.2 | Letter regarding change in independent accountants (incorporated by reference to Exhibit 16.1 to the Registrant’s Form 8-K filed April 25, 2003). | |
| 23.1 | Consent of J.H. Cohn LLP. | |
| 23.2 | Consent of Weinberg & Company, P.A. | |
| 23.3 | Consent of Maslon Edelman Borman & Brand, LLP (included in Exhibit 5.1). | |
| 24.1 | Power of Attorney (included on signature page hereof). |
Item
28. Undertakings.
(a)
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised
that in the opinion of the 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 the Registrant of
expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b)
The undersigned Registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration
statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement;
and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration statement;
| II-4 | ||
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(2)
That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof;
(3)
To remove from registration by means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering; and
(4)
That, for purposes of determining any liability under the Securities Act, each filing of the Registrant’s
annual report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan’s
annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
| II-5 |
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|
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SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New York, on March 26, 2004.
|
Chiral
Quest, Inc.
|
||
| |
|
|
| By: | /s/ Alan Roth | |
| Alan Roth, Ph.D. |
||
| President and Chief Executive Officer | ||
POWER
OF ATTORNEY
Each
person whose signature to this Registration Statement appears below hereby constitutes and appoints Alan D. Roth and Brian Lenz as
his or her true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his or her behalf individually
and in the capacity stated below and to perform any acts necessary to be done in order to file all amendments to this Registration
Statement and any and all instruments or documents filed as part of or in connection with this Registration Statement or the amendments
thereto and each of the undersigned does hereby ratify and confirm all that said attorney-in-fact and agent, or his substitutes, shall
do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1933, this Registration Statement has been signed as of the 26th day of March,
2004, by the following persons in the capacities indicated.
| Name |
Title |
|
| |
|
|
| /s/
Alan Roth |
President,
Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) |
|
| Alan
Roth |
||
| /s/
Brian Lenz |
Controller
and Secretary (Principal Accounting Officer) |
|
| Brian Lenz |
||
| /s/
Stephen C. Rocamboli
|
|
|
| Stephen C. Rocamboli |
Interim Chairman of the Board | |
/s/
Vincent M. Aita |
||
| Vincent M. Aita |
Director |
|
/s/ Kenneth W. Brimmer |
||
| Kenneth W. Brimmer |
Director
|
|
| Stephen Roth |
Director
|
|
/s/ David M. Tanen |
||
| David M. Tanen |
Director
|
|
/s/ Michael Weiser |
||
| Michael
Weiser |
Director
|
|
/s/ Xumu Zhang |
||
| Xumu Zhang |
Director
and Chief Technology Officer
|
| II-6 |
||
|
|
||
EXHIBIT
INDEX
| Exhibit No. | Description | |
| 2.1 | Merger Agreement dated November 12, 2002, by and among the Registrant, CQ Acquisition, Inc. and Chiral Quest, LLC (incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K filed November 27, 2002). | |
| 3.1 | Articles of Incorporation, as amended to date (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-KSB for the year ended December 31, 2003). | |
| 3.2 | Bylaws, as amended to date (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 10-KSB for the year ended December 31, 2003). | |
| 4.1 | Common Stock Purchase Warrant dated as of February 18, 2003 issued to Key West Associates, LLC (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 10-QSB for the period ended March 31, 2003). | |
| 4.2 | Option Agreement No. LL-1 dated May 6, 2003 issued to Princeton Corporate Plaza, LLC. (incorporated by reference to Exhibit 4.1 to the Registrant’s Form 10-QSB for the period ended June 30, 2003). | |
| 4.3 | Form of Option Agreement dated May 6, 2003 issued to Princeton Corporate Plaza, LLC (incorporated by reference to Exhibit 4.2 to the Registrant’s Form 10-QSB for the period ended June 30, 2003). | |
| 4.4 | Schedule of Options substantially identical to Exhibit 4.3 (incorporated by reference to Exhibit 4.3 to the Registrant’s Form 10-QSB for the period ended June 30, 2003). | |
| 4.5 | Form of Common Stock Purchase Warrant issued in connection with February 2004 private placement. | |
| 5.1 | Legal opinion of Maslon Edelman Borman & Brand, LLP. | |
| 10.1 | Employment Agreement dated November 8, 2002 between the Registrant and Alan D. Roth (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-QSB for the period ended March 31, 2003) | |
| 10.2 | License Agreement dated on or about October 27, 2000, as amended, between Chiral Quest, LLC and The Penn State Research Foundation (incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-QSB for the period ended March 31, 2003). | |
| 10.3 | Consulting Agreement dated May 15, 2003 between the Registrant and Xumu Zhang, Ph.D. (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-QSB for the period ended June 30, 2003). | |
| 10.4 | 2003 Stock Option Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-KSB for the year ended December 31, 2003). | |
| 10.5 | Supplement to Employment Agreement dated October 1, 2003 between the Registrant and Alan D. Roth (incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-KSB for the year ended December 31, 2003). | |
| 16.1 | Letter regarding change in independent accountants (incorporated by reference to Exhibit 16.1 to the Registrant’s Form 8-K/A filed January 5, 2004). | |
| 16.2 | Letter regarding change in independent accountants (incorporated by reference to Exhibit 16.1 to the Registrant’s Form 8-K filed April 25, 2003). | |
| 23.1 | Consent of J.H. Cohn LLP. | |
| 23.2 | Consent of Weinberg & Company, P.A. | |
| 23.3 | Consent of Maslon Edelman Borman & Brand, LLP (included in Exhibit 5.1). | |
| 24.1 | Power of Attorney (included on signature page hereof). |