ITEM 1 - BUSINESS
OVERVIEW
We are a biotech company focused on the commercial development of biological products for the prevention and treatment of human diseases and manufacturing and sales of materials in producing vaccines.
We intend to develop and obtain regulatory approval for commercial sale of the following vaccines: an HIV vaccine (HIV-PV Vaccine I), a vaccine designed to prevent and treat infection by the human immunodeficiency virus, or HIV, an HPV vaccine, a colon cancer therapeutic vaccine and other related potential products. The HIV vaccine and colon cancer vaccine are based on the technology platform co-developed by Dr. Liang Qiao, our chief executive officer and a Professor at Loyola University Chicago. The technology is owned by Loyola University Chicago. In June 2002, Loyola University Chicago exclusively licensed this technology to our subsidiary Bio-Bridge Science Corporation with respect to development and sales in the territories of People's Republic of China, Japan and the United States. Pursuant to an agreement with the Beijing Institute of Radiation Medicine, the pre-clinical testing of our first vaccine product candidate, HIV-PV Vaccine I, on laboratory animals in mainland China was completed and the test results were issued in June 2006 and showed encouraging results. After we have produced sufficient vaccine samples in our manufacturing facility in Beijing, China, we plan to apply to China's State Food and Drug Administration (SFDA) for approval to conduct clinical trials of HIV-PV Vaccine I.
Currently, we produce and sell bovine serum, a major production material in producing vaccines, through our 51% owned subsidiary, Bio-Bridge XHBD. We plan to sell cell culture medium starting in the third quarter of 2010 through a newly formed 51% owned subsidiary in China, Bio-Bridge JRS. Cell culture medium is also a very important material used to produce vaccines.
Since the process of development, testing and approval of a vaccine is a long-term process, we also plan to acquire profitable vaccine and vaccine production related companies selectively in Asia, mainly in China, to increase our revenues and to increase our product offerings.
In May 2003, the Company acquired a land use right for approximately 2.8 acres of land in the Tianzhu Export Processing Zone, Shunyi District, Beijing, China, which the Company is working to develop into a laboratory and bio-manufacturing facility in compliance with Good Manufacturing Practices, or GMP, regulations primarily for clinical trials of our vaccine candidates. The general plans for development include the construction of a laboratory facility (“Phase One”) and construction of an administrative office building (“Phase Two”). In 2009, the Phase One laboratory facility was put into service and is being depreciated over the remaining 19 years of the Company’s land use right, which is less than the laboratory facility’s estimated useful life of approximately 25 years. Previously, the laboratory facility construction was shown as construction in progress. At December 31, 2009, $42,471 was due to the contractors of Phase One for the completed construction and is recorded as due to contractors. At December 31, 2009, Phase Two was still in the design stage. The Company estimates the total project costs for Phase Two will be approximately $1,200,000. The Company estimates that construction may begin on Phase Two in 2011 or later, but currently has no plans for Phase Two construction.
We have finished the pre-clinical animal testing of HIV-PV Vaccine I through collaboration with Beijing Institute of Radiation Medicine and the testing showed encouraging results. After we have produced sufficient HIV-PV vaccine samples in our facility, we intend to submit application for approval of clinical trials to Beijing branch of the China State Food and Drug Administration (SFDA). After we receive approval, we will conduct Phase I, II and III human clinical trials. If these clinical trials show that our vaccine is safe and effective, we will apply for a new drug approval certificate and approval for sale. We intend to conduct a phase IV clinical study after our vaccine is made available to the market. To date, we have not commenced clinical testing of this vaccine, nor has it been approved by the SFDA or any other regulatory agency. We plan to apply for clinical testing with the SFDA in the third quarter of 2010. Also, we are conducting the pre-clinical activities for a colon cancer vaccine and an HPV vaccine.
Surgical Instrument Sales
On November 21, 2005, we entered into an exclusive distribution agreement with Xinhua Surgical Instruments Co. Ltd., located in Shandong, China. Under this agreement, we were granted exclusive distribution rights for all Xinhua surgical instruments in the United States, which are subject to FDA approval. On December 6, 2005, we received confirmation from the FDA of our registration as a medical device establishment, which enables us to perform initial distributor and repackager operations. This confirmation is not FDA approval of any product or any of our activities. It is neither a license, nor a certification. We began selling Xinhua surgical instruments that meet the criteria for class I medical devices under FDA rules, which do not require pre-market notification to the FDA.
Joint-ventures
On July 31, 2008, the Company acquired 51 percent of the outstanding capital interest of Huhhot Xinheng Baide Biotechnology Co., Ltd. for RMB 6,000,000 (US$889,058). XHBD was incorporated on May 17, 2006 under the laws of the People’s Republic of China (the “PRC”) as a limited company, which is similar to a limited liability company. XHBD is located in the capital city of Inner Mongolia of the PRC, Huhhot. The primary operations of the Company are the manufacture and distribution of bovine serum products, which is used in research, production of pharmaceuticals, and production of veterinary medicines. XHBD was renamed as Bio-Bridge Xinheng Baide Biotechnology Co., Ltd. (“Bio-Bridge XBB”).
On June 9, 2009, Bio-Bridge Science (HK) Co., Ltd., a wholly-owned subsidiary of Bio-Bridge Science, Inc. entered into an equity joint venture contract with JR Scientific Inc., a California based manufacturer of classical and custom cell culture medium and sera products and several other investors, to form a new cell culture medium joint venture in Beijing, China. The registered capital of the joint venture is RMB 10,000,000 (approximately US$1,465,000). The company invested RMB 5,100,000 (approximately US$747,000) in cash in the joint venture for 51% of the equity and JRS contributed certain technology for 15% of the equity. The balance of the equity was purchased by other investors, including 11% that was purchased by China Diamond, a company controlled by Trevor Roy, one of our directors. On October 16, 2009, Bio-Bridge Science Inc. received a business license from the Beijing Administration for Industry and Commerce of the PRC indicating approval of the formation of Bio-Bridge JRS Biosciences (Beijing) Co., Ltd. (“Bio-Bridge JRS”). Bio-Bridge JRS was officially established at the end of October 2009.
Operations
We have incurred significant losses since inception as a result of research and development, general and administrative expenses in support of our operations. We expect to continue to incur substantial losses over at least the next few years as we complete our pre-clinical trials, apply for regulatory approvals of clinical trials, construct our Phase II biomanufacturing facility and continue development of our technology. Although we still plan to acquire more profitable vaccine producing or vaccine production-related companies in China in the near future, we cannot guarantee that we will successfully complete acquisitions or that these acquisitions will bring us positive net income and cash flow on a consolidated basis. Therefore, we will still need to raise additional capital during the next twelve months to meet our operating expenses. See "Plan of Operations."
HISTORY, REORGANIZATIONS AND CORPORATE STRUCTURE OF THE COMPANY
We were incorporated in Delaware on October 26, 2004 as a holding company for the shares of Bio-Bridge Science Corp, a pre-existing vaccine development company. On November 4, 2004, we initiated exchange offers to the shareholders of Bio-Bridge Science Corp. By November 12, 2004, 100% of the shareholders of Bio-Bridge Science Corp. had tendered their shares. Effective December 1, 2004, we issued 29,971,590 shares of our common stock to the shareholders of Bio-Bridge Science Corp. pursuant to the Agreement for the Exchange of Shares dated as of November 4, 2004 ("Exchange Agreement") by and among us, Bio-Bridge Science Corp. and the shareholders of record of Bio-Bridge Science Corp. As a result of this exchange reorganization, effective December 1, 2004, we became the sole shareholder of Bio-Bridge Science Corp., and it became our wholly owned subsidiary. The Bio-Bridge Science Corp. shareholders acquired control of our company pursuant to the Exchange Agreement, resulting in Dr. Liang Qiao's ownership of 13,750,000 shares or approximately 40% of our company. The directors and members of management of Bio-Bridge Science Corp. are the same directors and management of Bio-Bridge Science, Inc. There was no change in corporate structure before and after the incorporation of Bio-Bridge Science, Inc. The acquisition was accounted for as a reverse merger (recapitalization) with Bio-Bridge Science Corp. deemed to be the accounting acquirer, and Bio-Bridge Science, Inc. deemed to be the legal acquirer. Accordingly, the historical financial information presented herein is that of Bio-Bridge Science Corp. as adjusted to give effect to any difference in the par value of the issuer's and the accounting acquirer's stock with an offset to capital in excess of par value. The historical basis of assets, liabilities and retained earnings of Bio-Bridge Science Corp., the accounting acquirer was carried forward after the acquisition.
Bio-Bridge Science Corp. was incorporated in the Cayman Islands on February 11, 2002 to complete development of, and commercialization of vaccines designed to prevent and treat infection and diseases. At the time of the exchange, Bio-Bridge Science Corp.'s directors included Dr. Liang Qiao, Wenhui Qiao, Toshihiro Komoike, Isao Arimoto and Shyh-Jing (Philip) Chiang. Its executive officers consisted of Dr. Liang Qiao, chief executive officer and secretary, Wenhui Qiao, president, Chuen Huei (Kevin) Lee, chief financial officer, and Toshihiro Komoike, vice president.
Bio-Bridge Science Corp. holds a 100% interest in Bio-Bridge Science (Beijing) Corp. Ltd., a Wholly-Foreign Owned Enterprise of the People's Republic of China, which was established on May 20, 2002. Bio-Bridge Science (Beijing) was issued an operating license for 25 years on May 20, 2002. This license can be renewed for an additional 25 years after payment of a registration fee. This 25-year limitation currently applies to all commercial enterprises in the People's Republic of China. Bio-Bridge Science Corp., through its wholly owned subsidiary in Beijing, China, is currently engaged in the development and commercialization of HIV vaccine, HPV vaccine, and colon cancer vaccine, in China. Bio-Bridge Science (Beijing)'s executive officer is Dr. Liang Qiao, general manager. Its directors include Chuen-Huei(Kevin) Lee, chairman, Dr. Liang Qiao, vice chairman, Wenhui Qiao, Mingjin Yu, Isao Arimoto, Anthony Cheung and Shannon Kirt Roy.
We incorporated Bio-Bridge Science (HK) CO., Ltd., a Hong Kong company in March 2008, and Bio-Bridge Science Holding Co., Ltd., a Cayman Islands corporation in February 2008, to serve as acquisition vehicles.
On July 31, 2008, the Company acquired 51 percent of the outstanding capital interest of Huhhot Xinheng Baide Biotechnology Co., Ltd. (“XHBD”). XHBD was incorporated on May 17, 2006 under the laws of the PRC as a limited company, which is similar to a limited liability company. XHBD is located in the city of Huhhot in Inner Mongolia of the PRC. The primary operations of the XHBD are the manufacture and distribution of bovine serum products, which is used in research, production of pharmaceuticals, and production of veterinary medicines. On July 1, 2009, XHBD received the approval to change its name to Bio-Bridge Xinheng Baide Biotechnology Co., Ltd. (“Bio-Bridge XBB”).
On June 9, 2009, Bio-Bridge Science (HK) Co., Ltd., a wholly-owned subsidiary of Bio-Bridge Science, Inc. entered into an equity joint venture contract with JR Scientific Inc., a California based manufacturer of classical and custom cell culture medium and sera products and several other investors, to form a new cell culture medium joint venture in Beijing, China. The registered capital of the joint venture is RMB 10,000,000 (approximately US$1,465,000). The company invested RMB 5,100,000 (approximately US$747,000) in cash in the joint venture for 51% of the equity and JRS contributed certain technology for 15% of the equity. The balance of the equity was purchased by other investors. On October 16, 2009, Bio-Bridge Science Inc. received a business license from the Beijing Administration for Industry and Commerce of the PRC indicating approval of the formation of Bio-Bridge JRS Biosciences (Beijing) Co., Ltd. (“Bio-Bridge JRS”).
PRODUCTS
Our major products under development are vaccines against HIV, cervical cancer and colon cancer. Also, we sell bovine serum through our 51% owned subsidiary, Bio-Bridge XBB, and we intend to sell cell culture medium through Bio-Bridge JRS, a 51% owned subsidiary in Beijing, China.
VACCINES
Most vaccines are preventive, and as a result, they are particularly suited to address epidemics, including HIV/AIDS. Some vaccines can be used to treat diseases, and they are called therapeutic vaccines.
Vaccines prevent infection by activating the immune system to fight against infectious pathogens. The immune system's initial response to a pathogen such as a virus includes the production of antibodies, which is one of the immune responses known to prevent viral infection. The antibodies bind to a specific part of the virus and prevent it from entering the cells. This specific structure, called an antigen, is often a protein on the viral surface. If a virus cannot enter a cell, it is unable to multiply and dies in the host. This protection against infection is called neutralization.
Another vaccine strategy is required to activate the immune system's cytotoxic T-cells, which are white blood cells that search for and eliminate virus-infected cells or tumor cells. Viruses replicate by subverting the metabolism of the infected cell to make more virus. Once this process is completed, a new crop of viruses leave the cell, often killing it in the process, and infect new cells. Except in transit between cells, viruses which work inside the cell are safe from any antibodies. But early in the process, infected cells display fragments of the viral proteins in their surface molecules. Cytotoxic T-cells recognize these fragments and bind to the infected cell and often will be able to destroy it before it can release a new crop of viruses. Similarly, tumor cells display fragments of tumor-specific or associated antigens in their surface molecules and specific cytotoxic T-cells can recognize these antigens and subsequently kill the tumor cells. Most cytotoxic T-cells will die after they have eliminated the infected cells or tumor cells, but some will become memory cells, or long-lived cells ready to respond to a later exposure to the pathogen.
OUR TECHNOLOGY
Bio-Bridge Science’s products are based on the unique papillomavirus pseudovirus technology co-developed by Dr. Liang Qiao, our chief executive officer. Papillomavirus are sexually transmitted viruses and their major structural protein can spontaneously assemble into virus-like particles. These particles can package unrelated genes encoding proteins of interest to form papillomavirus pseudovirus. Papillomavirus pseudoviruses are benign viruses, or vectors, that deliver the genes of interest to cells in mucosal and systemic lymphoid tissues via oral route. The infected antigen presenting cells then produce antigens that can then activate cytotoxic T-cells. Antigens on the surface of pseudoviruses and the antigens produced by the pseudoviruses can be recognized by B cells that develop into antibody-producing cells. Thus, oral administration of the pseudoviruses can induce antibodies and cytotoxic T-cells in mucosa and peripheral blood, i.e., mucosal and systemic immunity to prevent and to treat diseases. We plan to use this technology to develop vaccines against HIV and colon cancer.
GOVERNMENT REGULATION IN CHINA, JAPAN AND THE UNITED STATES
Our vaccine candidates must receive regulatory approval before they can be marketed. The regulatory requirements involve stringent standards that may vary among different countries. In general, before a drug can qualify for marketing approval, a registration application must be submitted to a regulatory authority for review and evaluation. The registration application principally contains detailed information about the safety and efficacy of a new medication. It also provides details about the manufacturing process, the proposed production facility and information to be provided to health care providers or patients. The registration process can last from several months to several years and depends, among other things, on the laws and regulations of the country in which the review takes place, the nature of the medication under review, the quality of the submitted data, and the efficiency of the review procedure. The process of developing a drug from discovery through testing, registration and initial product launch typically takes 10 to 15 years and, according to recent research by the Tufts Center for Drug Development, exceeds U.S. $800 million in general. There are four phases to clinical testing of unapproved drug candidates in humans:
o Phase I involves the first trial of a new drug candidate in humans. The focus at this phase is an assessment of clinical safety, tolerability, and metabolic and pharmacologic properties. Testing generally is performed in a small number of human volunteers;
o Phase II trials are controlled clinical studies that test the safety and efficacy of the drug candidates in several hundred patients with the targeted disease. The goals of this phase include determining the appropriate doses for further testing and identifying common side effects and risks that may be associated with the drug;
o Phase III trials establish safety and effectiveness for regulatory approval for indicated uses and to evaluate overall benefit-risk relationship. These studies usually involve from several hundred up to several thousand people. The results of these clinical trials are then submitted to appropriate regulatory authorities with the objective of obtaining approval to market the drug; and
o Phase IV trials may be conducted after approval and commercial launch to further evaluate the safety and efficacy of the products or to investigate potential new applications.
Potential Vaccines and Other Products
A. HIV VACCINE
HIV is the virus that causes Acquired Immunodeficiency Syndrome, or AIDS, a lethal disease characterized by the gradual deterioration of the human immune system. HIV is transmitted by three predominant means: sexual contact; exposure to blood from an infected person, such as sharing needles in intravenous drug use; and transmission from infected mothers to their newborns. Although the disease is manifested in many ways, the problem common to all patients is the destruction of essential immune cells known as T lymphocytes, or T-cells. Destruction of these T-cells by HIV makes the body particularly vulnerable to infections and cancers that typify AIDS and ultimately cause death. Blocking HIV infection is the most important step in preventing AIDS.
HIV is transmitted sexually or directly into the bloodstream. The mucosal surface is one of the most important portals for HIV transmission. The mucosal surface is the membranous tissue that covers surfaces or lines a tube or cavity of the body and serves to enclose and protect parts of the body from the exterior environment. Mucosal surfaces include the mouth, intestinal and vaginal cavity. The tissue in intestinal mucosa contains many immune cells that are usually infected with HIV-1 in patients with AIDS. In the course of an AIDS infection, the intestine is the earliest target for viral infection and loss of immune cells. Some candidate vaccines that induced relatively strong systemic immune responses in connection with the virus transmitted directly into the bloodstream have failed to provide adequate protection in non-human primate models. Therefore, there is reason to believe that mucosal immunity will be essential for designing an effective AIDS vaccine. Accordingly, we believe that it is important for the ideal HIV vaccines to induce not only systemic but also mucosal HIV-specific immune response to prevent the entry of HIV into the mucosa, to inhibit HIV replication, and to clear HIV during and after transmission. We believe that stimulating mucosal immune responses, including neutralizing antibodies and cytotoxic T-cells, will be essential in the development of an effective AIDS vaccine.
Several neutralizing antibodies isolated from HIV-infected individuals can globally neutralize diverse subtypes of HIV. Administration of the neutralizing antibodies in HIV patients resulted in reductions in amount of viruses present in a given volume of blood. Thus, eliciting broadly neutralizing antibodies is a major goal in HIV vaccine development. Neutralizing antibody-based HIV vaccine can induce neutralizing antibodies, which block the viral entry into target cells. Virus specific cytotoxic T-cells have been detected in HIV-infected individuals. These cytotoxic T-cells have been found to control viral replication, resulting in slower progression of the AIDS disease. Cytotoxic T-cells-based HIV vaccine can induce HIV specific cytotoxic T-cells that eliminate HIV infected cells and control viral replication.
We are developing an HIV vaccine using our technology platform, papillomavirus pseudovirus. Our papillomavirus pseudovirus technology is designed to administer viral peptides, or fragments of viral proteins, or gene of interest, to induce an immune response. Three regions of the major structural protein of bovine papillomavirus can be replaced by unrelated viral peptides to generate chimeric virus-like particles, or particles that consist of parts from two or more proteins of diverse origins. We have introduced HIV gp41 fragments on bovine papillomavirus chimeric virus-like particles. HIV gp41 is one of two proteins located on the surface of HIV that facilitates the fusion of the viral membrane with the cellular membrane. If gp41 is bound by neutralizing antibodies, then viral membrane fusion may be blocked and HIV may be prevented from entering and infecting cells. Furthermore, we use the gp41-papillomavirus chimeric virus-like particles presenting HIV-1 gp41 fragments to package a plasmid encoding HIV-1 Gag. This vaccine is designed to be given orally and induce both mucosal and systemic HIV-1 neutralizing antibodies and cytotoxic T-cells to treat and prevent HIV-1 infection.
OVERVIEW OF NEED FOR HIV VACCINE IN CHINA, JAPAN AND THE UNITED STATES
CHINA
In October 2009, the Chinese Ministry of Health estimated that 740,000 people were living with HIV in China, including 102,323 AIDS patients. In 2009, the newly-infected AIDS cases were reported to be 48,000. These numbers have to be considered in the context of China's extremely large population which is estimated at around 1.3 billion.
According to the Joint United Nations Program on HIV/AIDS, or UNAIDS, and the World Health Organization, or WHO, and their report dated 2003, high rates of HIV prevalence has been found among injecting drug users - 35-80% in Xinjiang and 20% in Guangdong provinces of China - while a severe HIV epidemic has affected communities in China where unsafe blood-collection practices occurred in the 1990s. The HIV epidemic has spread to 31 provinces, autonomous regions and municipalities, and the number of reported HIV/AIDS cases has increased significantly in recent years.
The Chinese government has acted to curb the HIV/AIDS epidemic by prioritizing AIDS drug approval and establishing a policy, referred to as the Fast Track policy, to expedite the drug approval process. In 2001, the PRC Ministry of Health, the lead government agency responsible for addressing the HIV/AIDS epidemic, formed a Center for Disease Control and Prevention, adopted a five-year action plan, and increased government spending at the national and provincial levels. The funding for safety of national blood banks has been increased through a RMB 1.5 billion (about $181 million) government bond issue. As a comparison, from 1990 to 1995, annual spending by the central government on HIV/AIDS was estimated to be around US$500,000 per year and increased to approximately $1.8 million per year from 1996 to 2000. The Chinese government spent $499 million from 2005 to 2007 to curb the spread of AIDS/HIV. In 2008, the Chinese government increased its efforts by spending $228 million alone (RMB 1.55 billion) to fight HIV/AIDS. To date, we have not received any funding commitments from the Chinese government, nor have we applied for any government funding. However, we may apply for government funding in the future.
International and domestic programs have been undertaken to help prevent the spread of HIV in China and treat the patients infected by HIV. Grassroots organizations have created peer-education groups, and even small groups of independently organized college students are traveling to the countryside to teach prevention and raise awareness of HIV. International non-governmental organizations, foreign governments and the United Nations are all active in China and have invested funds and expertise in addressing the HIV epidemic. The Chinese government has expressed a willingness to work with the international community to create policies and programs that will prevent HIV/AIDS from spreading. On February 24, 2006, the State Council issued China’s 2006-2010 Plan for preventing and curbing the spread of HIV, in which the chief goal is to keep the number of people infected by 2010 lower than 1.5 million.
Chinese government policies currently emphasize treatment of HIV/AIDS by locally producing more affordable antiretroviral treatments and negotiating reduced prices for patented antiretrovirals produced by multinational pharmaceutical companies to create "cocktail" treatments to suppress HIV. The prices of imported and Chinese-produced medications are still well beyond the reach of the vast majority of Chinese who have HIV. As a result, China is encouraging HIV/AIDS research in order to develop effective HIV/AIDS vaccine and treatment drugs. China's SFDA has given priority to domestically produced anti-AIDS drugs during the examination and approval process, so as to expedite public access to HIV drugs.
JAPAN
According to UNAIDS statistics, among Japanese who are sexually active, the rate of condom use is 80%. Even so, the rate of AIDS infections has risen 14%, the same rate that it has been increasing in sub-Saharan Africa, although the total number of Japanese cases is so far comparatively low. Japan's health ministry reported that the number of people in Japan newly infected with the HIV virus and those contracting AIDS reached an all-time high of 1,545 in 2009.
UNAIDS estimated that approximately 9,600 people were living with AIDS/HIV in Japan in 2007. The Ministry of Health, Labor and Welfare is at the forefront of domestic policies while the Ministry of Foreign Affairs formulates foreign policies on HIV/AIDS, and no concerted national policy has yet been articulated to bridge the various efforts in the fight against the domestic and global spread of the epidemic. Much of Japan's present-day legal and regulatory framework, social welfare coverage, promotion of basic and clinical research and provision of medical care and treatment concerning HIV/AIDS in Japan has arisen out of the 1996 settlement agreed to by representatives of the HIV-infected hemophiliacs and the Ministry of Health, Labour and Welfare. The epidemic was first identified in Japan among hemophiliacs who had been infected through contaminated blood products. When the contamination was linked to the failure of pharmaceutical companies and government officials to exercise proper safeguards, scandal erupted. This scandal peaked in the mid-1990's and became the climactic point in the history of HIV/AIDS in Japan, but once the legal settlement was reached, the issue of AIDS appeared to have been put to rest in the eyes of the general public. Ever since, the level of interest in HIV/AIDS in Japanese society has remained low. The implementation of effective measures to promote prevention and awareness-raising regarding sexual transmission of the disease, in comparison to the 1996 settlement, lags far behind. Nonetheless, there is a growing demand for greater efforts to counter the rapid spread of the epidemic among populations vulnerable to HIV infection.
Fighting infectious diseases has been given priority in Japan's Official Development Assistance scheme, and the government has pledged a total of US$3 billion under the Okinawa Infectious Diseases Initiative for the five-year period from 2000 to 2004. Although Japan can boast considerable expertise in treating tuberculosis, polio, and parasitic diseases, the same cannot be said in the case of HIV/AIDS, an area where Japan's potential contribution is seen as relatively limited. Consequently, the Japanese government has resorted to taking a comprehensive approach to fight all infectious diseases rather than focusing solely on HIV/AIDS. In this sense, the Okinawa Infectious Diseases Initiative fails to give high priority to HIV/AIDS, including it as one of many targeted infectious and parasitic diseases. Indeed, projects under this initiative that are specifically related to HIV/AIDS have only accounted for 8 percent of total expenditures. There are approximately 100 community-based nongovernmental organizations involved in HIV/AIDS issues on the domestic scene, which are mostly run on a volunteer basis by medical experts or people living with HIV/AIDS. They have been effective in conducting prevention programs and offering care and support for population groups vulnerable to HIV infection and not adequately reached by public agencies. Private financial resources for NGOs involved in HIV/AIDS issues are severely limited. Grants from private foundations seldom go to support nongovernmental organizations engaged in grassroots activities. Meanwhile, although many foundations fund research and offer scholarships in the fields of health, medicine and welfare, none give top priority to HIV/AIDS.
On May 23, 2008, Prime Minister Fukuda announced Japan’s new financial commitment of US$560 million to the Global Fund to Fight AIDS, Tuberculosis and Malaria (the Global Fund). This new commitment will bring Japan’s total contribution to US$1.4 billion since the Global Fund was established in 2002.
UNITED STATES
The UNAIDS/WHO 2008 report on the AIDS epidemic reports that infections are on the rise in the U.S. An estimated 1.2 million people were living with HIV in the United States in 2007, an increase from 900,000 in 2001. UNAIDS/WHO estimated that around 22,000 people died of AIDS/HIV in 2007. An estimated 40,000 people have been infected with HIV each year in the U.S. in the last ten years, but the epidemic is now disproportionately found among African Americans, Hispanic Americans and women. African Americans are just over 13% of the U.S. population (according to the 2005 census), but account for almost half of new HIV cases diagnosed in the 33 states with long-term, confidential name-based HIV reporting.
The great majority of people living with HIV in high-income countries, including the U.S., in need of antiretroviral therapy have access to it, so they are staying healthy and surviving longer than infected people elsewhere. After the introduction of antiretroviral therapy in 1995 and 1996, AIDS-related deaths fell steeply in the U.S. until the late 1990s and then continued to decline more gradually-from 19,005 reported AIDS deaths in 1998 to 16,371 deaths in 2002. However, the rate of death due to AIDS among African Americans was over twice as high as that among whites in 2002. African Americans now have the poorest survival rates among people diagnosed with AIDS-probably reflecting late diagnoses, often after the disease has become symptomatic, and inadequate access to quality health care services.
Progress recently has been made in treating HIV infection. Current HIV therapies slow multiplication of the virus and delay the onset of AIDS. They do not cure HIV infection or AIDS. Considering costs, toxicities, difficulties in compliance with complex drug regimens and the development of resistance to these drugs, we believe such therapies will be available only to a small fraction of the HIV-infected population. Accordingly, we believe they will probably have a minimal impact on the worldwide epidemic. Vaccines are still the best method to treat and prevent HIV infections.
In the United States, the annual number of new HIV infections has decreased from a peak of more than 150,000 in the mid-1980s and has stabilized since the late 1990s at approximately 40,000. Populations of minority races and ethnicities are disproportionately affected by the HIV epidemic. To reduce further the incidence of HIV, CDC (US Centers for Disease Control and Prevention) announced the Advancing HIV Prevention (AHP) initiative in 2003. This initiative comprises four strategies: making HIV testing a routine part of medical care, implementing new models for diagnosing HIV infections outside medical settings, preventing new infections by working with HIV-infected persons and their partners, and further decreasing prenatal HIV transmission.
Much has been accomplished since the announcement of AHP in mid-2003. CDC was poised to accomplish even more during 2005 and afterwards. Many new policies and plans have been put in place and many new partners have been enlisted. The next few years are critical to demonstrating the effect this enhanced HIV prevention approach has on curbing the epidemic and helping us make new strides in reducing the number of annual new infections and improving the lives of those persons who are HIV positive.
DRUG APPORVAL PROCESS IN CHINA, THE UNITED STATES, AND JAPAN
China
The SFDA in China regulates the drug approval process. The process involves pre-clinical in vitro laboratory and in vivo animal testing for toxicity and pharmacological effects, and submission to the SFDA of an application for approval of clinical studies. The provincial branch of the SFDA conducts an on-site review and sampling process and accepts the application within a maximum of five days from the date of submission. The Medicine Review Center of the SFDA then reviews the technology and may request supplementary information from the applicant. The Medicine Review Center completes its review within at least 100 days and the SFDA then approves the clinical study or disapproves it. After the SFDA approves the application for clinical trials, the applicant then presents the clinical study plan and information concerning participating parties. The applicant may then proceed with human clinical trial Phases I, II and III. Estimated completion times for each phase includes six months for Phase I, 12 months for Phase II and 12 to 18 months for Phase III (for therapeutic vaccines), and longer time for preventive vaccines. The next step is to apply to the SFDA for new drug certificates and approval for production and sale. This step of the process takes approximately three to six months. The Fast Track policy allows qualified applicants to enter the drug approval process immediately without waiting in line for application. Thousands of new drugs ordinarily wait in line for approval each year in China. We estimate that the total drug approval process in China may take five to seven years for the preventive HIV vaccine.
We plan to work with National Institute for the Control of Pharmaceutical and Biological Products to establish QC control procedures for our vaccine and submit our application for approval of clinical study to the SFDA in the third quarter of 2010. As our vaccine technology will be the first one in its kind, it may take more time to establish the QC procedures and consequently the estimated date for submittal of our application for approval of clinical study will be delayed, and accordingly, the amount of time estimated for SFDA approval will be increased. Moreover, encouraging results of pre-clinical tests do not necessarily indicate positive results in clinical trials. The SFDA has substantial discretion in the drug approval process and may require us to conduct additional pre-clinical and clinical testing or to perform post-marketing studies. We estimate that we need at least additional US$ 6 million to bring the preventive HIV-PV Vaccine I to market in China. We also anticipate that it will take approximately five to seven years to conduct clinical trials of the preventive HIV-PV Vaccine I and test its efficacy and safety in humans. We focus on the commercialization of our vaccine candidates in China first because the estimated cost of bringing the vaccine to market is much lower in China than those in the United States or Japan.
United States
The principal regulatory authority with respect to prescription drug approvals in the U.S. is the FDA. The FDA administers and executes requirements covering the research, development, testing, approval, safety, effectiveness, manufacturing, labeling and marketing of prescription drugs. Drug safety and efficacy are evaluated pursuant to FDA regulations throughout the life of a product, and in particular at four distinct stages:
o preclinical safety assessment;
o pre-approval safety or efficacy assessment in humans, or Phase I, II and III clinical trials;
o safety and efficacy assessment during FDA regulatory review, which is usually completed in 10 to 12 months or six months for priority drugs; and
o post-marketing safety surveillance.
The results of the pre-clinical safety assessment together with manufacturing information and analytical data are submitted to the FDA as part of the Investigational New Drug Application, or IND, and are reviewed by the FDA before the commencement of clinical trials. Unless the FDA objects to an IND by placing the study on clinical hold, the IND will become effective 30 days following its receipt by the FDA. If the FDA does place the study on clinical hold, the sponsor must resolve all of the FDA's concerns before the study may proceed. The IND application process may become extremely costly and substantially delay the development of products.
Clinical trials for drug candidates are typically conducted in three sequential phases that may overlap. The Phase I clinical trial takes approximately one year to complete. Phase II clinical trial is estimated to take about two years, and the Phase III clinical trial program is estimated to take approximately three years. A New Drug Application, or NDA, is the formal step asking the FDA for marketing approval of a new drug in the U.S., which includes all animal and human testing and analyses of the data, as well as information about how the drug behaves in the body and how it is manufactured. After the NDA is received, the FDA has 60 days to decide whether to file it so that it can be reviewed. The FDA can refuse to file an application if it is incomplete. If the FDA files the NDA, it then evaluates the safety, effectiveness and manufacturing processes, which generally takes about 10 months, or six months for priority drugs.
The FDA permits accelerated approval of biological products that are intended to reduce or prevent serious or life-threatening conditions. Under these requirements, new drugs may be approved for use in humans based on evidence of effectiveness derived from appropriate animal studies and any additional supporting data. Products evaluated for effectiveness under these requirements are evaluated for safety under preexisting requirements for establishing the safety of new drug and biological products, including Phase I and Phase II clinical trials. Most drugs to treat HIV have been approved under accelerated approval provisions, with the company required to continue its studies after the drug is on the market. We intend to pursue FDA review of our vaccine candidates under these requirements, which would shorten the approval process. However, under accelerated approval rules, if studies do not confirm the initial results, the FDA can withdraw the approval.
The FDA may also withdraw the product approval if compliance with pre- and post-market regulatory standards is not maintained or if problems occur after the product reaches the marketplace. In addition, the FDA may require post-marketing studies to monitor the effect of approved products, and may limit further marketing of the product based on the results of these post-market studies. The FDA has broad post-market regulatory and enforcement powers, including the ability to levy fines and civil and criminal penalties, suspend or delay issuance of approvals, seize or recall products, and withdraw approvals. Foreign regulatory bodies also enforce regulatory requirements. We estimate that it will cost approximately $300 million to commercialize our HIV Vaccine (HIV-PV vaccine I) in the United States.
Japan
Japanese regulatory authorities recognize clinical data developed outside of Japan. However, we will face two particular challenges that make the drug approval process sometimes difficult for drugs developed outside of Japan. First, the Japanese regulatory authorities request bridging studies to verify that foreign clinical data are applicable to Japanese patients. Second, Japanese regulatory authorities require the tests to determine appropriate dosages for Japanese patients to be conducted on Japanese patient volunteers. Due to these requirements, delays of two to three years in introducing a drug developed outside of Japan to the Japanese market are possible. In recent years, efforts have been made between the U.S. and Japan and countries in other regions to achieve shorter development and registration times for medicinal products by harmonizing the individual requirements of these three regions. The project is called the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH). For the foreseeable future, however, approval must be obtained separately in each market. The Japanese regulatory process for approval of new drugs is similar to the FDA approval process, and the estimated time needed to bring a new drug to market in each step of the process is substantially the same. Japan has a fast track program to accelerate approval of new drugs, but each case is considered differently. Accordingly, we cannot estimate the time needed to commercialize our products in Japan at this time. We anticipate that the cost to bring our HIV vaccine (HIV-PV Vaccine I) to market in Japan will be around US$200 million.
PRE-CLINICAL TESTING
The pre-clinical animal testing of our HIV vaccine (HIV-PV Vaccine I), was completed in China pursuant to agreements with the Beijing Institute of Radiation Medicine. We entered into an agreement with Beijing Institute of Radiation Medicine on May 6, 2004 to conduct the pre-clinical studies of safety and immunogenicity assessment of HIV-PV Vaccine I. These studies include acute toxicity test, chronic toxicity test, immunogenicity and immunological test, safety pharmacology and reproductive toxicity test. The information obtained from toxicity tests is generally useful for determining doses for additional studies, including Phase I clinical trials, providing preliminary identification of target organs of toxicity and, occasionally, revealing delayed toxicity. The term of this agreement was from May 6, 2004 to March 15, 2005, however the parties have agreed to continue the testing pursuant to the agreement. The aggregate amount for the testing is RMB 800,000 or US$96,734, under the terms of the agreement. As of December 31, 2009, we have paid all the aggregate fee of RMB 800,000 or US$96,734. Beijing Institute of Radiation Medicine also conducted biodistribution and integration studies for HIV-PV Vaccine I pursuant to an agreement that we entered into on May 12, 2004. Our aggregate fee for these tests pursuant to the agreement is RMB 200,000, or $24,184. As of December 31, 2009, the remaining commitment was RMB 40,000 or US$5,476. We have entered into confidentiality agreements with Beijing Institute of Radiation Medicine to protect our proprietary interests.
Beijing Institute of Radiation Medicine submitted to us the first part of the study report at the end of January 2006. The studies showed that the vaccine at low, medium and high doses did not have any side effects on the central nervous system, the cardiovascular system or the respiratory system of the animals. No significant differences on blood cells and serum biochemical parameters between pre- and post-treatment groups were observed within 14 days after treatment. We received the final complete result report in June 2006. Final results showed no toxicity was observed in the animals orally administered with the HIV vaccine. There is no indication that vaccine DNA integrates into host genome and passes through placenta barrier. The immunogenicity study in monkeys shows that the vaccine induces HIV-1 gp41-specific serum antibodies (IgG) and intestinal and vaginal antibodies (sIgA). The sera, intestinal and vaginal washings in the immunized animals neutralize HIV-1 primary isolate in vitro. The vaccine also induces HIV-1 Gag-specific T-cells in the vaccinated monkeys. We expect to submit the application for clinical studies to the SFDA in the third quarter of 2010.
THE MARKET FOR OUR HIV VACCINE
According to Datamonitor, the worldwide market for HIV/AIDS drugs is expected to increase from nearly $9.3 billion in 2007 to $15.1 billion by 2017. Although industrialized countries currently share a disproportion amount on spending related to HIV/AIDS, major international organizations, including the United Nations, have and may continue to provide funds to developing countries in order to effectively curb the spread of HIV/AIDS epidemic in these countries. The Global Fund to Fight AIDS, Tuberculosis and Malaria was created to increase resources to fight three of the world's most devastating diseases, and to direct those resources to areas of greatest need. Since its creation in 2002, the Global Fund has become the main source of finance for programs to fight AIDS, tuberculosis and malaria, with approved funding of US$ 11.4 billion for more than 550 programs in 136 countries. It provides a quarter of all international financing for AIDS globally, two-thirds for tuberculosis and three quarters for malaria.
The Chinese government has increased its resources to fighting HIV/AIDS including treatment to people living with HIV and additional resources for HIV prevention programs targeting vulnerable groups. The Chinese government spent $499 million from 2005 to 2007 to curb the spread of AIDS/HIV. In 2009, the Chinese government increased its efforts by spending $293 million alone (RMB 2.0 billion) to fight HIV/AIDS.
We anticipate that the initial market for our HIV vaccine will be primarily in China. To our knowledge, currently there is no effective HIV/AIDS vaccine commercially available either in China or other parts of the world. However, we estimate the size of this market to be at least $350 million per annum, based on the current HIV/AIDS population in China and the average cost of HIV/AIDS treatment available in China, which is currently growing at more than 20% per year.
B. COLON CANCER (CEA+) VACCINE
Carcinoembryonic antigen (CEA) is a 180-kDa cell surface glycoprotein extensively expressed in the majority of colon, rectal, stomach and pancreatic cancers, 70% of non-small cell lung cancers and 50% of breast cancers. Very low amounts of CEA can be expressed in normal adult colonic epithelia. Due to its unique expression pattern, it has been targeted as a tumor-associated antigen to induce CEA-specific antibodies, CD4+ T helper cells, and CD8+ cytotoxic T cells to treat CEA+ tumors.
Our colon cancer vaccine is a Papillomavirus Pseudovirus containing a plasmid encoding CEA that is to be given orally. Basically, we use the same technology platform co-invented by our Chairman and CEO, Dr. Liang Qiao, to make our colon cancer vaccine. We use bovine papillomavirus-like particles to package a plasmid encoding human CEA. Oral immunization in animals induces CEA-specific mucosal and systemic immune responses including intestinal CEA specific cytotoxic T-lymphocyte (CTL) responses. Importantly, this vaccine shows significant anti-tumor activities in a colon cancer model (CEA+Min+ mice).
We plan to start pre-clinical trial for our colon cancer vaccine in the second half of 2010 and we would like to complete it by the first half of 2011, and enter Phase I clinical trial in the second half of 2011. We expect that the clinical trials for this vaccine will take over three years to complete.
THE MARKET FOR OUR COLON CANCER VACCINE
Globally, colorectal cancer is the third leading cause of cancer in males and the fourth leading cause of cancer in females. More than 1.2 million cases of colon cancer are diagnosed worldwide each year with over 529,000 deaths, which demonstrates a substantial medical need. In the United States alone, colorectal cancer is the second most common cause of cancer, accounting for approximately 50,000 deaths and approximately 20% of all deaths from cancer. The frequency of colorectal cancer varies around the world. In countries where the people have adopted western diets, the incidence of colorectal cancer is increasing. According to the 2004 data from the National Program of Cancer Statistics (USCS), colon cancer was the fourth leading cancer-related death in the United States, and incidence was 149.5 per 100,000 population.
In China, the incidence is around 130,000-150,000 per year, and the mortality is around 60,000-90,000 per year according to the data released by the Chinese government. Most of the incidents occurred in middle to big cities, and the rate is increasing. We estimate that the potential market for our colon cancer vaccine candidate in China will be approximately $80 million per annum.
C. HPV (CERVICAL CANCER) VACCINE
Over 30 different types of HPV can be sexually transmitted and infect the genitals of both men and women. Cauliflower-like warts are the most commonly experienced consequence of infection with HPV. In most cases, the immune system clears the infection naturally, but in a small number of cases, and usually over many years, HPV can cause changes in the cells of the cervix, anus and rectum which can lead to cancer. Two types of HPV - types 16 and 18 - are considered particularly high-risk for the development of cancer and are present in about 70% of all cases of cervical cancer. Before cancer develops, precancerous lesions called cervical intraepithelial neoplasia (usually CIN for short) occur. The equivalent disease process for anal cancer begins with high-risk HPV infection and progresses through the three grades of precancerous lesions, known as anal intraepithelial neoplasia (AIN 1-3).
Our HPV vaccine candidate is an oral vaccine that will be used to prevent HPV types 16, 18, 31, 45 and 58 infection (cover up to 90% of HPV causing cervical cancer). Above all, more Chinese women are infected by HPV type 58 than women in western countries. Therefore, we believe that our HPV vaccine candidate will prevent more infections than the current two HPV vaccines in the market if successfully approved to market.
THE MARKET FOR OUR HPV VACCINE
Datamonitor sees a huge commercial opportunity in HPV vaccines, with annual sales of $1.4 billion, in teenage girls for the seven major markets by 2016 and a cumulative catch-up opportunity in women aged 13-26 that could add up to over $17 billion by 2016. According to the WHO report in 2003, 2.27 million women were affected by cervical cancer, and around 500,000 new cases were reported each year. The mortality rate is around 250,000 each year, and cervical cancer is the second leading cause of women cancer-related deaths. The increased rate of cervical cancer is about 2-3% each year, and the developing countries account for 80% of the incidents. China alone has accounted for one-third of the incidents and deaths of cervical cancer worldwide. We expect China to be a big potential market for our HPV vaccine if we are able to receive the related approvals from the SFDA. We estimate the annual market size for our HPV vaccine candidate will be around $120 million in China.
D. BOVINE SERUM
Bovine serum is used in research, production of pharmaceuticals, and production of veterinary medicines. Our production base is located in Huhhot, Inner Mongolia where there are significant amount of cows and, as a result, we have a cost-saving source to raw material. Since the bovine serum industry is fragmented in China, we are in a good position to secure more market share. The estimated annual market size for bovine serum in China is RMB 400-500 million.
E. CELL CULTURE MEDIUM
Our cell culture medium product is to be offered by our joint venture with JR Scientific, Inc. JR Scientific is an important Company in the manufacture of classical and custom cell culture media and sera products on a direct basis and under special OEM contracts with other suppliers. J R Scientific, Inc. was the first to provide the industry with large-scale powdered media, low protein serum-free hybridoma and insect cell culture media, and bulk liquid media transfer systems.
The unprecedented increase in demand for cell culture products is a direct result of the increased popularity of biopharmaceuticals. Recombinant proteins, monoclonal antibodies, and nucleic acid-based treatments are among fastest growing products. Indeed, their ability to target diseases and minimize side effects has meant they are now one of every four products launched.
Cultivated cell-based products rely on a medium consisting of media, sera, and reagents to keep cells nourished. For as long as there is growth in biopharmaceuticals, we can expect increased interest in culture products that are the foundation for these products.
The US$1.4 billion world market for cell culture products utilized in biomanufacturing, process development, and research is expanding at double-digit rates. Asian markets will continue to make a significant contribution to total sales. It is estimated that the annual market size for cell culture medium product in China is around RMB 400 million.
INTELLECTUAL PROPERTY
In April 2002, our wholly owned subsidiary, Bio-Bridge Science Corp., entered into an agreement with Loyola University Chicago for an exclusive license of our core technology related to papillomavirus pseudovius as a genetic vector and vaccine. The license is royalty-bearing, covers the countries of the U.S., Japan and PRC, and includes the right to grant sublicenses. This exclusive license gives us rights to all uses in all fields under the papillomavirus technology. The term of this license is perpetual or for the maximum period of time permitted by law, unless terminated pursuant to the terms of the license. We may terminate the license upon no earlier than 45 days and no later than 30 days notice to Loyola University. Loyola University of Chicago may terminate this agreement only if five years after U.S., Japanese and Chinese governments have granted permission for its use as a drug, Bio-Bridge has made no effort to market the product.
During the license term, we will pay to Loyola a royalty of 4% from the net profit for all uses of the licensed technology, including uses under sublicenses, reimbursement of expenditures and legal fees in the amount of $3,000 in granting the exclusive license for each country, and $50,000 in the event we are granted a permit of production under the licensed technology in these countries. To date, we have not generated any revenues from the sale of any products under development, or any revenues from sublicenses, and accordingly, no royalty is due under the agreement. We have reimbursed Loyola for expenditures and legal fees in an aggregate amount of $9,000 in connection with granting the exclusive license in each of the three countries. Since we have not been granted a permit of production in these countries, no payment of $50,000 is due under the agreement.
Under the license agreement with Loyola, we have the right to file patent applications and the right to initiate and control any actions concerning any claims of infringement. Dr. Liang Qiao has applied for patents related to the papillomavirus technology in China, Japan and the U.S. The patent was granted in China on July 16, 2003 under patent publication number CN 133338A for a term of 20 years. The U.S. Patent and Trademark Office (PTO) issued the patent for papilloma pseudovirus and preparation on April 12, 2005 under patent number 6,878,541 B2. U.S. patents generally have a term of 20 years from the date of filing. This patent is due to expire in 2022. In the biotechnology industry, it often takes several years from the date of filing of a patent application to the date of a patent issuance, often resulting in a shortened period of patent protection, which may adversely affect our ability to exclude competitors from our markets. The patent application in Japan is pending. On February 17, 2005, we filed a continuation application of the U.S. patent for broader protection of the technology than the issued patent. During 2006, all the claims in the second application were issued by the U.S. PTO. The second patent number is 7,205,126. Under the license agreement, Loyola owns the patents related to the papillomavirus technology. This license was followed by a second exclusive license agreement for the same technology platform between our wholly owned subsidiaries Bio-Bridge Science Corp. and Bio-Bridge Science (Beijing), effective as of June 2002. This sublicense covers the territory of mainland China and expires in June 2012. Under the terms of the sublicense, Bio-Bridge (Beijing) may use the technology at no charge and has the right to file patent applications and enforce its right to the technology. It is expected that the sublicense will be renewed at 2012 at no additional cost. Also, we were notified by the Japan Patent Office that our application for the patent in Japan has been allowed and we will be granted the patent after we pay the registration fee.
LABORATORY/LAND USE
On May 28, 2003, we entered into a land use agreement with Beijing Airport High-Tech Park Co. Ltd, or BTA, regarding the use of the 2.8 acres of land, on which we currently have our research laboratory to conduct the clinical trial of our HIV vaccine. This agreement expires in 2053. Under the Chinese law, there is no private ownership of land, and accordingly, we do not own this land. Land use rights can be purchased and sold under Chinese law.
Under the current Chinese law, our land use right may be extended for an additional 50 years for a one-time fee. We have paid the entire land use price to BTA pursuant to the agreement. The facility has 53,753 square feet of usable space.
COMPETITION
To our knowledge, currently there is no effective HIV vaccine commercially available to patients in the world. We are currently focused on the commercial development of an HIV vaccine. The pharmaceutical industry in which we participate is highly competitive. We face intense competition from a number of companies in the pharmaceutical industry, including Chiron Corp (now acquired by Novartis as a business unit), Merck & Co., Inc., Aventis Pasteur, among others. These companies are conducting or have completed Phase I or Phase II clinical trials of HIV vaccines. In addition, several of these companies and others are developing new drug therapies and other treatments that may mitigate the impact of the disease. In February 2004, Vaxgen announced that it failed the AIDS phase III clinical trial. Also, in September of 2007, Merck announced that its V520 vaccine had failed to prevent infection or to reduce the amount of the virus in the bloodstream.
There are currently two available HPV vaccines in the market - Merck’s Gardasil and GlaxoSmithKline’s Cervarix. Merck’s Gardasil was approved in 2006 in several countries. Gardasil is a quadrivalent, recombinant vaccine designed to reduce infection due to HPV types 6, 11, 16 and 18 and trials have already shown it to be effective for girls and women aged 9 to 26 years in the prevention of cervical cancer, precancerous or dysplastic lesions and genital warts. As of end of 2009, GlaxoSmithKline had won approval from the European Commission for its cervical cancer vaccine, Cervarix, and it was cleared for sale in nearly 100 countries and will compete with Gardasil. Cervarix is aimed to reduce infections due to HPV strains 16 and 18. The biggest difference between the two vaccines is that Cervarix is specifically designed to target two types of the virus, types 16 and 18, while Gardasil targets four types, two of which induce cancer and the other two induce genital warts.
Our HPV vaccine candidate is an oral vaccine that will be used to prevent HPV types 16, 18, 31, 45 and 58 infection (cover up to 90% of HPV causing cervical cancer). More Chinese women are infected by HPV type 58 than women in western countries. Therefore, our vaccine will prevent more HPV infections than Gardasil. Although Gardasil and Cervarix are approved in several countries to sell, they have not yet been approved in China. Also we believe that our vaccine price and production cost will be lower than international competitors, and thus, we believe our future HPV vaccine will be very competitive if we succeed in commercializing it.
To our knowledge, currently there is no effective colon cancer vaccine commercially available in the market worldwide. We have some competitors in this field, such as Sanofi Pasteur’s ALVAC, Antigenics’s Oncophage, and Sinofi Aventis/Oxford Biomedica’s Trovax. Of these, Trovax is in Phase III clinical trials.
These competitors are all substantially larger and more established than Bio-Bridge and have significantly greater financial resources and experience in developing and marketing drugs than we do. Companies in our industry compete based on technological leadership and superiority, speed to market, improved patient outcomes, effective marketing and distribution and acceptance by medical professionals. Although companies are developing competing vaccines, we believe that our technology is proprietary and provides competitive advantage. We intend to explore potential collaborative relationships with Chinese pharmaceutical companies and other companies with vaccine sales experience to market our products. By developing such strategic relationships, we believe that we can enhance our competitive position in this competitive marketplace.
ENVIRONMENTAL REGULATION
The construction of our laboratory facility in China is subject to extensive inspection and evaluation by regulatory agencies in China, including Beijing Tianzhu Export Processing Zone Management Commission and Beijing Municipal Planning Commission. We retained the Environmental Impact Assessment Center at China Agriculture University to conduct the environmental impact assessment of the project as required by Chinese law. The environmental assessments were provided with regard to the construction of the laboratory facility. These assessments found no potential environmental hazard resulting from our research and development efforts. The assessment confirms our compliance with the environmental regulations and was accepted by the EPA of Beijing Municipal Government. Also, Bio-Bridge JRS has also passed the environmental impact assessment by the local government for the facility renovation.
SCIENTIFIC ADVISORY BOARD
Our Scientific Advisory Board provides specific expertise in areas of research and development relevant to our business and the members discuss with our management personnel from time to time about our present and long-term research and development activities. Scientific Advisory Board members include:
o Dr. Mitchell Kronenberg PhD, an internationally recognized leading expert on NKT cells and mucosal immunology. He currently is the Scientific Director and President of La Jolla Institute for Allergy & Immunology (LIAI) and Adjunct Professor of Biology at the University of California, San Diego. He has over 230 highly cited publications, many in the most influential scientific journals. He is currently on the Finance Committee of the American Association of Immunologists and serves as the Deputy Editor for the Journal of Immunology. He was named a Roy and Robert Kroc Distinguished Visiting Professor of Immunology and Medicine by the University of California, Davis in 2000, and was a Burroughs Wellcome Fund Visiting Professor at Harvard University in 2002.
o Katherine L. Knight, PhD, Professor and Chairperson, Department of Microbiology and Immunology, Stritch School of Medicine, Loyola University Chicago. She is an internationally recognized immunologist with over 125 publications. She has served as President of American Association of Immunologists. Dr. Knight's research has been supported by the National Institutes of Health and other national agencies.
EMPLOYEES
We currently have 68 employees, including four in clinical study preparatory work, six in research and development, eight in management/administration, one in regulatory affairs, one in public relations, 20 in manufacturing and general affairs and six in sales.
EXECUTIVE OFFICERS OF THE REGISTRANT
Mr. Wenhui Qiao and Dr. Liang Qiao are brothers. There are no other family relationships among the executive officers and directors.
Our executive officers are appointed by our board of directors and serve at the board's discretion. There is no arrangement or understanding between any of our directors or executive officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current board of directors. There are also no arrangements, agreements or understandings to our knowledge between non-management stockholders that may directly or indirectly participate in or influence the management of our affairs. None of our directors or executive officers has, during the past five years:
o had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time,
o been convicted in a criminal proceeding and none of our directors or executive officers is subject to a pending criminal proceeding,
o been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities, or
o been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
BUSINESS EXPERIENCE
DR. LIANG QIAO is one of our co-founders and has served as our chairman of the board of directors, chief executive officer and secretary since October 2004. Since February 2002, Dr. Qiao has served as director of our wholly owned subsidiary Bio-Bridge Science Corp. and has served as its chief executive officer and chairman of the board since May 2004. Since July 2009, Dr. Qiao has served as a Professor at Loyola University Chicago, Strich School of Medicine. From July 2000 to June 2009, Dr. Qiao was an Associate Professor and from May 1994 to June 2000, Dr. Qiao was an Assistant Professor at Loyola University Chicago, Strich School of Medicine. Dr. Qiao also worked as a research scholar at the German Cancer Research Center in Heidelberg, Germany. Dr. Qiao received a B.M. from Henan Medical University in China and an M.D. from Lausanne University in Switzerland.
MR. WENHUI QIAO is one of our co-founders and has served as our president and director since October 2004. Mr. Qiao has served as director of Bio-Bridge Science Corp. since February 2002 and its president since May 2004. From July 1999 to December 2001, Mr. Qiao served as chief executive officer of Dongfang Huaying Anti- Radiation Company, which was located in Henan Province, China. From 1994 to 1998, he served as the chief representative for Henan Province in Japan. Mr. Qiao received a B.A. in Economics from Doshisha University in Japan.
MR. CHUEN HUEI (KEVIN) LEE, CFA, FRM, has served as our chief financial officer since October 2004. Mr. Lee also has served as chief financial officer of our Bio-Bridge Science Corp. subsidiary since May 2004. From October 2001 to June 2004, he served as Senior Vice President of China Metropolitan Ventures in Beijing and Shanghai, China. From February 2000 to August 2001, Mr. Lee served as Senior Manager of Grand Cathay Securities Corporation in Taipei, Taiwan. From September 1998 to February 2000, he was the Manager of American Express Bank's Taipei treasury department. Mr. Lee received a B.A. from National Taiwan University and an M.B.A. from Columbia University. He is a chartered financial analyst (CFA) charter holder and a certified financial risk manager (FRM).
MR. TOSHIHIRO KOMOIKE has served as our director since October 2004. Mr. Komoike also has served as director of our Bio-Bridge Science Corp. subsidiary since May 2004. From 1998 to 2004, Mr. Komoike served as Senior Manager of Sumisho Textile Company in Japan. He received a degree in Commerce from Kansai University in Japan. He is a vice president and our Japan representative.
MR. ISAO ARIMOTO is one of our co-founders and has served as our vice president and director since October 2004. Mr. Arimoto also has served as vice president of our Bio-Bridge Science Corp. subsidiary since May 2004 and its director since February 2002. Since February 1975, Mr. Arimoto has served as chief executive officer of Chugoko-Knit Company in Japan. He has 30 years of business experience as an entrepreneur in Japan and China.
MR. SHYH-JING (PHILIP) CHIANG has served as our director since October 2004. Mr. Chiang also has served as director of our Bio-Bridge Science Corp. subsidiary since February 2002. Since June2008, Mr. Chiang has served as investment banking head of Daiwa Securities SMBC-Cathay Co. in Taipei, Taiwan. From June 2004 to May 2008, Mr. Chiang served as head of investment banking at Nomura Securities in Taipei, Taiwan. From March 2004 to May 2004, he served as chief representative of Rabobank's office in Taipei. From June 2001 to May 2004, he was director of investment banking at ING Baring in Taipei. Mr. Chiang served as executive vice president of Grand Cathay Securities from August 2000 to June 2001. From September 1996 to April 2000, he served as vice president of Credit Agricole Indosuez. Mr. Chiang received a B.A. from Tunghai University in Taiwan and an M.B.A. from the University of Missouri.
MR. TREVOR ROY was a graduate of the University of Sydney. Mr. Roy's initial career was in Education where he was a teacher and administrator at both High School and Tertiary levels. Then in a business career spanning 30 years, Mr. Roy, with his investment and management experience, both in his home country of Australia and internationally, has been in a wide range of industries including Rural/agricultural, Theatrical, Marketing and Promotions, Food manufacturing and distribution, Medical, and Telephony and communications. For the past 18 years, Mr. Roy has been CEO (now Chairman) of the Creata Group. He has been instrumental in establishing its business as a global provider of marketing and promotional programs in 18 offices in 12 countries.
Mr. CHEUNG HIN SHUN ANTHONY Mr. Cheung's early career was in Finance, Accounting and Auditing with John B P Byrne & Co., now Grant Thornton in Hong Kong. This formed the foundation of a successful business management and investment career over 25 years that now includes: ownership of manufacturing facilities in Hong Kong and China (Dongguan) with in excess of 10,000 employees producing over 200 million consumer products annually; ownership of a Class 2 hospital in China (Fujian); and (commercial) real estate investments and developments in Hong Kong, China and the United States.
ITEM 1A
ITEM 1A RISK FACTORS
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT OF $11,678,908 AS OF DECEMBER 31, 2009, AND WE MAY NEVER ACHIEVE PROFITABILITY.
We have yet to establish any history of profitable operations. We had insignificant revenues since our inception in February 2002 until we acquired Bo-Bridge XBB on July 31, 2008. Also, we estimate it will be in the second or third quarter of 2010 before revenues from our new joint venture, Bio-Bridge JRS, will occur and it is not expected to result in positive cash flows on a consolidated basis in the near future. We incurred net losses of $415,476 in 2009 and $3,538,899 in 2008. These losses have resulted principally from research and development and general and administrative expenses. To date, we have engaged primarily in research, development and pre-clinical activities of our vaccine candidates. We anticipate that we will continue to incur substantial operating losses based on projected research and development and other operating costs for an indefinite period of time due to the significant costs associated with the development of our products. Even though we acquired Bio-Bridge XBB and the new joint venture of Bio-Bridge JRS, the contribution of net incomes and cash flows from these two subsidiaries is still not significant enough to support our operations for vaccine development. Our profitability will still require the successful development and commercialization of our HIV-PV Vaccine I, HPV vaccine, colon cancer vaccine and other product candidates. We may not be able to successfully develop and commercialize our vaccine candidates and generate enough revenues and net incomes to achieve profitability.
OUR INDEPENDENT AUDITORS HAVE ISSUED A REPORT QUESTIONING OUR ABILITY TO CONTINUE AS A GOING CONCERN.
The report of our independent auditors contained in our financial statements for the years ended December 31, 2009 and 2008 includes a paragraph that explains that we have incurred substantial losses. This report raises substantial doubt about our ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. We urge potential investors to review this report before making a decision to invest in Bio-Bridge Science.
WE NEED TO RAISE MORE FUNDS FOR OUR DEVELOPMENT PLANS. IF WE ARE UNABLE TO RAISE MORE FUNDS, OUR DEVELOPMENT PLANS MAY BE POSTPONED OR CURTAILED.
We must raise more money to fund the cost of developing, testing and obtaining regulatory approval of our vaccine candidates. To date, we have funded our operations through equity offerings. We will continue to raise money through public or private sales of our securities, debt financing or short-term bank loans, or a combination of the foregoing.
Although Bio-Bridge XBB provides us with some cash flows, we will need to secure funding of our capital needs to develop and commercialize our core vaccine candidates. We may still need more capital to fully implement our business, operating and development plans. However, additional funding may not be available on favorable terms to us, or at all. To the extent that money is raised through the sale of our securities, the issuance of those securities could result in dilution to our existing shareholders. If we raise money through debt financing or bank loans, we may be required to secure the financing with all or part of our business assets, which could be sold or retained by the creditor should we default in our payment obligations. If we fail to raise sufficient funds, we would have to curtail or cease operations.
AS A COMPANY IN THE EARLY STAGE OF DEVELOPMENT WITH AN UNPROVEN BUSINESS STRATEGY, OUR LIMITED HISTORY OF OPERATIONS MAKES EVALUATION OF OUR BUSINESS AND FUTURE PROSPECTS DIFFICULT.
We have had a limited operating history and our main vaccine candidates are still in development. Since our formation in February 2002, we have not yet demonstrated any ability to commercialize our vaccine candidates. As a result, it is difficult to evaluate our prospects, and our future success is more uncertain than if we had a longer or more proven history of operations.
OUR INTELLECTUAL PROPERTY RIGHTS MAY NOT PROVIDE MEANINGFUL PROTECTION FOR OUR PRODUCTS UNDER DEVELOPMENT, WHICH COULD ENABLE THIRD PARTIES TO USE OUR TECHNOLOGY, OR VERY SIMILAR TECHNOLOGY, AND COULD PREVENT US FROM DEVELOPING OR MARKETING OUR PRODUCT CANDIDATES.
We rely on patent and trade secret laws to limit the ability of others to compete with us using the same or similar technology in the U.S. and other countries. However, as described below, these laws afford only limited protection and may not adequately protect our rights to the extent necessary to sustain any competitive advantage we may have. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the U.S., and many companies have encountered significant problems in protecting their proprietary rights abroad. These problems can be caused by the absence of adequate rules and methods for defending and enforcing intellectual property rights.
We will be able to protect our technology from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are effectively maintained as trade secrets. The patent positions of companies developing drugs for pharmaceutical, biotechnology and biomedical industries, including our patent position, generally are uncertain and involve complex legal and factual questions, particularly as to questions concerning the enforceability of such patents against alleged infringement. The biotechnology patent situation outside the U.S. is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the U.S. and other countries may therefore diminish the value of our intellectual property. Moreover, our patent and patent applications may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. We also face the risk that others may independently develop similar or alternative technologies or design around our patented technologies.
We control a license with Loyola University of Chicago through an issued patent. However, the patent on which we rely may be challenged and invalidated. The patent that we have licensed from Loyola covering our technology was issued by the U.S. Patent and Trademark Office on April 12, 2005 and has a term of 20 years from the date of filing. This patent will not expire until 2022. We filed a continuation application of this issued patent with the Patent and Trademark Office to seek broader protection on our technology than the protection provided by the original patent, and the claims were all allowed. The patent in China was issued by the State Intellectual Property Office in July 2003. On March 1, 2010, we received a notice of allowance from the Japan Patent Office that we will be granted the patent in Japan after we submit the registration fee.
We have taken measures to protect our proprietary information. These measures, however, may not provide adequate protection of our trade secrets or other proprietary information. We seek to protect our proprietary information by entering into confidentiality agreements with employees, collaborators and consultants. Nonetheless, employees, collaborators or consultants may still disclose our proprietary information, and we may not be able to protect our trade secrets in a meaningful way. If we lose employees, we may not be able to prevent the disclosure or use of our technical knowledge or other trade secrets by those former employees despite the existence of nondisclosure and confidentiality agreements and other contractual restrictions to protect our proprietary technology. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets.
OUR RIGHTS TO THE USE OF TECHNOLOGY LICENSED TO US BY A THIRD PARTY ARE NOT WITHIN OUR CONTROL AND WITHOUT THIS TECHNOLOGY OUR PRODUCTS UNDER DEVELOPMENT MAY NOT BE SUCCESSFUL AND OUR BUSINESS PROSPECTS COULD BE HARMED.
We rely on a license to use technologies that are material to our business. We do not own the patents that underlie this license. Our rights to use these technologies and employ the inventions claimed in the licensed patents are subject to the continuation of and compliance with the terms of that license and the continued validity of these patents. Our license from Loyola University Chicago provides us with exclusive rights within the United States, Japan and China, including the right to enforce the patents licensed to us, but the scope of our rights under this license may become subject to dispute by our licensor or third parties. This license contains due diligence obligations, as well as provisions that allow the licensor to terminate the license upon specific conditions.
IF WE ARE UNABLE TO COMMERCIALIZE OUR VACCINE CANDIDATES, WE MAY BE UNABLE TO CONTINUE OPERATIONS.
Although we have other vaccine candidates, HIV-PV Vaccine I is our first product candidate. We do not know whether the HIV-PV Vaccine I will be effective in preventing or treating HIV infection. Although our research and pre-clinical trial have indicated that the HIV-PV Vaccine I technology contains a pseudovirus that induces both mucosal and systemic neutralizing antibodies and cytotoxic T-cell responses that may be used to prevent and treat HIV infection, other elements may be necessary to develop an effective vaccine. Also, we do not know whether other vaccine candidates, such as HPV vaccine or colon cancer vaccine, will be effective or not. Our success will depend primarily on the success of our vaccine candidates. In particular, we must be able to:
o complete pre-clinical trials on laboratory animals and obtain regulatory approvals to proceed with clinical trials of vaccine candidates;
o establish the safety, purity, potency and efficacy of vaccine candidates in humans;
o obtain regulatory approvals for our vaccine candidates; and
o successfully commercialize vaccine candidates.
WE MAY NOT BE ABLE TO OBTAIN REGULATORY APPROVAL TO MARKET OUR PRODUCTS IN CHINA, THE UNITED STATES OR JAPAN ON A TIMELY BASIS, OR AT ALL, TO COMMERCIALIZE OUR VACCINE CANDIDATES.
Clinical testing is a long, expensive and uncertain process. If the Chinese government approves our application for clinical testing, we cannot assure you that the data collected from our clinical trials will be sufficient to support approval of HIV-PV Vaccine I or other vaccine candidates by the SFDA or regulatory authorities in Japan and the United States, that the clinical trials will be completed on schedule or, even if the clinical trials are successfully completed and on schedule, that the SFDA or other regulatory authorities in the United States or Japan will ultimately approve HIV-PV Vaccine I or other vaccines for commercial sale.
To gain SFDA regulatory approval for the sale of HIV PV Vaccine I or other vaccine candidates in China, we believe, based on the SFDA's fast track policy that we will need to complete the following five steps:
o pre-clinical laboratory and animal testing;
o the submission to the SFDA of an application for approval of clinical study, which must be effective before clinical trials may commence;
o adequate Phase I, II and III clinical studies to establish the safety, purity and potency of the product candidate and demonstrate how it behaves in the human body;
o obtain Drug Production Quality Control Procedure or GMP certification;
o the submission of an application to the SFDA for Drug Registration Document, and obtain new drug approval certificate; and
o sales for pre-production drugs in the market and phase IV clinical study.
We estimate that the total drug approval process in China may take over three years for therapeutic vaccine and approximately five to seven years for preventative HIV PV Vaccine I. Also, we expect it would take over three years for HPV vaccine and colon cancer vaccine to finish the approval process. However, the SFDA has substantial discretion in the drug approval process and may require us to conduct additional pre-clinical and clinical testing or to perform post-marketing studies. The approval process may also be delayed due to changes in government regulation, future legislation or administrative action or changes in SFDA policy that occur prior to or during our regulatory review. Delays or failure to obtain regulatory approvals may:
o delay or prevent commercialization of, and our ability to derive product revenues from, our product candidates;
o impose significant costs on us to comply with such laws and regulations; and
o diminish any competitive advantage the we may otherwise have.
In the United States and Japan, we must receive approval from the appropriate regulatory authorities before we can commercialize our vaccine candidates. We anticipate that the regulatory approval to market our vaccine candidates in the United States and Japan will vary and may differ from that required by the SFDA. We may incur significant costs to comply with government regulations in the future, and such regulations may have a material adverse effect on us.
DELAY IN COMMENCEMENT AND COMPLETION OF OUR CLINICAL TRIALS COULD JEOPARDIZE OUR ABILITY TO OBTAIN REGULATORY APPROVAL TO MARKET OUR VACCINE CANDIDATES IN CHINA, THE UNITED STATES AND JAPAN ON A TIMELY BASIS.
Our clinical trials could be delayed for a variety of reasons, including:
o availability of funds;
o unforeseen safety issues;
o determination of dosing issues;
o lower-than-anticipated retention rate of volunteers in the trial;
o serious adverse events related to the vaccine;
o inability to monitor patients adequately during or after treatment; or
o different interpretations of our pre-clinical and clinical data, which can lead initially to inconclusive results.
Our inability to commence or complete our clinical trials in a timely manner could jeopardize our ability to obtain regulatory approval.
THE RESULTS OF OUR CLINICAL TRIALS MAY NOT SUPPORT OUR VACCINE CANDIDATE CLAIMS.
Even if our clinical trials are commenced and completed as planned, their results may not support our vaccine candidate claims. Success in pre-clinical testing and early phases of clinical trials does not ensure that later phases of clinical trials will be successful, and the results of later phases of clinical trials may not replicate the results of prior clinical trials and pre-clinical testing. The clinical trial process may fail to demonstrate that our vaccine candidates are safe for humans and effective for indicated uses. This failure would cause us to abandon a vaccine candidate and may delay or prevent development of other vaccine candidates.
ALTHOUGH OUR LABORATORY AND MANUFACTURING FACILITY IN CHINA IS COMPLETED, WE MAY NOT BE SUCCESSFUL AT MANUFACTURING OR SUPPLYING OUR VACCINE CANDIDATES IN NECESSARY QUANTITIES, OR AT ALL.
In May 2003, we purchased a right to use for 50 years land located in the Shunyi District of Beijing, China for the purpose of building and operating a laboratory and manufacturing facility in China. To date, we have completed the construction of the laboratory and manufacturing facility. However, if:
o we are unable to raise the necessary funding for purchasing equipment; or
o approval of the facility in compliance with GMP requirements is not obtained
We will be unable to proceed to produce our vaccine candidates. Our facility may not pass domestic or foreign regulatory approvals or be able to manufacture our vaccine candidates in commercial quantities, or at all, or we may not be able to manufacture our vaccine candidates on a cost-effective basis.
WE DEPEND ON KEY MANAGEMENT EMPLOYEES FOR OUR FUTURE SUCCESS. IF WE LOSE OUR KEY MANAGEMENT EMPLOYEES, OUR ABILITY TO OBTAIN FINANCING, DEVELOP OUR PRODUCT CANDIDATES, CONDUCT CLINICAL TRIALS OR EXECUTE OUR BUSINESS STRATEGY COULD BE SUBSTANTIALLY HARMED AND THE VALUE OF THE STOCK YOU OWN COULD BE ADVERSELY AFFECTED.
Our future success is substantially dependent on the efforts of our senior management and scientific staff, particularly our chief executive officer, Liang Qiao, MD. These individuals have played a critical role in developing the vaccine and conducting pre-clinical trials, raising financing and negotiating business development opportunities. The loss of the services of these key members of our senior management and scientific staff may prevent us from achieving our business objectives, and the value of our stock you own could be adversely affected. We do not have employment agreements with our senior management. We do not maintain key person life insurance for any of our key personnel.
WE CURRENTLY HAVE NO MANUFACTURING FACILITY AND NO MANUFACTURING EXPERIENCE.
We have no manufacturing experience. Pre-clinical study of the vaccine on laboratory animals is being conducted through the collaboration between us and Loyola University of Chicago and Beijing Institute of Radiation Medicine, respectively. We have completed most of our manufacturing facility in China to produce HIV-PV Vaccine I for clinical trials on a commercial scale, and are in the process of purchasing equipment to allow us to manufacture our vaccine samples. However, we may not have adequate manufacturing capacity to produce HIV-PV Vaccine I on a commercial scale. Our lack of manufacturing experience could delay commercialization of our vaccine candidates, entail higher costs and result in our being unable to effectively sell our products.
WE HAVE NO EXPERIENCE IN MARKETING, SELLING OR DISTRIBUTING PRODUCTS AND NO INTERNAL CAPABILITY TO DO SO. OUR LACK OF SALES AND MARKETING PERSONNEL AND DISTRIBUTION RELATIONSHIPS MAY IMPAIR OUR ABILITY TO GENERATE REVENUES.
We have no sales, marketing or distribution capability. We do not anticipate having the resources in the foreseeable future to allocate to the sales and marketing of our product candidates under development. Our future success depends, in part, on our ability to enter into and maintain such collaborative relationships, the collaborator's strategic interest in the products under development and such collaborator's ability to successfully market and sell any such products. We intend to pursue collaborative arrangements regarding the sales, marketing and distribution of our products, however, we may not be able to establish marketing or distribution arrangements with collaborators in a timely manner or on favorable terms, or at all.
WE FACE COMPETITION FROM SEVERAL COMPANIES WITH GREATER FINANCIAL, PERSONNEL AND RESEARCH AND DEVELOPMENT RESOURCES THAN OURS, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
The goal of developing an HIV vaccine, HPV vaccine and colon cancer vaccine is an area of interest to competitors, and several companies with substantially greater financial, personnel and research and development resources than ours have announced that they are trying to develop vaccine in our area and are planning, conducting or have completed some stages of clinical trials. Although our research has indicated that HIV-PV Vaccine I contains a pseudovirus that induces both mucosal and systemic neutralizing antibodies and cytotoxic T-cells that may be used to prevent and treat HIV infection, other elements may be necessary to develop an effective vaccine, and several of our competitors are working to develop vaccines that affect the immune system differently. In addition, several of these companies are working to develop new drug cocktails and other treatments that may mitigate the impact of the disease. Even if we commence and complete our clinical trials, obtain SFDA and other required regulatory approvals and commercialize HIV-PV Vaccine I, our competitors may develop vaccines or treatments that are as or more effective, or less complex or less expensive to produce, than HIV-PV Vaccine I. Also, Merck’s Gardasil and GSK’s Cervarix have been approved in some countries to prevent cervical cancer, and this may increase our difficulty to market our HPV vaccine if approved since these competitors have first mover advantage.
ADVERSE PUBLICITY REGARDING THE SAFETY OR SIDE EFFECTS OF OUR VACCINES COULD HARM OUR BUSINESS AND CAUSE OUR STOCK PRICE TO FALL.
There may be potential side effects or safety concerns in connection with clinical trials of vaccine candidates. If our studies or other researchers' studies were to raise or substantiate concerns over the safety or side effects of our vaccine candidates or vaccine development efforts generally, our reputation and public support for our future clinical trials could be harmed, which would harm our business and could cause our stock price to fall.
OUR USE OF HAZARDOUS MATERIALS, CHEMICALS AND VIRUSES REQUIRE US TO COMPLY WITH REGULATORY REQUIREMENTS AND EXPOSES US TO POTENTIAL LIABILITIES.
Our research and development activities involve the controlled use of hazardous materials, chemicals and viruses. We are subject to federal, state, local and foreign laws governing the use, manufacture, storage, handling and disposal of such materials. Although we believe that our safety procedures for the use, manufacture, storage, handling and disposal of such materials comply with the standards prescribed by the federal, state, local and foreign regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident, we could be held liable for significant damages or fines. These damages could exceed our resources and any applicable insurance coverage. In addition, we may be required to incur significant costs to comply with regulatory requirements in the future.
WE MAY BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS AND INCUR SUBSTANTIAL LIABILITIES, WHICH COULD REDUCE DEMAND FOR HIV-PV VACCINE I OR LIMIT COMMERCIALIZATION OF OUR VACCINE CANDIDATES.
We will face an inherent risk of exposure to product liability suits in connection with vaccine candidates, vaccines to be tested in human clinical trials and products that may be sold commercially. We may become subject to a product liability suit if our vaccine candidates cause injury, or if vaccinated individuals subsequently become infected with HIV or cancers. We currently do not carry clinical trial insurance or product liability insurance. Although we intend to obtain clinical trial insurance prior to commencement of any clinical trials, we may not be able to obtain insurance at a reasonable cost, if at all. Regardless of merit or eventual outcome, product liability claims may result in decreased demand for a vaccine, injury to our reputation, withdrawal of clinical trial volunteers and loss of revenues.
POLITICAL OR SOCIAL FACTORS MAY DELAY OR REDUCE REVENUES BY DELAYING OR IMPAIRING OUR ABILITY TO MARKET OUR VACCINES.
Products developed for use in addressing the HIV/AIDS epidemic, cervical cancer or colon cancer have been, and will continue to be, subject to competing and changing political and social pressures. The political and social response to the HIV/AIDS epidemic, cervical cancer, and colon cancer have been highly charged and unpredictable. Political or social pressures may delay or cause resistance to bringing our product to market or limit pricing of our product.
RISKS RELATED WITH OWNERSHIP OF OUR SECURITIES
THE TRADING PRICE OF OUR COMMON STOCK MAY DECREASE DUE TO FACTORS BEYOND OUR CONTROL. THIS MAY RESULT IN SUBSTANTIAL LOSSES TO INVESTORS IF THEY ARE UNABLE TO SELL THEIR SHARES AT OR ABOVE THEIR PURCHASE PRICE.
The trading price of our common stock is subject to significant fluctuations due to a number of factors, including:
o our status as a company with a limited operating history and no revenues to date, which may make risk-averse investors more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the shares of a seasoned issuer in the event of negative news or lack of progress;
o announcements of new products by us or our competitors;
o the timing and development of our products;
o general and industry-specific economic conditions;
o actual or anticipated fluctuations in our operating results;
o our capital commitments; and
o the loss of any of our key management personnel.
In addition, the financial markets have experienced extreme price and volume fluctuations. The market prices of the securities of biotechnology companies, particularly companies like ours without consistent revenues and earnings, have been highly volatile and may continue to be highly volatile in the future, some of which may be unrelated to the operating performance of particular companies. The sale or attempted sale of a large amount of common stock into the market may also have a significant impact on the trading price of our common stock. Many of these factors are beyond our control and may decrease the market price of our common stock, regardless of our operating performance. In the past, securities class action litigation has often been brought against companies that experience volatility in the market price of their securities. Whether or not meritorious, litigation brought against us could result in substantial costs, divert management's attention and resources and harm our financial condition and results of operations.
WE DO NOT ANTICIPATE PAYING ANY CASH DIVIDENDS IN THE FORESEEABLE FUTURE, WHICH MAY REDUCE YOUR RETURN ON AN INVESTMENT IN OUR COMMON STOCK.
We have never had earnings, but we plan to use any future earnings to fund our operations. We do not plan to pay any cash dividends in the foreseeable future. We cannot guarantee that we will, at any time, generate sufficient surplus cash that would be available for distribution as a dividend to the holders of our common stock. Therefore, any return on your investment would derive from an increase in the price of our stock, which may or may not occur.
WE MAY RAISE ADDITIONAL CAPITAL THROUGH A SECURITIES OFFERING THAT WOULD DILUTE YOUR OWNERSHIP INTEREST AND VOTING RIGHTS.
Our certificate of incorporation currently authorizes our board of directors to issue up to 100,000,000 shares of common stock and 5,000,000 shares of preferred stock. On March 3, 2010, our board of directors will be entitled to issue up to 59,122,155 additional common shares and 1,000,000 additional preferred shares. The power of the board of directors to issue shares of common stock, preferred stock or warrants or options to purchase shares of our stock is generally not subject to shareholder approval.
We require substantial capital to fund our business. If we raise additional funds through the issuance of equity, equity-related or convertible debt securities, these securities may have rights, preferences or privileges senior to those of the holders of our common stock. The issuance of additional common stock or securities convertible into common stock by our board of directors will also have the effect of diluting the proportionate equity interest and voting power of holders of our common stock.
OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS CONTINUE TO OWN A SIGNIFICANT PERCENTAGE OF OUR STOCK, AND AS A RESULT, THE TRADING PRICE FOR OUR SHARES MAY BE DEPRESSED AND THESE STOCKHOLDERS CAN TAKE ACTIONS THAT MAY BE ADVERSE TO YOUR INTERESTS.
Our principal stockholders, executive officers and directors, in the aggregate, beneficially own approximately 75.8% of our common stock. These stockholders, acting together, will have the ability to exert substantial influence over all matters requiring approval by our outstanding stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets. In addition, they could dictate the management of our business and affairs. This concentration of ownership could have the affect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination that could be favorable to you. This significant concentration of share ownership may also adversely affect the trading price for our common stock because investors may perceive disadvantages in owning stock in companies with controlling stockholders.
OUR INCORPORATION DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER THAT STOCKHOLDERS CONSIDER FAVORABLE, COULD LIMIT THE MARKET PRICE OF YOUR STOCK AND CAN INHIBIT AN ATTEMPT BY OUR STOCKHOLDERS TO CHANGE OUR DIRECTION OR MANAGEMENT.
Our certificate of incorporation and bylaws contain provisions that could delay or prevent a change in control of our company. Some of these provisions:
o authorize our board of directors to determine the rights, preferences, privileges and restrictions granted to, or imposed upon, the preferred stock and to fix the number of shares constituting any series and the designation of such series without further action by our stockholders; and
o prohibit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates. In addition, we are governed by the provisions of Section 203 of Delaware General Corporate Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us, which may prevent or frustrate any attempt by our stockholders to change our management or the direction in which we are heading. These and other provisions in our amended and restated certificate of incorporation and bylaws and under Delaware law could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.
WE ARE SUBJECT TO THE PENNY STOCK RULES. THESE RULES MAY ADVERSELY AFFECT TRADING IN OUR COMMON STOCK.
Our common stock is a low-priced security under the penny stock rules promulgated under the Securities Exchange Act of 1934. In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document which describes the risks associated with such stocks, the broker-dealer's duties in selling the stock, the customer's rights and remedies and certain market and other information. Furthermore, the broker-dealer must make a suitability determination approving the customer for low-priced stock transactions based on the customer's financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions may decrease the willingness of broker-dealers to make a market in our common stock, decrease liquidity of our common stock and increase transaction costs for sales and purchases of our common stock as compared to other securities.
Stockholders should be aware that, according to Securities and Exchange Commission Release No. 34-29093, dated April 17, 1991, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:
(i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
(ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
(iii) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons;
(iv) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and
(v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses.
Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.
RISKS RELATING TO OUR FOREIGN OPERATIONS
OUR OPERATIONS ARE LOCATED IN CHINA AND MAY BE ADVERSELY AFFECTED BY CHANGES IN THE POLICIES OF THE CHINESE GOVERNMENT.
Our business operations may be adversely affected by the political environment in the PRC. The PRC has operated as a socialist state since 1949 and is controlled by the Communist Party of China. In recent years, however, the government has introduced reforms aimed at creating a "socialist market economy" and policies have been implemented to allow business enterprises greater autonomy in their operations. Changes in the political leadership of the PRC may have a significant effect on laws and policies related to the current economic reforms program, other policies affecting business and the general political, economic and social environment in the PRC, including the introduction of measures to control inflation, changes in the rate or method of taxation, the imposition of additional restrictions on currency conversion and remittances abroad, and foreign investment. These effects could substantially impair our business, profits or prospects in China. Moreover, economic reforms and growth in the PRC have been more successful in certain provinces than in others, and the continuation or increases of such disparities could affect the political or social stability of the PRC.
THE CHINESE GOVERNMENT EXERTS SUBSTANTIAL INFLUENCE OVER THE MANNER IN WHICH WE MUST CONDUCT OUR BUSINESS ACTIVITIES.
The PRC only recently has permitted greater provincial and local economic autonomy and private economic activities. The government of the PRC has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in the PRC or particular regions thereof, and could require us to divest ourselves of any interests we then hold in Chinese properties or joint ventures. Any such developments could have a material adverse effect on our business, operations, financial condition and prospects.
FUTURE INFLATION IN CHINA MAY INHIBIT ECONOMIC ACTIVITY IN CHINA AND ADVERSELY AFFECT OUR OPERATIONS.
In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation, which have led to the adoption by the PRC government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. Inflation in 2007 and the first quarter of 2008 has risen dramatically, the PRC government has imposed and will, in our view, impose more controls on credit and/or prices, or to take other action, which could inhibit economic activities in China, and thereby adversely affecting our business operations and prospects in the PRC.
GOVERNMENTAL CONTROL OF CURRENCY CONVERSION MAY AFFECT THE VALUE OF YOUR INVESTMENT.
The PRC government imposes controls on the convertibility of Renminbi (“RMB”) into foreign currencies and, in certain cases, the remittance of currency out of China. We expect to receive substantially all of our revenues in RMB. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to make payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.
FLUCTUATION IN THE VALUE OF RENMINBI RELATIVE TO OTHER CURRENCIES MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND/OR AN INVESTMENT IN OUR SHARES.
The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. Since 1994, the conversion of RMB into foreign currencies, including the U.S. dollar, has been based on rates set by the People’s Bank of China, or PBOC, which are set daily based on the previous day’s PRC interbank foreign exchange market rate and current exchange rates on the world financial markets. Since 1994, the official exchange rate for the conversion of RMB to U.S. dollars has generally been stable. On July 21, 2005, however, PBOC announced a reform of its exchange rate system. Under the reform, Renminbi is no longer effectively linked to U.S. dollars but instead is allowed to trade in a tight 0.3% band against a basket of foreign currencies. If the RMB were to increase in value against the U.S. dollar, for example, mainland Chinese consumers would experience a reduction in the relative prices of goods and services, which may translate into a positive increase in sales. On the other hand, a decrease in the value of the RMB against the dollar would have the opposite effect and may adversely affect our results of operations. Any significant revaluation of RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payments. For example, an appreciation of RMB against the U.S. dollars would make any new RMB denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into RMB for such purposes.
UNCERTAINTIES WITH RESPECT TO THE PRC LEGAL SYSTEM COULD ADVERSELY AFFECT US AND WE MAY BE UNABLE TO ENFORCE OUR RIGHTS DUE TO POLICIES REGARDING THE REGULATION OF FOREIGN INVESTMENTS IN CHINA.
Our operations in China are governed by PRC laws and regulations. The PRC's legal system is a civil law system based on written statutes in which decided legal cases have little value as precedents, unlike the common law system prevalent in the United States. Our operations in China are governed by PRC laws and regulations. We are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises (WFOE). However, the PRC does not have a well-developed, consolidated body of laws governing foreign investment enterprises. As a result, the administration of laws and regulations by government agencies may be subject to considerable discretion and variation, and may be subject to influence by external forces unrelated to the legal merits of a particular matter. China's regulations and policies with respect to foreign investments are evolving. Definitive regulations and policies with respect to such matters as the permissible percentage of foreign investment and permissible rates of equity returns have not yet been published. Statements regarding these evolving policies have been conflicting and any such policies, as administered, are likely to be subject to broad interpretation and discretion and to be modified, perhaps on a case-by-case basis. The uncertainties regarding such regulations and policies present risks which may affect our ability to achieve our business objectives. We may not be able to enforce any legal rights we may have under our contracts or otherwise. Our failure to enforce our legal rights may have a material adverse impact on our operations and financial position, as well as our ability to compete with other companies in our industry.
In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
IT MAY BE DIFFICULT FOR SHAREHOLDERS TO ENFORCE ANY JUDGMENT OBTAINED IN THE UNITED STATES AGAINST US, WHICH MAY LIMIT THE REMEDIES OTHERWISE AVAILABLE TO OUR SHAREHOLDERS.
Substantially all of our assets are located outside the United States. Our current operations are conducted in China. Moreover, many of our directors and officers are nationals or residents of countries other than the United States. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for shareholders to effect service of process within the United States upon these persons. In addition, there is uncertainty as to whether the courts of China would recognize or enforce judgments of United States courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities law of the United States or any state thereof, or be competent to hear original actions brought in China against us or such persons predicated upon the securities laws of the United States or any state thereof. Our PRC counsel has advised us that the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.
RISKS RELATING TO OUR CORPORATE STRUCTURE
PRC LAWS AND REGULATIONS GOVERNING OUR BUSINESS AND THE VALIDITY OF CERTAIN OF OUR CONTRACTUAL ARRANGEMENTS ARE UNCERTAIN. IF WE ARE FOUND TO BE IN VIOLATION, WE COULD BE SUBJECT TO SANCTIONS. IN ADDITION, CHANGES IN SUCH PRC LAWS AND REGULATIONS MAY MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing for profit business, or the enforcement and performance of our contractual arrangements. We are considered a foreign person or foreign invested enterprise under PRC law. As a result, we are subject to PRC law limitations on foreign ownership of Chinese companies. These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
The PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.
ITEM 1B
ITEM 1B - UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2
ITEM 2 - PROPERTIES
Our corporate office is located in approximately 1,253 square feet of leased office space in Oak Brook, Illinois. We lease this office space at a monthly base rent of approximately $2,323 per month, plus triple net expenses. This lease will expire on August 31, 2010. We expect that this property will be adequate for our needs for the lease term.
Effective July 20, 2009, Bio-Bridge JRS leased a facility in Beijing, China at an annual rent of $36,245 in which it plans to commence cell culture medium operations in 2010. The lease expires July 19, 2012.
Under the Chinese law, there is no private ownership of land, and accordingly, we do not own land. Land use rights can be purchased and sold under Chinese law.
In May 2003, we acquired a 50 year land use right for approximately 2.8 acres of land in the Tianzhu Export Processing Zone, Shunyi District, Beijing, China, on which we completed a laboratory and biomanufacturing facility in 2009 compliant with GMP regulations, which will be used primarily for clinical trials of our vaccine candidates.
At August 20, 2009, Bio-Bridge XBB purchased a land at LeSheng Economic Park District, Helingeer City, Inner Mongolia. The land area is 4.7 acres (approximately 18,933 square meters) and its cost was $166,290. The land will be used for the future manufacturing facility and headquarter for Bio-Bridge XBB.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
We are not currently subject to either threatened or pending litigation, actions or administrative proceedings.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth quarter of our fiscal year ended December 31, 2009.
PART II
ITEM 5
ITEM 5 - MARKET FOR THE COMPANY'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the over-the-counter market on the OTC Bulletin Board under the symbol "BGES.OB." The following table sets forth the high and low bid information for our common stock for each quarter within the last fiscal year during which our stock was traded. Prior to November 2005, there was no active market for our stock.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. As of December 31, 2009, there were approximately 193 stockholders of record of our common stock.
We have never paid any dividends on the common stock. We currently anticipate that any future earnings will be retained for the development of our business and do not anticipate paying any dividends on the common stock in the foreseeable future.
ISSUANCE OF COMMON STOCK FOR SERVICES
On July 1, 2008, the Company agreed to issue CH Capital LLC 50,000 shares of restricted common stock for investor relations services. The fair value of the 50,000 shares was determined to be $87,500 based on the closing price of the Company’s common stock on the date the agreement was signed. The Company recorded $87,500 as consulting expense when the shares were granted.
On October 1, 2008, the Company entered into consulting agreements with two scientific advisors in which the company granted 20,000 shares of restricted common stock to them for scientific advisory service. The fair value of the 20,0000 shares was determined to be $23,000, based on the closing price of the shares when granted, and was recorded as compensation cost when the shares were granted.
On November 26, 2008, the company granted 70,000 shares of restricted common stock to seven board members for their service. The fair value of the 70,000 shares of restricted common stock was determined to be $36,400, based on the closing price of the shares when granted, and was recorded as compensation cost when the shares were granted.
On July 20, 2009, the Company issued 38,160 shares of common stock to two employees. The shares were valued at $9,540 based on the OTCBB closing bid price of the shares on the date the shares were granted and was recorded as compensation expense.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth aggregate information regarding our equity compensation plans in effect as of December 31, 2009:
On December 1, 2004, the Company’s shareholders approved the 2004 Stock Incentive Plan. The 2004 Stock Incentive Plan provides for the grant of incentive stock options to our employees, and for the grant of non-statutory stock options, restricted stock, stock appreciation rights and performance shares to our employees, directors and consultants. The Company has reserved a total of 2,000,000 shares of its common stock for issuance pursuant to the 2004 Stock Incentive Plan. The 2004 Stock Incentive Plan does not provide for automatic annual increases in the number of shares available for issuance under the plan. As of September 30, 2008, 1,877,000 options had been granted under this plan.
The administrator determines the exercise price of options granted under our 2004 Stock Incentive Plan, but the exercise price must not be less than 85% of the fair market value of our common stock on the date of grant. In the event the participant owns 10% or more of the voting power of all classes of our stock, the exercise price must not be less than 110% of the fair market value per share of our common stock on the date of grant. With respect to all incentive stock options, the exercise price must at least be equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed 10 years, except with respect to any participant who owns 10% of the voting power of all classes of our outstanding stock or the outstanding stock of any parent or subsidiary of ours, which term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator determines the term of all other options; however, no option will have a term in excess of 10 years from the date of grant.
On November 26, 2008, the Company approved and adopted the 2008 Stock Incentive Plan. The 2008 Stock Incentive Plan provides for the grant of incentive stock options to our employees, and for the grant of non-statutory stock options, restricted stock, stock appreciation rights and performance shares to our employees, directors and consultants. The Company has reserved a total of 4,000,000 shares of its common stock for issuance pursuant to the 2008 Stock Incentive Plan. The 2008 Stock Incentive Plan does not provide for automatic annual increases in the number of shares available for issuance under the plan. As of December 31, 2008, no options had been granted under this plan.
The administrator determines the exercise price of options granted under our 2008 Stock Incentive Plan, but the exercise price must not be less than 85% of the fair market value of our common stock on the date of grant. In the event the participant owns 10% or more of the voting power of all classes of our stock, the exercise price must not be less than 110% of the fair market value per share of our common stock on the date of grant. With respect to all incentive stock options, the exercise price must at least be equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed 10 years, except with respect to any participant who owns 10% of the voting power of all classes of our outstanding stock or the outstanding stock of any parent or subsidiary of ours, which the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator determines the term of all other options; however, no option will have a term in excess of 10 years from the date of grant.
Issuance of stock options
On July 1, 2007, the Company granted two scientific board advisors 10,000 shares each of restricted common stock for one year of scientific board service. The fair value of 20,000 shares was determined to be $20,000, based on the closing price of the shares when granted, and was recorded as compensation cost when the shares were granted.
On July 20, 2009, the Company granted 1,083,000 options to purchase shares of common stock to employees, expiring 10 years from the date granted, and exercisable at $0.001 to $0.52 per share. Options to purchase 3,000 shares of common stock are exercisable at $0.001 per share, options to purchase 840,000 shares of common stock are exercisable at $0.47 per share, and options to purchase 240,000 shares of common stock are exercisable at $0.52 per share. 283,000 of the options vested immediately and 700,000 of the options will vest ratably over 21 months. The options were valued at $258,793; the fair value of the stock options on the date granted determined using a Black-Scholes pricing model. The Company recognized $71,863 of compensation expense from the date the options were granted through September 30, 2009 for the fair value of the vested options.
The fair value of the options granted on July 20, 2009 were determined using a Black-Scholes option pricing model with the following assumptions: 2.32% average risk-free interest rate; 179% expected volatility; six year expected term, and 0% dividend yield.
On December 18, 2009, the Company granted 351,500 options to purchase shares of common stock to employees, expiring 10 years from the date granted, and exercisable at $0.50 per share. 43,938 of the options vested immediately and 307,562 of the options will vest ratably over 21 months. The options were valued at $185,873; the fair value of the stock options on the date granted determined using a Black-Scholes pricing model. The Company recognized $10,843 of compensation expense from the date the options were granted through December 31, 2009 for the fair value of the vested options.
The fair value of the options granted on December 18, 2009 were determined using a Black-Scholes option pricing model with the following assumptions: 1.62% average risk-free interest rate; 190% expected volatility; six year expected term, and 0% dividend yield.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
Not Applicable for a Smaller Reporting Company.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion of our financial condition and plan of operations should be read in conjunction with the financial statements and related notes thereto. The following discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed herein. We undertake no obligation publicly to release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances.
OVERVIEW
Bio-Bridge Science, Inc. is a biotechnology company whose subsidiaries are focused on the commercial development of HIV-PV Vaccine I, HPV vaccine, colon cancer vaccine, mucosal adjuvant. Also, we sell bovine serum through our 51% owned subsidiary, Bio-Bridge XBB. The pre-clinical testing of HIV-PV Vaccine I on laboratory animals in Beijing, China was completed in June 2006. After the lab equipment is installed and we are able to produce vaccine candidate samples, we will apply to China's State Food and Drug Administration for approval to conduct clinical trials of HIV-PV Vaccine I. As of December 31, 2005, we had completed the construction of the outside body of our laboratory and bio-manufacturing facility in Beijing, China. The internal clean room installation project has been substantially completed as of end of 2006. We expect to pass the local government inspection and receive the necessary licenses in the second quarter of 2010, and by then the laboratory facility will be in operations fully. We acquired a 51% equity interest in Huhhot Xinheng Baide Biotechnology Co. Ltd. at the end of July in 2008. Bio-Bridge XBB produces and sells bovine serum, a major material used in the production of vaccines.
On June 9, 2009, Bio-Bridge Science (HK) Co., Ltd., a wholly-owned subsidiary of Bio-Bridge Science, Inc. entered into an equity joint venture contract with JR Scientific Inc., a California based manufacturer of classical and custom cell culture medium and sera products and several other investors, to form a new cell culture medium joint venture in Beijing, China. The registered capital of the joint venture is RMB 10,000,000 (approximately US$ 1,464,000). The company invested RMB 5,100,000 (approximately US$732,000) in cash in the joint venture for 51% of the equity and JRS contributed certain technology for 15% of the equity. The balance of the equity was purchased by other investors. On October 16, 2009, Bio-Bridge Science Inc. received a business license from the Beijing Administration for Industry and Commerce of the PRC indicating approval of the formation of Bio-Bridge JRS Biosciences (Beijing) Co., Ltd. (“Bio-Bridge JRS”).
Plan of Operations
Vaccine Development
Our primary corporate focus is on the commercial development of our potential vaccine products through our subsidiaries. Our capital requirements, particularly as they relate to product research and development, have been and will continue to be significant. Our future cash requirements and the adequacy of available funds will depend on many factors, including the pace at which we are able to obtain regulatory approvals of vaccine candidates, whether or not a market develops for our products and, if a market develops, the pace at which it develops, and the pace at which the technology involved in making our products changes.
The pre-clinical testing of HIV-PV Vaccine I on laboratory animals was completed in Beijing Institute of Radiation Medicine, and the testing result was issued in June 2006 and showed encouraging results. After the vaccine samples are produced in our GMP facility, we will submit application for clinical trials with the Chinese SFDA. We have purchased and installed the laboratory equipment and it is operating well. We plan to apply to the Chinese SFDA for the clinical trial in the third quarter of 2010. The clinical trial for therapeutic vaccine is expected to last three years. The clinical trial for preventive vaccine will last longer, most likely five to seven years.
We also plan to conduct the pre-clinical trials for colon cancer vaccine and HPV vaccine. We estimate that we will complete the pre-clinical trial of colon cancer vaccine by late 2010 and that of HPV vaccine by early 2011. We expect to enter clinical trials of colon cancer vaccine in the second half of 2011. As we discussed previously, clinical trial for therapeutic vaccine is expected to last three years. All the technology to make HIV vaccine and colon cancer vaccine is based on the technology co-developed by our CEO, Dr. Liang Qiao. Because we use the same technology to develop our potential vaccine products, we expect to use the same GMP facility in Beijing, China, to produce the HIV vaccine and colon cancer vaccine for pre-clinical and clinical trials.
To date we have funded our operations from funds we raised in private offerings. During the next twelve months, we will need to raise capital through an offering of our securities or from loans to continue research and development of our various vaccine product candidates in China as well as conducting potential acquisition activities in China. We estimate that our capital requirements for the next twelve months will be as follow:
o approximately $1.2 million for preparatory work and Phase I clinical study of HIV-PV Vaccine I;
o approximately $1.2 million for working capital and general corporate needs;
o approximately $1.0 million for pre-clinical trials on colon cancer vaccine and HPV vaccine; and
o approximately $0.5 million for pre-clinical trials on adjuvant.
We expect that the therapeutic vaccine can be brought to market in three years and the preventive vaccine can be brought to market in five to seven years, if we are successful in raising funds to complete development of the vaccines. As of December 31, 2009, our cash and cash equivalents and trading securities position was $1,643,895. Although we raised capital in 2008 and 2009 in private placements, we will still need to raise additional funds through the public or private sales of our securities, loans, or a combination of the foregoing to meet our planned operations. We cannot guarantee that financing will be available to us, on acceptable terms or at all. We also may borrow from local banks in China given that our land use right and laboratory facility could be used as collateral for borrowing. If we fail to obtain other financing in the next 12 months, either through an offering of our securities or by obtaining additional loans, we may be unable to develop our planned projects as scheduled and may be forced to scale back.
Distribution of Xinhua surgical instruments
We signed an exclusive agency agreement with Xinhua Surgical Instruments Co. Ltd. to distribute its operational instruments in the United States at the end of 2005. We are currently seeking collaboration with local distributors and developing markets for Xinhua instruments. We built up a B2C website devoted to selling Xinhua surgical instruments in 2008. Also, we initiated some marketing campaigns, such as buying Google keywords. As a result of our efforts, our surgical instrument sales increased from $23,251 in 2008 to $80,290 in 2009, a 245% increase.
Acquisitions of companies complementary to the Company
Another major corporate focus is for the Company to acquire other profitable vaccine companies or vaccine production related companies, such as those producing materials for vaccine production, in China. Such an acquisition may help support our development of our in-house vaccine candidates by providing us with operating cash flows, lower cost for material used in our vaccine production, skillful work force in vaccine production, and a distribution channel. We believe these companies will be complementary to us and make us more competitive.
On July 31, 2008, the Company completed the acquisition of Huhhot Xinheng Baide Biotechnology Co. Ltd., (“XHBD”), in which the Company purchased 51% of the outstanding capital interests of XHBD for RMB 6 million (approximately US$ 881,000). XHBD was incorporated on May 17, 2006 under the laws of the People’s Republic of China (“PRC”) as a limited company. XHBD is located in the city of Huhhot in Inner Mongolia, China. The primary operations of the Company are the manufacture and distribution of bovine serum products, which is used in research and production of vaccines. We completed the 51% acquisition of Xinheng Baide on July 31, 2008 and its operations are included in our consolidated financial statements beginning August 1, 2008. At July 1, 2009, XHBD changed its name to Bio-Bridge Xinheng Baide( Inner Mongolia) Biotechnology Co. Ltd. ( “Bio-Bridge XBB”).
At August 20, 2009, Bio-Bridge XBB purchased a land at LeSheng Economic Park District, Helingeer City, Inner Mongolia. The land area is 4.7 acres (approximately 18,933 square meters) and its cost was $166,290. The land will be used for the future manufacturing facility and headquarters for Bio-Bridge XBB.
Joint Venture
On June 9, 2009, Bio-Bridge Science (HK) Co., Ltd., a wholly-owned subsidiary of Bio-Bridge Science, Inc. entered into an equity joint venture contract with JR Scientific Inc., a California based manufacturer of classical and custom cell culture medium and sera products and several other investors, to form a new cell culture medium joint venture in Beijing, China. The registered capital of the joint venture will be RMB 10,000,000 (approximately US$1,464,000). The company invested RMB 5,100,000 (approximately US$732,000) in cash in the joint venture for 51% of the equity and JRS contributed certain technology for 15% of the equity. The balance of the equity was purchased by other investors, including 11% by China Diamond, an entity controlled by Trevor Roy, one of our directors.
On October 16, 2009, Bio-Bridge Science Inc. received a business license from the Beijing Administration for Industry and Commerce of the PRC indicating approval of the formation of Bio-Bridge JRS Biosciences (Beijing) Co., Ltd. (“Bio-Bridge JRS”). Bio-Bridge JRS was officially established at the end of October 2009.
The plant was decorated and major equipment has been purchased. The major production technology is transferred from JRS and the technicians are being trained to produce the qualified cell culture medium samples. We expect that Bio-Bridge JRS will formally produce and sell cell culture medium and related products in China in the third quarter of 2010.
Results of Operations
Year ended December 31, 2009 Compared to Year ended December 31, 2008
During the years ended December 31, 2009 and 2008, we had revenues of $963,755 and $618,705, respectively. The increase was due to sales from XHBD for $288,011 and the increase in sales of surgical instrument of $57,039 in 2009. The cost of revenues was $610,176 in 2009 and $467,983 in 2008. XHBD’s financial results are included in our consolidated financial statements beginning August 1, 2008. As a result, the revenue and cost of goods sold increased in 2009 due to a full year of XHBD’s sales and our continued efforts to sell surgical instruments in the United States.
For the year ended December 31, 2009, research and development expense was $277,457 as compared to $104,422 for the year ended December 31, 2008. The increase of $173,035 resulted from the intensified pre-clinical development of our HIV-PV Vaccine I in Beijing laboratory facility and the increased depreciation expense of the laboratory, which we started to accrue since July 1, 2009 .
For the year ended December 31, 2009, general and administrative expense was $1,223,593, as compared to $3,431,609 for the year ended December 31, 2008. The expenses occurred in 2008 were $2,208,016 more than that incurred in 2009, which was due primarily to stock compensation cost of $2.3 million in association with warrants issued in private placements in which we raised $3.98 million from directors or corporations controlled by our director in 2008. The selling and distribution expenses were $183,751 in the year ended December 31, 2009 as compared to $140,820 for the year ended December 31, 2008. The increase of $42,931 was due primarily to the increased selling and distribution expense of XHBD, which was $111,894 as compared to $50,288 in 2008. The selling and distribution expenses of Delaware office was decreased from $90,532 to $71,857.
Net loss attributable to Bio Bridge Science for the year ended December 31, 2009, was $415,476 as compared to $3,538,899 for the year ended December 31, 2008. This decrease in net loss was primarily attributable to a decrease in general and administrative expenses, which was mainly composed of compensation costs related to private placements in which we raised $3.98 million from directors or corporations controlled by our director in 2008.
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalent and trading securities balances, which totaled $1,643,895 at December 31, 2009 and $1,601,886 at December 31, 2008.
Net cash used in operating activities was $1,201,980 for the year ended December 31, 2009 and $832,170 for the year ended December 31, 2008. The difference was mainly due to the change in working capital.
Cash flows provided (used) in investing activities was $(892,023) for the year ended December 31, 2009 and $162,198 for the year ended December 31, 2008. This change was due to proceeds from sale of trading securities in 2008 offset by an increased investment in long term assets in 2009.
Net cash provided by financing activities was $2,087,284 for the year ended December 31, 2009 as compared to $2,190,664 in the year ended December 31, 2008. The Company received investment from shareholders and minority interests of $1,869,945 and $234,346 respectively in 2009 as compared to $2,182,349 from shareholders in 2008.
From February 11, 2002 (inception) to December 31, 2009, we have an accumulated deficit of $11,678,908. Our operations have been funded through issuances of our common stock and preferred stock whereby we raised an aggregate $8,365,888 from February 11, 2002 (inception) through December 31, 2009.
During 2008, the Company sold 5,841,610 shares of its common stock to seven individuals for a total of $4,245,999. Four of these individuals, who purchased a total of 5,488,276 shares of common stock for a total of $3,980,000, are members of our Board of Directors. Some of the sales agreements also included warrants to purchase common stock.
Based on our current operating plan, we believe that we have sufficient cash and cash equivalents to last approximately through January 2011. We will need to obtain additional financing in addition to the funds already raised through the sale of equity securities to fund our cash needs and continue our operations beyond January 2011. Additional financing, whether through public or private equity or debt financing, arrangements with stockholders or other sources to fund operations, may not be available, or if available, may be on terms unacceptable to us. Our ability to maintain sufficient liquidity is dependent on our ability to raise additional capital. If we issue additional equity securities to raise funds, the ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of our common stock. Debt incurred by us would be senior to equity in the ability of debt holders to make claims on our assets. The terms of any debt issued could impose restrictions on our operations. If adequate funds are not available to satisfy either medium or long-term capital requirements, our operations and liquidity could be materially adversely affected and we could be forced to cut back our operations.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Use of Estimates
The preparation of financial statements in conformity 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 revenues and expenses during the reporting periods. Management makes these estimates using the best information available and the best judgment at the time the estimates are made, however actual results could differ materially from those estimates.
Stock-Based Compensation
The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions, for services, and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (“FASB”). The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee share-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total share-based compensation charge is recorded in the period of the measurement date.
The fair value of Bio-Bridge’s common stock option grants are estimated using the Black-Scholes-Merton option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton option pricing model could materially affect compensation expense recorded in future periods.
Impairment of Long-Lived Assets, Goodwill and Intangible Assets
We review long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable in accordance with the authoritative guidance provided by the FASB. Our long-lived assets, such as property and equipment, are reviewed for impairment when events and circumstances indicate that depreciable or amortizable long lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. When specific assets are determined to be unrecoverable, the cost basis of the asset is reduced to reflect the current value.
We use various assumptions in determining the current fair value of these assets, including future expected cash flows and discount rates, as well as other fair value measurements. Our impairment loss calculations require us to apply judgment in estimating future cash flows, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to future impairment losses that could be material to our results.
Inventory Valuation
Inventories are stated at the lower of cost or market. Market is defined as current replacement cost, except that market should not exceed the net realizable value and should not be less than net realizable value reduced by an allowance for an approximately normal profit margin. The cost of inventories is determined by using the first-in, first-out method. We perform a monthly analysis of our inventory balances to determine if the carrying amount of inventories exceeds their net realizable value. Our determination of estimated net realizable value is based on customer orders, market trends and historical pricing. If the carrying amount exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net realizable value.
Derivative financial instruments
The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. For stock-based derivative financial instruments, the Company uses both the Black-Scholes-Merton option pricing models to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.
Recent Accounting Pronouncements
In June 2009, the FASB issued authoritative guidance on accounting standards codification and the hierarchy of generally accepted accounting principles (“GAAP") effective for interim and annual reporting periods ending after September 15, 2009. The FASB accounting standards codification (“ASC, “Codification”) has become the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. However, rules and interpretive releases of the SEC issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. Beginning with the quarter ending September 30, 2009, all references made by the Company to GAAP in its condensed consolidated financial statements use the Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, it does not have an impact on our financial position, results of operations and cash flows.
In June 2009, the FASB made an updated the principle for the consolidation of variable interest entities. Among other things, the update replaces the calculation for determining which entities, if any, have a controlling financial interest in a variable interest entity (VIE) from a quantitative based risks and rewards calculation, to a qualitative approach that focuses on identifying which entities have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. The update also requires ongoing assessments as to whether an entity is the primary beneficiary of a VIE (previously, reconsideration was only required upon the occurrence of specific events), modifies the presentation of consolidated VIE assets and liabilities, and requires additional disclosures about a company’s involvement in VIE’s. This update will be effective for fiscal years beginning after November 15, 2009. The Company does not currently believe that the adoption of this update will have any effect on its consolidated financial position and results of operations.
In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective for us beginning July 1, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. We believe the adoption of this new guidance will not have a material impact on our financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
Lease Commitments
As of December 31, 2009, we had remaining outstanding commitments with respect to our non-cancelable operating leases as follows: $55,249 for the year ending December 31, 2010, $36,245 for the year ending December 31, 2011, and $18,122 for the year ending December 31, 2012.
Royalty and License Arrangements
Liang Qiao, M.D., our co-founder and chief executive officer, is one of the two co-inventors of our core technology that was assigned to Loyola University Chicago in April 2001. Under an agreement with Loyola University Chicago, we have obtained exclusive rights to this technology for use in its future products within the United States, Japan and the People's Republic of China, including mainland China, Hong Kong, Taiwan and Macau. The license continues perpetually or for the maximum period of time permitted by law, unless terminated earlier under the terms of the agreement. Pursuant to this agreement, Loyola receives a royalty of 4% from the net profit for all uses of the licensed technology, including uses under sublicenses. As of December 31, 2009, we had not generated any revenues from the sale of any products under development, nor had we received any revenues from sublicenses.
Contractual Obligations
Payments due under contractual obligations at December 31, 2009 mature as follows:
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Issuance of Common Stock
See PART II Item 5 for issuance of unregistered common stock.
Inflation
Inflation has not had a material impact on our business.
Currency Exchange Fluctuations
Most of the Company’s revenues and some of the expenses in 2009 were denominated primarily in Renminbi (“RMB”), the currency of the PRC, and was converted into US dollars at the exchange rate of 6.8282 to 1. In the third quarter of 2005, the Renminbi began to rise against the US dollar. There could be no assurance that RMB/U.S. dollar exchange rates will remain stable in the future. A fluctuation of RMB relative to the U.S. dollar would affect our business, financial condition and results of operations. We do not engage in currency hedging.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements together with the report of Independent Registered Public Accounting Firm appear beginning on Page of this Report.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A
ITEM 9A - CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the applicable period to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. However, all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and reporting.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2009 at the reasonable assurance level due to the material weaknesses described below.
Management concluded that an accounting error had been made in the Company’s historical March 31, 2009 financial statements in relation to the adoption of provisions of EITF 07-5, " Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock ”. As a result, the Company’s financial statements for the quarter ended March 31, 2009 were restated.
Management evaluated the impact of this restatement on our assessment of our disclosure controls and procedures and concluded that the control deficiency that resulted in the incorrect recording of the adoption of provisions of EITF 07-5 represented a material weakness.
During 2009, there has been an ongoing focus on addressing the material weaknesses in disclosure and financial reporting controls. The remedial actions undertaken include periodic review of our accounting treatment in accordance with the US GAAP and related accounting pronouncements. We had hired additional capable accounting personnel in the second quarter of 2009.
The Principal Executive Officer and the Principal Financial Officer anticipate that the remedial actions and resulting improvement in controls will generally strengthen our disclosure controls and procedures, as well as our internal control over financial reporting (as defined in Rules 13a-15(c) and 15d-15(e) under the Exchange Act).
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.
ITEM 9B
ITEM 9B - OTHER INFORMATION
None.
PART III
ITEM 10
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, AND COPRORATE GOVERNANCE
The following table sets forth the names, ages, and positions of our directors and executive officers.
Mr. Wenhui Qiao and Dr. Liang Qiao are brothers. There are no other family relationships among the executive officers and directors.
Our executive officers are appointed by our board of directors and serve at the board's discretion. There is no arrangement or understanding between any of our directors or executive officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current board of directors. There are also no arrangements, agreements or understandings to our knowledge between non-management stockholders that may directly or indirectly participate in or influence the management of our affairs. None of our directors or executive officers has, during the past five years:
o had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time,
o been convicted in a criminal proceeding and none of our directors or executive officers is subject to a pending criminal proceeding,
o been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities, or
o been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
BUSINESS EXPERIENCE
DR. LIANG QIAO is one of our co-founders and has served as our chairman of the board of directors, chief executive officer and secretary since October 2004. Since February 2002, Dr. Qiao has served as director of our wholly owned subsidiary Bio-Bridge Science Corp. and has served as its chief executive officer and chairman of the board since May 2004. Since July 2009, Dr. Qiao has served as a Professor at Loyola University Chicago, Strich School of Medicine. From July 2000 to June 2009, Dr. Qiao was an Associate Professor and from May 1994 to June 2000, Dr. Qiao was an Assistant Professor at Loyola University Chicago, Strich School of Medicine. Dr. Qiao also worked as a research scholar at the German Cancer Research Center in Heidelberg, Germany. Dr. Qiao received a B.M. from Henan Medical University in China and an M.D. from Lausanne University in Switzerland.
MR. WENHUI QIAO is one of our co-founders and has served as our president and director since October 2004. Mr. Qiao has served as director of Bio-Bridge Science Corp. since February 2002 and its president since May 2004. From July 1999 to December 2001, Mr. Qiao served as chief executive officer of Dongfang Huaying Anti- Radiation Company, which was located in Henan Province, China. From 1994 to 1998, he served as the chief representative for Henan Province in Japan. Mr. Qiao received a B.A. in Economics from Doshisha University in Japan.
MR. CHUEN HUEI (KEVIN) LEE, CFA, FRM, has served as our chief financial officer since October 2004. Mr. Lee also has served as chief financial officer of Bio-Bridge Science Corp. since May 2004. From October 2001 to June 2004, he served as Senior Vice President of China Metropolitan Ventures in Beijing and Shanghai, China. From February 2000 to August 2001, Mr. Lee served as Senior Manager of Grand Cathay Securities Corporation in Taipei, Taiwan. From September 1998 to February 2000, he was the Manager of American Express Bank's Taipei treasury department. Mr. Lee received a B.A. from National Taiwan University and an M.B.A. from Columbia University. He is a chartered financial analyst (CFA) charter holder and a certified financial risk manager (FRM).
MR. TOSHIHIRO KOMOIKE has served as our director since October 2004. Mr. Komoike also has served as director of Bio-Bridge Science Corp. since May 2004. From 1998 to 2004, Mr. Komoike served as Senior Manager of Sumisho Textile Company in Japan. He received a degree in Commerce from Kansai University in Japan. He is a vice president and our Japan representative.
MR. ISAO ARIMOTO is one of our co-founders and has served as our director since October 2004. Mr. Arimoto also has served as director of Bio-Bridge Science Corp. since February 2002. Since February 1975, Mr. Arimoto has served as chief executive officer of Chugoko-Knit Company in Japan. He has 30 years of business experience as an entrepreneur in Japan and China.
MR. SHYH-JING (PHILIP) CHIANG has served as our director since October 2004. Mr. Chiang also has served as director of Bio-Bridge Science Corp. since February 2002. Since June 2008, Mr. Chiang has served as investment banking head of Daiwa Securities SMBC-Cathay Co. in Taipei, Taiwan. From June 2004 to May 2008, Mr. Chiang served as head of investment banking at Nomura Securities in Taipei, Taiwan. From March 2004 to May 2004, he served as chief representative of Rabobank's office in Taipei. From June 2001 to May 2004, he was director of investment banking at ING Baring in Taipei. Mr. Chiang served as executive vice president of Grand Cathay Securities from August 2000 to June 2001. From September 1996 to April 2000, he served as vice president of Credit Agricole Indosuez. Mr. Chiang received a B.A. from Tunghai University in Taiwan and an M.B.A. from the University of Missouri.
MR. TREVOR ROY was a graduate of the University of Sydney. Mr. Roy's initial career was in Education where he was a teacher and administrator at both High School and Tertiary levels. Then in a business career spanning 30 years, Mr. Roy, with his investment and management experience, both in his home country of Australia and internationally, has been in a wide range of industries including Rural/agricultural, Theatrical, Marketing and Promotions, Food manufacturing and distribution, Medical, and Telephony and communications. For the past 18 years, Mr. Roy has been CEO (now Chairman) of the Creata Group. He has been instrumental in establishing its business as a global provider of marketing and promotional programs in 18 offices in 12 countries.
MR. CHEUNG HIN SHUN ANTHONY's early career was in finance, accounting and auditing with John B P Byrne & Co., now Grant Thornton in Hong Kong. This formed the foundation of a successful business management and investment career over 25 years that now includes: ownership of manufacturing facilities in Hong Kong and China (Dongguan) with in excess of 10,000 employees producing over 200 million consumer products annually; ownership of a Class 2 hospital in China (Fujian); and (commercial) real estate investments and developments in Hong Kong, China and the United States.
Our board of directors currently consists of seven members. Our bylaws provide that our directors will be elected at each annual meeting of the stockholders. Their term of office will run until the next annual meeting of the stockholders and until their successors have been elected.
To date, our board of directors has not separately designated a standing audit committee. Since no such committee exists, our entire board of directors constitutes the audit committee pursuant to Section 3(a)(58)(A) of the Exchange Act of 1934.
No individual on our board of directors possesses all of the attributes of an audit committee financial expert and no one on our board of directors is deemed to be an audit committee financial expert. In forming our board of directors, we sought out individuals who would be able to guide our operations based on their business experience, both past and present, or their education. Mr. Lee, our Chief Financial Officer, serves as our financial expert regarding generally accepted accounting principles and general application of such principles in connection with the accounting for estimates and accruals, including an understanding of internal control procedures and policies over financial reporting, and maintains sufficient experience analyzing or evaluating financial statements in such depth and breadth as may be required of an audit committee financial expert. However, Mr. Lee is not an elected director of the company. We recognize that having a person who possesses all of the attributes of an audit committee financial expert would be a valuable addition to our board of directors. As a result, we are looking for suitable and renowned professionals to serve the capacity of audit committee financial experts.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires our directors and executive officers, and persons who beneficially own more than ten percent of a registered class of our equity securities, to file with the Securities and Exchange Commission (the "Commission") initial reports of beneficial ownership and reports of changes in beneficial ownership of our Common Stock. The rules promulgated by the Commission under Section 16(a) of the Exchange Act require those persons to furnish us with copies of all reports filed with the Commission pursuant to Section 16(a). Except for filings related to stock option grants in 2009, To our knowledge, based solely upon review of the copies of such reports received or written representations from the reporting persons, we believe that during our 209 fiscal year our directors, executive officers and persons who own more than 10% of our common stock complied with all Section 16(a) filing requirements.
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Such code of ethics will be provided to any person without charge, by sending a request to our principal executive office. We also posted the adopted code of ethics on our corporate website: www.bio-bridge-science.com. You may request a copy of this code of ethics to be sent as a pdf file to an e-mail address or by regular mail.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Summary Compensation Table
The following executive compensation disclosure reflects all compensation awarded to, earned by or paid to the executive officers below, for the fiscal year ended December 31, 2009. The following table summarizes all compensation for fiscal year 2009 and 2008 received by our chief executive officer and our four highest paid officers in fiscal year 2009 and 2008.
The following Summary Compensation Table sets forth certain information regarding the compensation of our named executive officers for services rendered in all capacities to Bio-Bridge during the year ended December 31, 2009 and 2008.
Summary Compensation Table
(1)
Represents fair market value of options vested during the year ended December 31, 2009 and 2008, calculated using the Black-Scholes option pricing model and related assumptions as disclosed in Note 8, Shareholders Equity, of our consolidated financial statements.
The following table sets forth information concerning grants of plan based awards to the named executive officers at December 31, 2009.
Grants of Plan-Based Awards Table For 2009
The following table sets forth information concerning the outstanding equity awards granted to the named executive officers at December 31, 2009.
Outstanding Equity Awards at Fiscal Year End Table
(1) All the above-named officer’s employment with Bio-Bridge Science, Inc. commenced on October 26, 2004.
COMPENSATION OF DIRECTORS
Each of our seven directors receive an option to purchase 40,000 shares of common stock for services as a director in 2009 in addition to expense reimbursement in connection with attending board meetings.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
We currently do not have any employment agreements with our executive officers.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
The following tables set forth certain information regarding beneficial ownership of our securities as of December 31, 2009 by (i) each person who is known by us to own beneficially more than five percent (5%) of the outstanding shares of each class of our voting securities, (ii) each of our directors and executive officers, and (iii) all of our directors and executive officers as a group. We believe that each individual or entity named has sole investment and voting power with respect to the securities indicated as beneficially owned by them, subject to community property laws, where applicable, except where otherwise noted. Unless otherwise stated, their address is c/o Bio-Bridge Science, Inc., 1211 West 22nd Street, Suite 615, Oak Brook, IL 60523. As of December 31, 2009 there were 40,877,445 shares of common stock and 4,000,000 shares of preferred stock issued and outstanding.
COMMON STOCK
(1) Includes an option to purchase 600,000 shares and an option to purchase 115,000 shares, of which 25,000 shares are exercisable within 60 days of March 2, 2010.
(2) Includes 825,000 shares, 20,000 warrants to purchase common stock, an option to purchase 150,000 shares, an option to purchase 250,000 shares and an option to purchase 96,250 shares, of which 18,750 shares are exercisable within 60 days. Also includes 850,000 shares held by Mingjin Yu, Mr. Qiao's wife. Mr. Qiao disclaims beneficial ownership of the shares held by his wife, except to the extent of his pecuniary interest therein.
(3) Includes an option to purchase 150,000 shares, and an option to purchase 250,000 shares and an option to purchase 56,250 shares, of which 18,750 shares are exercisable within 60 days.
(4) Includes 750,000 shares, an option to purchase 150,000 shares and an option to purchase 40,000 shares and 20,000 warrants to purchase common stock.
(5) Includes 2,125,000 shares, an option to purchase 250,000 shares, an option to purchase 40,000 shares, and 1,500,000 shares owned by Yukiko Arimoto, Mr. Arimoto's wife. Mr. Arimoto disclaims beneficial ownership of the shares held by his wife, except to the extent of his pecuniary interest therein.
(6) Includes 786,111 shares, an option to purchase 5,000 shares and an option to purchase 40,000 shares. Also includes 100,000 shares held by Mei-Ju Shi, Mr. Chiang 's wife. Mr. Chiang disclaims beneficial ownership of the shares held by his wife, except to the extent of his pecuniary interest therein.
(7) Includes 2,000,000 preferred shares convertible into common stock owned through directly or indirectly controlled companies and an option to purchase 40,000 shares and 4,948,276 warrants to purchase common stock.
(8) Includes 2,000,000 preferred shares convertible into common stock, an option to purchase 40,000 shares and 3,500,000 warrants to purchase common stock.
* less than 1%
CHANGE OF CONTROL
To the knowledge of management, there are no present arrangements or pledges of securities of our Company that may result in a change in control of the Company.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Dr. Liang Qiao, our chief executive officer and chairman of the board, and Wenhui Qiao, a director, are brothers.
SHARE EXCHANGE WITH BIO-BRIDGE SCIENCE CORP.
On December 1, 2004, the related parties below participated in the share exchange with Bio-Bridge Science Corp., a Cayman Islands corporation ("Bio-Bridge Science"). In exchange for shares in Bio-Bridge Science, each received shares of common stock of registrant as set forth below.
(1) See "Security Ownership of Certain Beneficial Owners and Management" for a listing of all issuer securities owned by these promoters.
Royalty and License Arrangements
Liang Qiao, MD., our co-founder and chief executive officer, is one of the two co-inventors of our core technology that was assigned to Loyola University Chicago in April 2001. Under a license agreement with Loyola University Chicago, Bio-Bridge Science Corp. has obtained exclusive rights to this technology for use in our future products within the United States, Japan and the People’s Republic of China. This license continues perpetually or for the maximum period of time permitted by law, unless terminated earlier by us with prior notice or by Loyola University in the event we do not make any effort to market the product after five years from the date on which the U.S., Japan or China grant us a permit for production. See "Business-Intellectual Property." Pursuant to this agreement, Loyola is entitled to receive a royalty of four percent from the net profit for all uses of the licensed technology, including uses under sublicenses. To date, we have not generated any revenues from the sale of any products under development, or any revenues from sublicenses.
Our director, Wenhui Qiao, is president of our wholly-owned subsidiary Bio-Bridge Science (Beijing). In April 2002, Bio-Bridge Science Corp. signed a sublicense agreement with Bio-Bridge Science (Beijing). Under the terms of the agreement, Bio-Bridge Science Corp, granted an exclusive license to Bio-Bridge Science( Beijing) within mainland China. The term of the license agreement is 10 years. There are no royalty fees or one-time costs owed to us under this agreement. We expect that the sublicense agreement will be renewed on the same terms when it expires.
Investments
The Company sold 366,667 investment units with a unit price at $0.75 for total consideration of $275,000 in the second quarter of 2008. Each unit included one share of common stock, a three-year warrant to purchase one-half share of common stock at $0.75 and a five-year warrant to purchase one-half share of common stock at $1.20 (an aggregate of 366,667 warrants). Two directors of the Company each purchased 20,000 investment units in the offering.
On July 2, 2008, the Company entered into a securities purchase agreement with NFR International Pty Limited and China Diamond Limited (collectively, “NFR/China Diamond”), two companies controlled by Mr. Trevor Roy, a member of our Board of Directors. NFR/ China Diamond agreed to purchase a total of 3,448,276 investment units from us at $0.725 per unit. Each unit consists of one share of common stock, a four-year warrant to purchase one-half share of common stock at $0.725 and a five-year warrant to purchase one-half share of common stock at $1.10. The investment by NFR/China Diamond totals $2,500,000, of which $125,000 was paid on July 2, 2008, with the balance due in ten monthly installments through May 1, 2009. As of December 31, 2008, we had received $1,335,000 from NFR/China Diamond. The fair value of the warrants acquired by NFR/China Diamond resulted in compensation expense of $1,179,310. In addition, $189,655 of stock compensation was recognized for the difference between the fair value of the units based on the closing price of the Company’s common stock on the date the agreement was signed and the purchase price of the units.
On July 9, 2008, the Company entered into a securities purchase agreement with Cheung Hin Shun Anthony, a member of our Board Directors, in which Mr. Cheung agreed to purchase a total of 2,000,000 investment units from us at $0.725 per unit. Each unit consists of one share of common stock, a four-year warrant to purchase one-half share of common stock at $0.725 and a five-year warrant to purchase one-half share of common stock at $1.10. The total investment by Mr. Cheung totals $1,450,000, of which $120,000 was received at July 9, 2008, and the balance will be paid in ten monthly installments through May 31, 2009. The fair value of the warrants acquired by Mr. Cheung resulted in compensation expense of $712,800. In addition, $150,000 of stock compensation was recognized for the difference between the fair value of the units based on the closing price of the Company’s common stock on the date the agreement was signed and the purchase price of the units.
In the first quarter of 2009, the Company sold 12,800 shares of common stock to 123 investors at $1.375 per share for a total consideration of $17,600.
Director Independence
In assessing the independence of our Board members, our Board has reviewed and analyzed the standards for independence required under the NASDAQ Capital Market, including NASDAQ Marketplace Rule 4200(a)(15), and applicable SEC regulations. Based on this analysis, our Board has determined that each of Trevor Roy, Philip Shyh-Jing (Philip) Chiang, Anthony Cheung, Isao Arimoto meet the standards for independence provided in the listing requirements of the NASDAQ Capital Market and SEC regulations. As a result, four of our seven Board members meet such standards of independence.
With respect to our Board committees, our entire Board serves the function of various committees, including the audit committee.
ITEM 14
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth fees billed to us by our auditors during the fiscal years ended December 31, 2009 and December 31, 2008 for: (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services by our auditor that are reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees, (iii) services rendered in connection with tax compliance, tax advice and tax planning, and (iv) all other fees for services rendered.
The board of directors serves the function of the audit committee.
PART IV
ITEM 15
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
(1) Financial Statements - See Index to Consolidated Financial Statements under Item 8 above.
(2) Exhibits - See Index to Exhibits following the signatures to this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Liang Qiao
Chief Executive Officer, Secretary and
March 31, 2010
Liang Qiao, M.D.
Chairman of the Board (Principal Executive Officer)
/s/ Chuen Huei (Kevin) Lee
Chief Financial Officer (Principal
March 31, 2010
Chuen Huei (Kevin) Lee
Financial and Accounting Officer)
/s/ Wenhui Qiao
President and Director
March 31, 2010
Wenhui Qiao
/s/ Shyh-Jing (Philip) Chiang
Director
March 31, 2010
Shyh-Jing (Philip) Chiang
/s/ Isao Arimoto
Director
March 31, 2010
Isao Arimoto
/s/ Toshihiro Komoike
Vice President and Director
March 31, 2010
Toshihiro Komoike
/s/ Trevor Roy
Director
March 31, 2010
Trevor Roy
/s/ Cheung Hin Shun Anthony
Director
March 31, 2010
Cheung Hin Shun Anthony
Exhibit Index
2.1
Agreement for the exchange of shares by and among the registrant, Bio-Bridge Science Corporation and the shareholders of record of Bio-Bridge Science Corporation, dated November 4, 2004(incorporated by reference to exhibits to Registration Statement No. 333-121786.)
3.1(i)
Certificate of incorporation of the registrant (incorporated by reference to exhibits to Registration Statement No. 333-121786.)
3.1(ii)
Certificate of determination of preferred shares (incorporated by reference to an exhibit to Form 8-K filed November 11, 2005.)
3.2(i)
Bylaws of the registrant (incorporated by reference to exhibits to Registration Statement No. 333-121786.)
10.1
Exclusive License Agreement between Bio-Bridge Science Corporation and Loyola University Chicago, dated April 22, 2004 (incorporated by reference to exhibits to Registration Statement No. 333-121786.)
10.2
Exclusive Sub-license Agreement between Beijing Bio-Bridge Science Corporation and Beijing Bio-Bridge Science Corporation, dated June 20, 2002 (incorporated by reference to exhibits to Registration Statement No. 333-121786.)
10.3
stock incentive plan (incorporated by reference to exhibits to Registration Statement No. 333-121786.)
10.4
Lease between Bio-Bridge Science Corporation and SFERS Real Estate K Limited Partnership, dated July 30, 2004 (incorporated by reference to exhibits to Registration Statement No. 333-121786)
10.5
Agreement between Bio-Bridge Beijing Science Corporation and Beijing Institute of Radiation Medicine, dated May 6, 2004. (incorporated by reference to exhibits to Registration Statement No. 333-121786)
10.6
Land Use Right Agreement between Bio-Bridge Science (Beijing) Co. Ltd. and Beijing Airport High-Tech Park Co. Ltd., dated May 28, 2003. (incorporated by reference to exhibits to Registration Statement No. 333-121786)
10.7
Agreement between Bio-Bridge Beijing Science Corporation and Beijing Institute of Radiation Medicine, dated May 12, 2004. (incorporated by reference to exhibits to Registration Statement No. 333-121786)
10.8
Exclusive Agency Agreement between Registrant and Xinhua Surgical Instruments Co., Ltd. dated November 16, 2005. (incorporated by reference to an exhibit to Form 8-K filed November 11, 2005)
10.9
Investment Agreement between Registrant and Dutchess Private Equities Fund, L.P. dated November 29, 2005(incorporated by reference to an exhibit to Form 8-K filed December 2, 2005).
10.10
Registration Rights Agreement between Registrant and Dutchess Private Equities Fund, L.P. dated November 29, 2005. (incorporated by reference to an exhibit to Form 8-K filed November 11, 2005)
10.11
Code of Ethics (incorporated by reference to an exhibit to Form 10-KSB filed March 31, 2007).
10.12
Securities Purchase Agreement dated January 2007(incorporated by reference to an exhibit to Form 10-KSB filed March 31, 2007).
10.13
Common Stock Warrant Purchase Agreement dated January 2007(incorporated by reference to an exhibit to Form 10-KSB filed March 31, 2007).
10.14
Registration Right Agreement dated January 2007(incorporated by reference to an exhibit to Form 10-KSB filed March 31, 2007).
10.15
Exclusive Agency Agreement between Registrant and Xinhua Surgical Instruments Co., Ltd. dated March 17, 2008 (incorporated by reference to an exhibit to Form 10-KSB filed on March 31, 2008).
10.16
Sale and Purchase Agreement between Registrant and Huhhot Xinheng Baide Technology Co. Ltd. dated April 30, 2008 (incorporated by reference to EX. 1.01 to Form 8-K filed on May 1, 2008).
10.17
Regulation S Securities Purchase Agreement between Registrant, NFR International Pty Limited, and China Diamond Limited (incorporated by reference to EX. 1.01 to Form 8-K filed on July 3, 2008).
10.18
Promissory Note issued by NFR International Pty Limited dated July 2, 2008 (incorporated by reference to EX 1.02 to Form 8-K filed on July 3, 2008).
10.19
Promissory Note issued by China Diamond Limited dated July 2, 2008(incorporated by reference to EX 1.03 to Form 8-K filed on July 3, 2008).
10.20
Regulation S Securities Purchase Agreement between Registrant and Cheung Hin Shun Anthony dated July 9,2008 (incorporated by reference to EX 1.01 to Form 8-K filed on July 11, 2008).
10.21
Promissory Note issued by Cheung Hin Shun Anthony dated July 9, 2008 (incorporated by reference to EX 1.02 to Form 8-K filed on July 11, 2008).
10.22
Stock Incentive Plan (incorporated by reference to Form 10KSB filed March 31, 2009
10.23*
Equity Joint Venture Contract dated June 9, 2009 (incorporated by reference to Exhibit 1 to Form 8-K filed June 10, 2009).
31.1 *
Chief Executive Officer Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *
Chief Financial Officer Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1 *
Chief Executive Officer Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2 *
Chief Financial Officer Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
*Filed herewith
BIO-BRIDGE SCIENCE INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2009 AND 2008
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Bio-Bridge Science Inc.
We have audited the accompanying consolidated balance sheets of Bio-Bridge Science Inc. and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bio-Bridge Science Inc. and Subsidiaries as of December 31, 2009 and 2008 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming Bio-Bridge Science Inc. and Subsidiaries will continue as a going concern. The Company has experienced recurring losses since inception. This condition raises substantial doubt regarding the Company's ability to continue as a going concern. Management's plans in regard to this matter are described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for noncontrolling interests and for determining if certain instruments (or embedded features) are indexed to its own stock effective January 1, 2009.
WEINBERG & COMPANY, P.A.
Los Angeles, California.
March 22,
BIO-BRIDGE SCIENCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
See accompanying notes to the consolidated financial statements.
BIO-BRIDGE SCIENCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
See accompanying notes to the consolidated financial statements.
BIO-BRIDGE SCIENCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
See accompanying notes to the consolidated financial statements.
(Continued)
BIO-BRIDGE SCIENCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
BIO-BRIDGE SCIENCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOW
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Continued)
BIO-BRIDGE SCIENCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOW
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008(Continued)
See accompanying notes to the consolidated financial statements.
BIO-BRIDGE SCIENCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Bio-Bridge Science, Inc ("the Company") was incorporated in the State of Delaware on October 26, 2004. The Company's fiscal year end is December 31. On December 1, 2004, the Company acquired all of the outstanding shares of Bio-Bridge Science Corporation ("BBS"), a Cayman Islands corporation, in exchange for 29,971,590 shares of its common stock, and as a result, BBS became a wholly owned subsidiary of Bio-Bridge Science, Inc. The acquisition was accounted for as a reverse merger (recapitalization) with BBS deemed to be the accounting acquirer, and the Company the legal acquirer.
BBS was incorporated in the Cayman Islands on February 11, 2002. At the time of the exchange, BBS held a 100% interest in Bio-Bridge Science (Beijing) Corp. ("Bio-Bridge Beijing"), a wholly-foreign funded enterprise of the People's Republic of China ("PRC") which was established on May 20, 2002. Bio Bridge Beijing is currently engaged in the development and commercialization of several vaccine candidates, such as HIV-PV vaccine I, cervical cancer vaccine, colon cancer vaccine, in mainland China.
On July 31, 2008, the Company acquired 51 percent of the outstanding capital interest of Bio-Bridge Xinheng Baide Biotechnology Co., Ltd. (“Bio-Bridge XBB”). The primary operations of Bio-Bridge XBB are the manufacture and distribution of bovine serum products, which is used in research, the production of pharmaceuticals, and production of veterinary medicines.
In June, 2009, the Company entered into an equity joint venture contract to purchase 51 percent of Bio-Bridge JRS Biosciences (Beijing) Co., Ltd. (“Bio-Bridge JRS”). On October 16, 2009 the joint venture received a business license to do business in China and began minimal start up activities.
Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, the Company had a net loss of $403,511 and used cash in operations of $1,332,080 for the year ended December 31, 2008, and had an accumulated deficit of $11,678,908 at December 31, 2009. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Based on our current operating plan, we believe that we have sufficient cash and cash equivalents to last approximately through January 2011. We will need to obtain additional financing in addition to the funds already raised through the sale of equity securities to fund our cash needs and continue our operations beyond January 2011. Additional financing, whether through public or private equity or debt financing, arrangements with stockholders or other sources to fund operations, may not be available, or if available, may be on terms unacceptable to us. Our ability to maintain sufficient liquidity is dependent on our ability to raise additional capital. If we issue additional equity securities to raise funds, the ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of our common stock. Debt incurred by us would be senior to equity in the ability of debt holders to make claims on our assets. The terms of any debt issued could impose restrictions on our operations. If adequate funds are not available to satisfy either medium or long-term capital requirements, our operations and liquidity could be materially adversely affected and we could be forced to cut back our operations.
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Bio-Bridge Science Inc. and our wholly owned subsidiaries, Bio-Bridge Science Corp., Bio-Bridge Beijing, Bio-Bridge Science Holding Co., Bio-Bridge Science (HK), Co. and our 51% owned subsidiaries Bio-Bridge XBB and Bio-Bridge JRS. Intercompany accounts and transactions have been eliminated in consolidation.
Change in accounting principle
On January 1, 2009, the Company adopted authoritative guidance issued by the Financial Accounting Standards Board (FASB) which affects the accounting for warrants and many convertible instruments. As a result, certain options and warrants and the conversion feature of the Company’s convertible preferred stock previously treated as equity are no longer afforded equity treatment because the strike price of the warrants is denominated in US dollars, a currency other than the Company’s functional currency, the Chinese Renminbi. As a result, these instruments are not considered indexed to the Company’s own stock, and as such, all future changes in the fair value of these instruments will be recognized currently in earnings until such time as the options, warrants, or beneficial conversion feature are exercised or expire (see Note 9).
On January 1, 2009, the Company adopted authoritative guidance issued by the FASB on noncontrolling interests in consolidated financial statements. This guidance establishes accounting and reporting standards for a noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership in the consolidated entity that should be reported as equity in the consolidated financial statements. The adoption of this did not have any material impact on the Company’s financial condition and results of operations. However, it did impact the presentation and disclosure of noncontrolling (minority) interests in the Company’s consolidated financial statements. The presentation and disclosure requirements were retrospectively applied to the consolidated financial statements. As such, all prior periods presented have been conformed to current year’s presentation. (see Note 3)
Use of Estimates
The preparation of financial statements in conformity 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 revenues and expenses during the reporting periods. Management makes these estimates using the best information available and the best judgment at the time the estimates are made, however actual results could differ materially from those estimates.
Revenue recognition
The Company recognizes revenue from the sales of products in accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin ("SAB") No. 104, when persuasive evidence of an order arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Generally, these criteria are met at the time the product is shipped to customers when title and risk of loss have transferred.
Cash and Cash Equivalents
For financial reporting purpose, the Company considers all highly liquid investments purchased with original maturity of three months or less to be cash equivalents.
The Company's cash balances on deposit in banks located in the PRC totaled the US dollar equivalent of $1,258,137 and $1,245,445 at December 31, 2009 and 2008, respectively. The Company and its subsidiaries have not experienced any losses in such accounts and do not believe the cash is exposed to any significant credit risk.
The Company's cash balances on deposit in banks in the United States of America are guaranteed up to $250,000 by the Federal Deposit Insurance Corporation (the “FDIC”). The Company may periodically be exposed to risk for the amount of funds held in one bank in excess of the insurance limit. In order to control the risk, the Company's policy is to maintain cash balances with high quality financial institutions. The Company had no cash balances with a bank in excess of the insurance limit as of December 31, 2009 and 2008.
Accounts Receivable
Accounts receivable consist of trade receivables from customers, less allowances for doubtful accounts, estimated future returns and customer rebates and credits.
Trade receivables are presented on the balance sheet as outstanding amounts adjusted for any allowance for bad debts. The Company maintains an allowance for doubtful receivables based primarily on historical loss experience. Additional amounts are provided through charges to income, as management feels necessary, after evaluation of receivables and current economic conditions. Amounts which are considered to be uncollectible are charged off and recoveries of amounts previously charged off are credited to the allowance upon recovery. At December 31, 2009 and December 31, 2008, the allowance for doubtful accounts was $40,037 and $12,000, respectively.
Inventories
Inventories are stated at the lower of cost or market. Market is defined as current replacement cost, except that market should not exceed the net realizable value and should not be less than net realizable value reduced by an allowance for an approximately normal profit margin. The cost of inventories is determined by using the first-in, first-out method. We perform a monthly analysis of our inventory balances to determine if the carrying amount of inventories exceeds their net realizable value. Our determination of estimated net realizable value is based on customer orders, market trends and historical pricing. If the carrying amount exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net realizable value.
Plant and Equipment
Plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation or amortization is provided over the estimated useful life of the asset, using the straight-line method. Estimated useful lives are as follows:
Asset category
Useful Life
Machinery
years
Vehicles
years
Laboratory
Shorter of 30 years or lease term
Leasehold improvements
Shorter of 4 years or lease term
Office equipment
years
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of operations. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.
Construction in Progress
Construction in progress represents direct costs of construction or acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until it is completed and ready for intended use. The Construction in progress was completed and transferred to property and equipment during 2009.
Land Use Rights
According to the law of China, the government owns all the land in China. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Land use rights are being amortized using the straight-line method over the 25 year life of the Company’s Chinese business license, which is shorter than the lease term of 50 years.
Goodwill and Intangible Assets
As required by guidance issued by the FASB, management performs impairment tests of goodwill and indefinite-lived intangible assets whenever an event occurs or circumstances change that indicate impairment has more likely than not occurred. Also, management performs impairment testing of goodwill and indefinite-lived intangible assets at least annually.
Goodwill is related to the Company's acquisition of Bio-Bridge XBB on July 31, 2008 (see Note 3). Goodwill and other intangible assets are accounted for in accordance with guidance issued by the FASB on goodwill and other intangible assets. Under this guidance, goodwill is not amortized. Rather, goodwill is assessed for impairment at least annually. The Company tests goodwill by using a two-step process. In the first step, the fair value of the reporting unit is compared with the carrying amount of the reporting unit, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. Based on management’s assessment, there were no indicators of impairment of recorded goodwill at December 31, 2009 or 2008.
Intangible assets subject to amortization are related to technology for producing cell culture medium contributed to Bio-Bridge JRS by a noncontrolling interest (see Note3). In accordance with guidance issued by the FASB on accounting for the impairment and disposal of long-lived assets, the Company reviews intangible assets subject to amortization at least annually to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If the carrying value of an asset exceeds its undiscounted cash flows, the Company writes down the carrying value of the intangible asset to its fair value in the period identified. If the carrying value of assets is determined not to be recoverable, the Company records an impairment loss equal to the excess of the carrying value over the fair value of the assets. The Company’s estimate of fair value is based on the best information available, in the absence of quoted market prices. The Company generally calculates fair value as the present value of estimated future cash flows that the Company expects to generate from the asset using a discounted cash flow income approach as described above. If the estimate of an intangible asset’s remaining useful life is changed, the Company amortizes the remaining carrying value of the intangible asset prospectively over the revised remaining useful life. The discounted cash flow valuation methodology and calculations will be used in 2010 impairment testing. The Company’s first measurement period will be in the third quarter of 2010.
Trading Securities
The Company accounts for trading securities using the guidance issued by the FASB for accounting for certain investments in debt and equity securities. The Company’s investment in trading securities is comprised of its investment in a Van Kampen unit investment fund. Trading securities are reported at fair value, with any changes in fair value during a period recorded as a charge or credit to net income (loss). Gains or losses realized upon sale of all securities are recognized at the time of sale. Cash received in excess of cumulative dividends is considered a return of principal.
Financial Assets and Liabilities Measured at Fair Value.
Effective January 1, 2008, fair value measurements are determined by the Company's adoption of authoritative guidance issued by the FASB, with the exception of the application of the statement to non-recurring, non-financial assets and liabilities as permitted. The adoption of the authoritative guidance did not have a material impact on the Company's fair value measurements. Fair value is defined in the authoritative guidance as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1-Quoted prices in active markets for identical assets or liabilities.
Level 2-Inputs, other than the quoted prices in active markets, are observable either directly or indirectly.
Level 3-Unobservable inputs based on the Company's assumptions.
The Company is required to use observable market data if such data is available without undue cost and effort
The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s consolidated balance sheets on a recurring basis and their level within the fair value hierarchy as of December 31, 2009:
At December 31, 2009, the Company’s financial assets and liabilities that were measured at fair value include its investment in trading securities which have a cost of $208,454, a gross unrealized loss of $46,410 and a fair value of $162,044. The Company estimates the fair value of its trading securities based on unadjusted quoted prices in active markets of identical assets, which is a Level 1 valuation.
Derivative financial instruments
The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. For stock-based derivative financial instruments, the Company uses both the Black-Scholes-Merton option pricing models to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.
Foreign Currency Translation
The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). Capital accounts of the consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of balance sheet date. Income and expenditures are translated at the average exchange rate of the year.
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US dollars at the rates used in translation.
Comprehensive Income
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s current components of comprehensive income consist of foreign currency translation adjustments:
Research and Development
Research and development costs are expensed as incurred. For the years ended December 31, 2009 and 2008, research and development expenses totaled $277,457 and $104,422, respectively.
Income Taxes
The Company accounts for income tax using the liability method that allows for recognition of deferred tax benefits in future years. Under the liability method, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future utilization is uncertain.
Loss per Share
Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. The diluted earnings per share calculation gives effect to all potentially dilutive common shares outstanding during the period using the treasury stock method. Common equivalent shares consist of shares issuable upon the exercise of stock options or warrants. As of December 31, 2009, common stock equivalents were composed of options convertible into 3,731,500 shares of the Company's common stock and warrants convertible into 8,814,943 shares of the Company's common stock. As of December 31, 2008, common stock equivalents were composed of options convertible into 2,297,000 shares of the Company's common stock and warrants convertible into 8,864,943 shares of the Company's common stock. For the years ended December 31, 2009 and 2008, common equivalent shares have been excluded from the calculation of loss per share as their effect is anti-dilutive.
Stock-Based Compensation
The Company periodically issues stock options and warrants to employees and non-employees in capital raising transactions, for services and for financing costs. Stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. Options vest and expire according to terms established at the grant date.
Concentrations
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and unsecured trade accounts receivable.
For the years ended December 31, 2009 and 2008, approximately 92% and 96% of the Company’s sales were to customers located in China.
For the year ended December 31, 2009, four customers accounted for 90% of total sales (40%, 26%, 14%, and 10% respectively). At December 31, 2009, these customers accounted for 80% of accounts receivable (28%, 20%, 19%, and 13%, respectively). For the year ended December 31, 2009, four vendors accounted for 92% of total purchases (40%, 26%, 14%, and 12% respectively). At December 31, 2009, these vendors accounted for 75% of accounts payable (27%, 25%, 12%, and 11%, respectively)
For the year ended December 31, 2008, four customers accounted for 100% of total sales (40%, 30%, 20% and 10% respectively). At December 31, 2008, three of these customers accounted for 100% of accounts receivable (40%, 31%, and 29%, respectively). For the year ended December 31, 2008, three vendors accounted for 87% of total purchases (38%, 37%, and 12% respectively). At December 31, 2008, these vendors accounted for 85% of accounts payable (40%, 35%, and 10%, respectively)
Noncontrolling interests
The Company accounts for the non-controlling interests in accordance with guidance issued by the FASB which defines a non-controlling interest as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The guidance requires, among other items, that a noncontrolling interest be included in the consolidated balance sheets within equity separate from the parent’s equity and consolidated net income (loss) is reported inclusive of both the parent’s and non-controlling interest’s shares and, separately, the amounts of consolidated net income (loss) attributable to the parent and non-controlling interest in the consolidated statement of operations.
Economic and Political Risks
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Recent Accounting Pronouncements
In June 2009, the FASB issued authoritative guidance on accounting standards codification and the hierarchy of generally accepted accounting principles (“GAAP") effective for interim and annual reporting periods ending after September 15, 2009. The FASB accounting standards codification (“ASC, “Codification”) has become the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. However, rules and interpretive releases of the SEC issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. Beginning with the quarter ending September 30, 2009, all references made by the Company to GAAP in its condensed consolidated financial statements use the Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, it does not have an impact on our financial position, results of operations and cash flows.
In June 2009, the FASB made an updated the principle for the consolidation of variable interest entities. Among other things, the update replaces the calculation for determining which entities, if any, have a controlling financial interest in a variable interest entity (VIE) from a quantitative based risks and rewards calculation, to a qualitative approach that focuses on identifying which entities have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. The update also requires ongoing assessments as to whether an entity is the primary beneficiary of a VIE (previously, reconsideration was only required upon the occurrence of specific events), modifies the presentation of consolidated VIE assets and liabilities, and requires additional disclosures about a company’s involvement in VIE’s. This update will be effective for fiscal years beginning after November 15, 2009. The Company does not currently believe that the adoption of this update will have any effect on its consolidated financial position and results of operations.
In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective for us beginning July 1, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. We believe the adoption of this new guidance will not have a material impact on our financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
3. NONCONTROLLING INTERESTS
We consolidate the accounts of entities in which we have a controlling financial interest under the voting control model. At December 31, 2009 the noncontrolling interest relates to third party investors who own 49% of Bio Bridge XBB and 49% of Bio Bridge JRS. At December 31, 2008 the noncontrolling interest relates to 49% of Bio Bridge XBB (see Note 2).
At December 31, 2009 and 2008, noncontrolling interests consisted of the following:
Bio-Bridge XBB
On July 31, 2008, the Company acquired 51 percent of the outstanding capital interest of Huhhot Xinheng Baide Biotechnology Co., Ltd., later renamed Bio-Bridge Xinheng Baide Biotechnology Co. (Bio-Bridge XBB). Bio Bridge-XBB is located in the city of Huhhot in Inner Mongolia of the PRC and is organized under the laws of the PRC. Bio Bridge-XBB manufactures and distributes bovine serum products, which is used in research, the production of pharmaceuticals, and production of veterinary medicines. The Company purchased 51 percent of the outstanding capital interest of Bio Bridge XBB in exchange for cash of $881,058 (RMB 6,000,000). The acquisition was accounted for as a purchase. As such, the results of Bio Bridge XBB's operations have been included in the consolidated financial statements since August 1, 2008. The components of the purchase price and the allocation of the purchase price are as follows:
Goodwill represents the excess of the purchase price of Bio Bridge XBB over the fair value of the identifiable assets acquired and liabilities assumed. The Company accounts for minority interest using a historical basis.
For the years ended December 31, 2009 and 2008, Bio Bridge XBB recorded revenue of $924,049 and $595,454, respectively, and recorded net income of $132,674 and $92,715, respectively.
The following unaudited pro forma operating data shown below presents the results of operations as of December 31, 2008, as if the acquisition of XHBD had occurred on the last day of the immediately preceding fiscal period. Accordingly, transaction costs related to the acquisition are not included in the loss from operations shown below. The pro forma results are not necessarily indicative of the financial results that might have occurred had the acquisition actually taken place on the respective dates, or of future results of operations.
In addition, China Diamond, an entity controlled by Mr. Trevor Roy, a director of the Company, purchased 14 percent of bio-Bridge XHBD on April 30, 2008.
Bio-Bridge JRS
On June 9, 2009, Bio-Bridge Science (HK) Co., Ltd., a wholly-owned subsidiary of Bio-Bridge Science, Inc. entered into an equity joint venture contract with JR Scientific Inc., a California based manufacturer of classical and custom cell culture medium and sera products and several other investors, to form a new cell culture medium joint venture in Beijing, China. The registered capital of the joint venture is RMB 10,000,000 (approximately US$ 1,465,000). The company invested RMB 5,100,000 (approximately US$747,000) in cash in the joint venture for 51% of the equity and JRS contributed certain technology for 15% of the equity. The balance of the equity was purchased by other investors. On October 16, 2009, Bio-Bridge Science Inc. received a business license from the Beijing Administration for Industry and Commerce of the PRC indicating approval of the formation of Bio-Bridge JRS Biosciences (Beijing) Co., Ltd. (“Bio-Bridge JRS”).
Bio-Bridge JRS engaged an independent valuation firm to assist it in the valuation of the intangible assets contributed by JRS. The methods used to value the assets contributed included the discounted cash flow method. The technology is for non-patented research and development information and technical data related to cell culture manufacturing processes. Based on management’s assessment, including the utilization of the results of the independent valuation report, the Company determined the value of the technology contributed by JRS to be $219,677 to be amortized over its estimated useful life of five years beginning in 2010.
For the years ended December 31, 2009, Bio-Bridge JRS had no revenue and recorded expenses, primarily made up of start up general and administrative, totaling $129,508.
In addition, China Diamond, an entity controlled by Mr. Trevor Roy, a director of the Company purchased 11 percent of Bio-Bridge JRS in 2009.
4. INVENTORIES
At December 31, 2009 and 2008, inventories consisted of the following:
5. TRADING SECURITIES
At December 31, 2009 and 2008, trading securities consisted of the following:
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2009 and 2008:
Construction of laboratory
In May 2003, the Company acquired a land use right for approximately 2.8 acres of land in the Tianzhu Export Processing Zone, Shunyi District, Beijing, China, which the Company plans to develop into a laboratory and bio-manufacturing facility in compliance with Good Manufacturing Practices, or GMP, regulations primarily for clinical trials of our vaccine candidates. The general plans for development include the construction of a laboratory facility (“Phase One”) and construction of an administrative office building (“Phase Two”). In 2009, the Phase One laboratory facility was put into service and is being depreciated over the remaining 19 years of the Company’s land use right, which is less than the laboratory facility’s estimated useful life of approximately 25 years. Previously, the laboratory facility construction was shown as construction in progress. At December 31, 2009, $42,471 was due to the contractors of Phase One for the completed construction and is recorded as due to contractors. At December 31, 2009, Phase Two was still in the design stage. The Company estimates the total project costs for Phase Two will be approximately $1,200,000. The Company estimates that construction may begin on Phase Two in 2011 or later, but currently has no plans for Phase Two construction.
Depreciation expense for fixed assets the years ended December 31, 2009 and 2008 was $213,347 and $34,656, respectively.
7. LAND USE RIGHTS
In July 2003, the Company obtained a 50 year land use right to build a research factory in Beijing, PRC. This amount has been capitalized and is being amortized over twenty-five years, the term of the Company's business license. At August 20, 2009, Bio-Bridge XBB acquired a land use rights for $166,290 to be its future headquarter and manufacturing facility. As of December 31, 2009, no construction had commenced on Bio-Bridge XBB’s land use right.
Land use right as of December 31, 2009 and 2008, consisted of the following:
The expected amortization of the land use right over each of the next five years and thereafter is summarized as follows:
8. INCOME TAXES
The Company has not recorded a provision for U.S. federal income tax for the years ended December 31, 2009 and 2008 due to a net operating loss carry forward in the United States of America. The net operating loss carry forward in the United States of America as of December 31, 2009 was $886,103 and expires through 2029.
In accordance with the relevant tax laws and regulations of PRC, the applicable corporation income tax rate for BBS Beijing, XHBD and Bio-Bridge JRS are 25%.
Corporation Income Tax ("CIT")
Beginning January 1, 2008, China implemented a new CIT, in which local and foreign enterprises are subject to CIT of 25%. Previously, the CIT was 33%. BBS Beijing is entitled to full exemption from Chinese CIT for the first two years after recording a profit. BBS Beijing did not record a profit in 2009 or 2008.
Significant components of the Company's deferred income tax assets at December 31, 2009 and 2008 are as follows:
Reconciliation of the effective income tax rate to CIT statutory rate for the years ended December 31, 2009 and 2008 is as follows:
Effective January 1, 2007, the Company adopted Guidance issued by the FASB for accounting for uncertainty in income taxes. The guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The FASB also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of December 31, 2009, the Company does not have a liability for unrecognized tax uncertainties. The Company and its Chinese subsidiaries have never been subject to a tax examination and all years are open to examination by the tax authorities.
Value added tax ("VAT")
In accordance with the relevant tax laws in the PRC, VAT is levied at 17% on the invoiced value of sales and is payable by the consumer. The Company is required to remit the VAT collected to the tax authority, but may deduct therefore the VAT it has paid on eligible purchases.
9. DERIVATIVE LIABILITY
In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Under the authoritative guidance, effective January 1, 2009, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The strike price of options and warrants issued by the Company, and the conversion feature in the Company’s preferred stock are denominated in US dollars, a currency other than the Company’s functional currency, RMB. As a result, the options and warrants and conversion feature are not considered indexed to the Company’s own stock. The fair value of certain of the Company’s options and warrants, and the conversion feature of the Company’s convertible preferred stock, have been re-characterized as derivative liabilities effective January 1, 2009. The FASB’s guidance requires the fair value of these liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
At January 1, 2010, the Company had 3,731,500 options and 8,814,943 warrants outstanding with a strike price denominated in US dollars, a currency other than the Company’s functional currency, RMB. The Company determined that 3,611,000 of the options and 5,488,276 of the warrants were issued pursuant to share-based payments and therefore were not subject to the liability accounting.
The derivative liabilities were valued using the Black-Scholes-Merton valuation technique with the following assumptions:
The risk-free interest rate is based on the yield available on U.S. Treasury securities. The Company estimates volatility based on the historical volatility if its common stock. The expected life of the options and warrants and conversion feature are based on the expiration date of the related options and warrants and convertible preferred stock. The expected dividend yield was based on the fact that the Company has not paid dividends to common shareholders in the past and does not expect to pay dividends to common shareholders in the future.
Accounting for the derivatives was implemented in the first quarter of 2009 and is reported as a cumulative change in accounting principles. The cumulative effect on the accounting for the conversion feature of the notes and the warrants at December 31, 2008 is as follows:
The warrants were originally recorded at their relative fair value as an increase in additional paid-in capital. The change in the accumulated deficit includes gains resulting from decreases in the fair value of the derivative liabilities through December 31, 2008. The derivative liability amounts reflect the fair value of each derivative instrument as of the January 1, 2009, date of implementation.
The Company measured the fair value of the options, warrants, and conversion feature as of December 31, 2009 as $377,013. For the year ended December 31, 2009, the Company recorded a gain on the change in the fair value of derivatives of $912,356.
10. SHAREHOLDERS’ EQUITY
Preferred Stock
On December 31, 2006, the Company amended its certificate of incorporation to provide for 5,000,000 shares of Series A preferred stock. Pursuant to the Company's certificate of incorporation, its board of directors has the authority, without further action by the stockholders, to issue up to 5,000,000 shares of undesignated preferred stock, par value $0.001 per share. The Company's board will also have the authority, without the approval of the stockholders, to fix the designations, powers, preferences, privileges and relative, participating, optional or special rights and the qualifications, limitations or restrictions of any preferred stock issued, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the common stock. Preferred stock could thus be issued with terms that could delay or prevent a change in control of our company or make removal of management more difficult.
On January 20, 2007, the Company entered into a Securities Purchase Agreement with three individuals, whereby the Company agreed to sell 4,000,000 shares of Series A Convertible Preferred Stock and warrants to purchase 3,000,000 shares of common stock at $1.00 per share. On February 12, 2007, the preferred stock and warrants were issued for $0.75 per unit, or $3,000,000 in aggregate.
The preferred stock earns dividends at 12% annually, in common shares of the Company valued at $1.00 per share, payable semiannually in arrears. The preferred stock dividend is cumulative and non-participating. During the years ended December 31, 2009 and 2008, the Company recorded $387,200 and $360,000 of preferred stock dividends payable. The preferred stock has liquidation preference of $0.75 per share and no voting rights. The preferred shares contain standard anti-dilution protection.
At the holder’s option, the preferred stock is convertible into the Company’s common stock on a one-for-one basis anytime up to January 30, 2010 (three years). The conversion price is $0.75 per share, subject to reset adjustments for the first year, but in no event below $0.50 per share.
At the Company’s option, the preferred stock is convertible into the Company’s common stock (at the conversion price initially set at $0.75 per share) when the average closing price of the common stock for any 20 consecutive trading days is at least $2.00. On the third anniversary (January 30, 2010) of the closing, the Company shall have the right to convert all the Preferred Stock then outstanding into shares of common stock.
As of March 22, 2010, the preferred share holders are in the process of converting the preferred shares into shares of common stock.
The warrants are exercisable through January 20, 2010, into 3,000,000 shares of the Company’s common stock for $1.00 per share.
The $3,000,000 proceeds were allocated to the preferred stock and warrants based on their relative fair values. The Company determined the fair value of the warrants to be $693,177 using a Black-Scholes option pricing model with the following assumptions: expected volatility of 50%, a risk-free interest rate of 3.40%, an expected term of 3 years, and 0% dividend yield. The Company determined the warrants are properly classified as an equity instrument and no value was recorded for the warrants as any value assigned would result in an increase and decrease to additional-paid-in-capital in the same amount. The conversion terms of the preferred stock resulted in a beneficial conversion feature valued at $1,293,320. The Company recorded a charge to retained earnings for $1,293,320 representing a deemed dividend to the preferred stockholders with the offset recorded in additional paid in capital.
Common Stock
In 2008, the Company sold 5,841,610 shares of common stock and warrants to purchase 5,814,943 shares of common stock to seven individuals at $0.725 to $0.75 per unit, for total consideration of $4,245,999. Four of these individuals, who purchased a total of 5,488,276 shares of common stock and warrants to purchase 5,488,276 shares of common stock for a total of $3,980,000, are members of our Board of Directors. As of December 31, 2008, $2,182,349 of the total consideration had been received, and the balance of $2,062,650 is included in subscription receivable, including $1,852,500 subscription receivable from directors.
The fair value of the warrants acquired by the directors was $1,903,586, which was determined using the Black-Scholes valuation method, using the following assumptions: no expected dividend yield; a risk-free interest rate of 2.4%; an expected life of 3 to 5 years; and an estimated volatility of 56 percent based on recent history of the stock price in the industry. The total of $1,903,586 was charged to compensation expense on the date the warrants were acquired (see Note 10). In addition, $339,655 of stock compensation was recognized for two of the directors for the difference between the fair value of the units they purchased based on the closing price of the Company’s common stock and the purchase price of the units on the dates of the transactions.
Issuance of common stock for services
On July 1, 2008, the Company agreed to issue CH Capital LLC 50,000 shares of restricted common stock for investor relations services. The fair value of the 50,000 shares was determined to be $87,500 based on the closing price of the Company’s common stock on the date the agreement was signed. The Company recorded $87,500 as consulting expense when the shares were granted.
On October 1, 2008, the Company entered into consulting agreements with two scientific advisors in which the company granted 20,000 shares of restricted common stock to them for scientific advisory service. The fair value of the 20,0000 shares was determined to be $23,000, based on the closing price of the shares when granted, and was recorded as compensation cost when the shares were granted.
On November 26, 2008, the Company granted 70,000 shares of restricted common stock to seven board members for their service. The fair value of the 70,000 shares of restricted common stock was determined to be $36,400, based on the closing price of the shares when granted, and was recorded as compensation cost when the shares were granted.
On July 21, 2009, the Company agreed to issue 38,160 of restricted common stock to two employees for their services. The fair value of the 38,160 shares was determined to be $9,540, based on the closing price of the shares when granted, and was recorded as compensation cost when the shares were granted.
On October 1, 2009, the Company entered into consulting agreements with two scientific advisors in which the company granted 20,000 shares of restricted common stock to them for scientific advisory service. The fair value of the 20,0000 shares was determined to be $11,000, based on the closing price of the shares when granted, and was recorded as compensation cost when the shares were granted.
11. STOCK OPTION AND WARARNTS
On December 1, 2004, the Company approved and adopted the 2004 Stock Incentive Plan. The 2004 stock incentive plan provides for the grant of incentive stock options to our employees, and for the grant of non-statutory stock options, restricted stock, stock appreciation rights and performance shares to our employees, directors and consultants. The Company has reserved a total of 2,000,000 shares of its common stock for issuance pursuant to the 2004 stock incentive plan. The 2004 stock incentive plan does not provide for automatic annual increases in the number of shares available for issuance under the plan. As of December 31, 2009, 1,877,000 options had been granted under this plan, and an additional 420,000 options have been granted outside of the plan.
The administrator determines the exercise price of options granted under our 2004 stock incentive plan, but the exercise price must not be less than 85% of the fair market value of our common stock on the date of grant. In the event the participant owns 10% or more of the voting power of all classes of our stock, the exercise price must not be less than 110% of the fair market value per share of our common stock on the date of grant. With respect to all incentive stock options, the exercise price must at least be equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed 10 years, except with respect to any participant who owns 10% of the voting power of all classes of our outstanding stock or the outstanding stock of any parent or subsidiary of ours, which the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator determines the term of all other options; however, no option will have a term in excess of 10 years from the date of grant.
On November 26, 2008, the Company approved and adopted the 2008 Stock Incentive Plan. The 2008 stock incentive plan provides for the grant of incentive stock options to our employees, and for the grant of non-statutory stock options, restricted stock, stock appreciation rights and performance shares to our employees, directors and consultants. The Company has reserved a total of 4,000,000 shares of its common stock for issuance pursuant to the 2004 stock incentive plan. The 2004 stock incentive plan does not provide for automatic annual increases in the number of shares available for issuance under the plan. As of December 31, 2009, no options had been granted under this plan.
The administrator determines the exercise price of options granted under our 2008 stock incentive plan, but the exercise price must not be less than 85% of the fair market value of our common stock on the date of grant. In the event the participant owns 10% or more of the voting power of all classes of our stock, the exercise price must not be less than 110% of the fair market value per share of our common stock on the date of grant. With respect to all incentive stock options, the exercise price must at least be equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed 10 years, except with respect to any participant who owns 10% of the voting power of all classes of our outstanding stock or the outstanding stock of any parent or subsidiary of ours, which the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator determines the term of all other options; however, no option will have a term in excess of 10 years from the date of grant.
Issuance of stock options
On July 20, 2009, the Company granted 1,083,000 options to purchase shares of common stock to employees, expiring 10 years from the date granted, and exercisable at $0.001 to $0.52 per share. Options to purchase 3,000 shares of common stock are exercisable at $0.001 per share, options to purchase 840,000 shares of common stock are exercisable at $0.47 per share, and options to purchase 240,000 shares of common stock are exercisable at $0.52 per share. 283,000 of the options vested immediately and 800,000 of the options will vest ratably over 21 months. The options were valued at $258,791, the fair value of the stock options on the date granted determined using a Black-Scholes pricing model. The Company recognized $138,697 of compensation expense from the date the options were granted through December 31, 2009 for the fair value of the vested options. Amortization of the unvested options will be as follows: $96,075 for the year ended December 31, 2010, and $24,019 for the year ended December 31, 2011. The fair value of the options granted on July 20, 2009 were determined using a Black-Scholes option pricing model with the following assumptions: 2.32% average risk-free interest rate; 179% expected volatility; six year expected term, and 0% dividend yield.
On December 18, 2009, the Company granted 351,500 options to purchase shares of common stock to 28 employees, expiring 10 years from the date granted, and exercisable at $0.50 per share. 43,938 of the options vested immediately and 307,562 of the options will vest ratably over 19 months. The options were valued at $182,423 the fair value of the stock options on the date granted determined using a Black-Scholes pricing model. The Company recognized $45,606 of compensation expense from the date the options were granted through December 31, 2009 for the fair value of the vested options. Amortization of the unvested options will be as follows: $91,211 for the year ended December 31, 2010, and $45,606 for the year ended December 31, 2011. The fair value of the options granted on December 18, 2009 were determined using a Black-Scholes option pricing model with the following assumptions: 1.62% average risk-free interest rate; 191% expected volatility; six year expected term, and 0% dividend yield.
At December 31, 2009 and 2008, stock options outstanding were as follows:
The following table summarizes information about stock options outstanding as of December 31, 2009:
Information relating to stock options at December 31, 2009 summarized by exercise price is as follows:
The aggregate intrinsic value of 3,731,500 options outstanding and 2,823,938 options exercisable as of December 31, 2009 were $325,365 and $268,256, respectively. The aggregate intrinsic value for the options is calculated as the difference between the price of the underlying awards and quoted price of the Company’s common shares for the options that were in-the-money as of December 31, 2009.
Common stock warrants
On June 4, 2008 and June 18, 2008, the Company issued two series of warrants to four investors to purchase 183,334 shares of common stock at $0.75 per share with a term of three years and to purchase 183,333 shares of common stock at $1.20 per share with a term of four years (366,667 warrants in the aggregate). Warrants to purchase 40,000 shares of common stock were acquired by two of our directors (see Note 9). We recorded the fair value of the warrants acquired by the two directors as compensation costs. The fair value of three-year warrant and five-year warrant issued to our directors was $5,898 and $5,610, respectively, at the grant date, which was determined using the Black-Scholes valuation method, using the following assumptions: no expected dividend yield; a risk-free interest rate of 2.4%; an expected life of 3 and 5 years respectively; and an estimated volatility of 56 percent based on recent history of the stock price in the industry. The total of $11,508 was charged to compensation cost at the date the warrants were granted.
On July 2, 2008, Company issued warrants to another director to purchase 1,724,138 shares of common stock at $0.725 per share with a term of four years and to purchase 1,724,138 shares of common stock at $1.10 per share with a term of five years. We recorded the fair value of the warrants to purchase the 3,448,276 shares of common stock as compensation cost. The fair value of four-year warrant and five-year warrant issued to these two investors was $633,091 and $546,220, respectively, at the grant date, which was determined using the Black-Scholes valuation method, using the following assumptions: no expected dividend yield; a risk-free interest rate of 2.4%; an expected life of 4 and 5 years respectively; and an estimated volatility of 56 percent based on recent history of the stock price in the industry. The total of $1,179,311 was charged to compensation cost at the date the warrants were granted.
On July 9, 2008, Company issued warrants to another director to purchase 1,000,000 shares of common stock at $0.725 per share with a term of four years and to purchase 1,000,000 shares of common stock at $1.10 per share with a term of five years. We recorded the fair value of the warrants to purchase 2,000,000 shares of common stock as compensation cost. The fair value of four-year warrant and five-year warrant issued to these two investors was $382,474 and $330,293, respectively, at the grant date, which was determined using the Black-Scholes valuation method, using the following assumptions: no expected dividend yield; a risk-free interest rate of 2.4%; an expected life of 4 and 5 years respectively; and an estimated volatility of 56 percent based on recent history of the stock price in the industry. The total of $712,767 was charged to compensation cost at the date the warrants were granted.
At December 31, 2009 and 2008, warrants outstanding were as follows:
The following table summarizes information about warrants outstanding at December 31, 2009:
The aggregate intrinsic value of 8,814,943 warrants outstanding and exercisable as of December 31, 2009 was zero.
12. COMMITMENTS AND CONTINGENCIES
Lease Commitment
As of December 31, 2009, we had remaining outstanding commitments with respect to our non-cancelable operating leases as follows: $55,249 for the year ending December 31, 2010, $36,245 for the year ending December 31, 2011, and $18,122 for the year ending December 31, 2012.
Royalty and License Arrangements
Liang Qiao, M.D., our co-founder and chief executive officer, is one of the two co-inventors of our core technology that was assigned to Loyola University Chicago in April 2001. Under an agreement with Loyola University Chicago, we have obtained exclusive rights to this technology for use in its future products within the United States, Japan and the People's Republic of China, including mainland China, Hong Kong, Taiwan and Macau. The license continues perpetually or for the maximum period of time permitted by law, unless terminated earlier under the terms of the agreement. Pursuant to this agreement, Loyola receives a royalty of 4% from the net profit for all uses of the licensed technology, including uses under sublicenses. As of December 31, 2009, we had not generated any revenues from the sale of any products under development, nor had we received any revenues from sublicenses.
Line of credit
The Company has a line of credit with JP Morgan Chase Bank, N.A. On December 31, 2009, there were no borrowings outstanding under the line of credit agreement. The maximum borrowing amount available under the line of credit is $100,000, bears interest at 4% plus prime, matures February 12, 2011, and is collateralized by the Company’s bank accounts held at JP Morgan Chase Bank, N.A., (totaling $218,625 at December 31, 2009).
13. SUBSEQUENT EVENTS
On January 30, 2010, the Company issued 3,000,000 warrants to two directors for services. The fair value of the warrants of approximately $1,521,805 will be expensed on the date granted.
On January 30, 2010, holders of 4,000,000 shares of the Company’s convertible preferred stock elected to convert the preferred shares into shares of the Company’s common stock on a one-for-one basis.