10-Q 1 phage10qmarch2001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended of March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to _______________ Commission file number PHAGE THERAPEUTICS INTERNATIONAL INC. ------------------------------------- (Exact name of registrant as specified in its charter) Florida 91-1930691 ------- ---------- (State or other jurisdictions of (I.R.S. Employer incorporation or organization) Identification No.) 19017 - 120th Avenue NE, Suite #102, Bothel, Washington 98011 ------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (425) 482-9511 --------------- Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- As of March 31, 2001, the registrant had 10,895,444 shares of Common Stock outstanding with a par value of $0.001 par value.

PART 1 - FINANCIAL INFORMATION ITEM 1. Financial Statements. The information in this report for the three months ended March 31, 2001 and 2000 is unaudited but includes all adjustments (consisting only of normal recurring accruals, unless otherwise indicated) which Phage Therapeutics International Inc ("Phage" or the "Company") considers necessary for a fair presentation of the financial position, results of operations, changes in stockholders' equity and cash flows for those periods. The condensed consolidated financial statements should be read in conjunction with the Company's financial statements and the notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Interim results are not necessarily indicative of results for the full fiscal year. 1 PHAGE THERAPEUTICS INTERNATIONAL INC. (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 TABLE OF CONTENTS Page No. Consolidated balance sheets 1 Consolidated statements of operations 2 Consolidated statements of cash flows 3 & 4 Consolidated statements of changes in stockholders' equity 5 & 6 Notes to the consolidated financial statements 7 to 21 2

PHAGE THERAPEUTICS INTERNATIONAL INC. 7 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 1. NATURE AND CONTINUANCE OF OPERATIONS Phage Therapeutics International Inc. ("Phage", or the "Company") is a development stage company focused on the development, manufacturing and marketing of bacteriophage therapeutic agents as pharmaceutical products. The products will be developed specifically for the treatment of antibiotic-resistant and other bacterial infectious agents. The Company was originally incorporated in the State of Florida on July 8, 1997 under the name All Products Distribution Corporation, and changed its name to Phage Therapeutics International Inc. on August 19, 1998. The consolidated Company's date of inception is considered to be December 24, 1996, the date of inception of Phage Therapeutics, Inc. ("PhageTx" or the "Subsidiary"), the Company's legally owned subsidiary. The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As at March 31, 2001 the Company had a working capital of $1,136,167 and has incurred losses of $6,134,366 from the date of inception , December 24, 1996 to March 31, 2001. The Company anticipates expending approximately $5,000,000 over the next twelve month period in pursuing its anticipated plan of operations. The Company anticipates covering these costs by additional equity financing. Subsequent to March 31, 2001, the Company completed an offering of 2,142,857 units at $0.70 per unit pursuant to Regulation D, Rule 506 of the United States Securities Act of 1933, as amended. The total proceeds of $1,500,000 will help the Company complete its anticipated plan of operations. If the Company is unable to complete its further financing requirements, it will then modify its expenditures and plan of operations to coincide with the actual financing completed. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, changes in stockholders' equity and cash flows at March 31, 2001 and for the periods then ended have been made. These financial statements should be read in conjunction with the audited financial statements of the Company for the year ended December 31, 2000. The results of operations for the period ended March 31, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001. 2. SIGNIFICANT ACCOUNTING POLICIES In preparing these financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for the period. Actual results in the future periods could be different from these estimates made in the current period. The following is a summary of the significant accounting policies of the Company. Basis of consolidation and presentation The consolidated financial statements include the accounts of Phage Therapeutics International Inc. and its majority- owned subsidiary Phage Therapeutics, Inc., a Washington corporation. As of March 31, 2001, the Company owned approximately 88% of the outstanding common stock of Phage Therapeutics, Inc. All significant inter-company transactions have been eliminated in consolidation. 9 PHAGE THERAPEUTICS INTERNATIONAL INC. 8 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Basis of consolidation and presentation (cont'd...) Effective March 25, 1999, the Company acquired 71% of the outstanding common stock of Phage Therapeutics, Inc. through a series of share exchange agreements with certain PhageTx shareholders (see Note 3). Added to the Company's previous share holdings of PhageTx, this transaction increased the Company's interest in PhageTx, to approximately 80%. As a result of this transaction, the former shareholders of PhageTx obtained control of the Company. For accounting purposes, this acquisition has been treated as a recapitalization of the Company. The accounting for this recapitalization is similar to a reverse take-over in which the financial statements presented include the accounts of PhageTx since inception (December 24, 1996) and the accounts of the company since the date of acquisition, March 25, 1999 to March 31, 2001. Cash and cash equivalents All short-term investments, which consist entirely of bank repurchase agreements and certificates of deposit, with maturities of three months or less at date of purchase are considered to be cash equivalents. The amounts are recorded at cost, which approximates fair market value. Capital assets Capital assets are recorded at cost and are amortized over their useful lives using the straight-line method, which range from three to five years. Research and development expenses Research and development costs are expensed as incurred. Accounting for impairment of long-lived assets and for long-lived assets to be disposed of The Company has adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). In accordance with SFAS No. 121, Long- Lived Assets to be held and used by the Company are reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, the Company bases its evaluation on such impairment indicators as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. In the event that facts and circumstances indicate that the carrying amount of an asset may not be recoverable and an estimate of future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss will be recognized. As at December 31, 2000, the Company's analysis indicated that there was an impairment of its long-lived assets as outlined in Note 4. Management has estimated that the research and experimentation costs to date are greater than the estimated future undiscounted cash flows. Therefore, research and experimentation costs to date have been expensed during the development stage period. 10 PHAGE THERAPEUTICS INTERNATIONAL INC. 9 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Financial instruments The Company's financial instruments consist of cash and cash equivalents, deposit, non-current, accounts payable, accrued liabilities, due to related parties and notes payable to related party. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximate their carrying values, unless otherwise noted. Loss per share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under SFAS 128, basic and diluted earnings per share are to be presented. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares outstanding in the period. Diluted earnings per share takes into consideration common shares outstanding (computed under basic earnings per share) and potentially dilutive common shares. The Company is a development stage company and has recorded a loss per share. The weighted average number of shares outstanding for 2001, 10,895,444 and 2000, 7,392,586, do not include the 1,942,858 (2000 - 2,028,572) warrants outstanding, the stock options of 2,880,000 (2000 - 2,755,000) and the 2,142,857 common shares issued subsequent to March 31, 2001 as their effect would be anti-dilutive. Of the total 1,942,858 shares issued in the three month period ended March 31, 2000, 582,857 shares are included in the weighted average number of 7,392,586 shares outstanding at March 31, 2000. Income taxes Income taxes are provided in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Stock-based compensation Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and has adopted the disclosure only provisions of SFAS 123. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee is required to pay for the stock. The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services". 11 PHAGE THERAPEUTICS INTERNATIONAL INC. 10 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 2. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Accounting for derivative instruments and hedging instruments In June 1998, the Financial Accounting Standards Board ("FASB") issued the Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on the derivative designation. The effective date of SFAS 133 was deferred by FASB Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", and further amended by FASB Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Transactions". Since the Company does not have derivative instruments and hedging activities, pursuant to SFAS 133, there would be no impact on its financial position or the results of its operations from the adoption of this accounting policy. Segment Reporting In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. The statement is effective for fiscal years beginning after December 15, 1997. The Company does not have any reporting requirements as defined by SFAS No. 131. 3. RECAPITALIZATION During March 1999 the Company issued 3,393,141 common shares to acquire 71% of the issued and outstanding shares of Phage Therapeutics, Inc. (the "PhageTx Acquisition"). This transaction increased the Company's ownership of PhageTx to approximately 80%. As a result of this transaction the former shareholders of PhageTx acquired control over a majority of shares of the Company. Accordingly, the transaction has been treated for accounting purposes as a recapitalization of the Company and, therefore, these financial statements represent a continuation of the legal subsidiary, PhageTx, not the Company, as the legal parent. In accounting for this transaction: i) PhageTx is deemed to be the purchaser and parent company for accounting purposes. Accordingly, its net assets are included in the consolidated balance sheet at their historical book values; ii) Phage was formed for the sole purpose of seeking a target acquisition candidate and its net assets as of the Effective Date were negative. Accordingly, the acquisition of the Company will be accounted for at the net book value of the net assets of the Company recorded at the date of acquisition. The net assets acquired are as follows: Cash and equivalents $ 173 Account receivable 4,000 Accounts payable (39,018) ---------------- Net assets acquired $ (34,845) ================ 12 PHAGE THERAPEUTICS INTERNATIONAL INC. 11 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 3. RECAPITALIZATION (cont'd...) iii)Historical cost financial statements presented are those of PhageTx, with equity amounts of PhageTx retroactively restated to reflect the number of shares received in the business combination. iv) The consolidated statements of operations and cash flows include PhageTx's results of operations and cash flows from December 24, 1996 (date of inception) and Phage's results of operations from the Effective Date. 4. CAPITAL ASSETS ================================================================================ March 31, December 31, 2001 2000 ---------------- ---------------- Research and development equipment $ 111,777 $ 33,499 Computer and office equipment 69,557 52,309 Furniture and fixtures 20,979 18,178 Leasehold improvements 41,414 6,341 ---------------- ---------------- 243,727 110,327 Accumulated amortization (55,682) (49,804) ---------------- ---------------- $ 188,045 $ 60,523 ================================================================================ In accordance with SFAS No. 121, Long-Lived Assets to be held and used by the Company, are reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. As at December 31, 2000, the Company's analysis of its capital assets determined an impairment value of $6,598 on research and development equipment, computer and office equipment and furniture and fixtures. The amount of $6,598 was the net book value of $104,529 in capital cost minus accumulated amortization of $97,931. The amount was recorded as a loss on disposal of capital assets. 5. NOTES PAYABLE TO RELATED PARTY ================================================================================ March 31, December 31, 2001 2000 ----------------- ----------------- Principal amount $ 140,198 $ 140,198 Accrued interest 13,064 21,209 ----------------- ----------------- $ 153,262 $ 161,407 ================================================================================ In 1999, the Company received several loans from Prostar Limited which totalled $140,198. The loans bear interest at 13 11% per annum and are repayable on demand. PHAGE THERAPEUTICS INTERNATIONAL INC. 12 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 6. CAPITAL STOCK As a result of the PhageTx Acquisition transaction, all historical stockholders' equity amounts have been retroactively restated to reflect the number of shares received in the business combination. Accordingly, the historical equity amounts shown in the Consolidated Statement of Changes in Stockholders' Equity reflect the equity transactions completed by PhageTx, with share amounts restated to reflect the equivalent number of shares of the Company's common stock, issued in exchange for the respective shares of PhageTx stock. Equity transactions are shown as if the Company had acquired 100% of the issued and outstanding shares of PhageTx common stock, an adjustment is recorded to indicate the number of shares of the legal parent outstanding as of the date of the acquisition, and a non-controlling interest is deducted from the total share amount to reflect the number of shares of PhageTx not yet owned by the Company as of the date of the acquisition. At inception of PhageTx, 2,357,136 shares of common stock were issued at an average price of approximately $0.06 per share, as restated. Consideration for issuance of the shares consisted of $100,000 in cash and $40,000 as reimbursement of expenses paid on behalf of PhageTx by a founder. Between April 1997 and July 1997 an additional 1,600,000 shares of common stock were issued for cash consideration at a price of $0.40 per share, as restated. Under the terms of an employment agreement, the President and CEO of PhageTx was granted the right to purchase 100,000 shares of common stock (which is included in the 1,600,000 shares), at a price of $0.40 per share, as restated, representing the market price of the stock at the time employment commenced. Beginning April 1997, a monthly amount of $5,000 was withheld from salary payments as consideration for the stock purchase. All consideration related to this stock purchase had been received by PhageTx as of December 31, 1997. In August 1997 PhageTx initiated a financing round which raised $1.0 million. As of December 31, 1997, 735,000 shares of common stock had been issued in connection with this round at a price of $1.00 per share. Subsequent to December 31, 1997, an additional 265,000 shares of common stock were subscribed to complete the minimum specified in the offering, with 100,000 of these shares purchased by the Company. The amount paid by the Company for these shares is treated as a contribution of capital to PhageTx in the consolidated financial statements. During April and May 1998, PhageTx completed a private placement financing round raising an additional $500,000 to fund PhageTx's short-term operations. PhageTx engaged a placement agent to assist with the financing round. In connection with this financing, the placement agent received approximately 13% of the cash raised in the offering as commission and expense reimbursement and was to receive approximately 85,000 post-consolidated common shares, as restated of the Company. Certain founders of PhageTx transferred to the placement agent, for a total value of $300,000, the 85,000 common shares of PhageTx from their shareholdings. This transaction was recorded as a contribution of capital. Prior to the beginning of the financing round described above, PhageTx completed a bridge debt financing of $200,000 which consisted of promissory notes, each with a term of 40 days, paying interest at 10% per annum. These notes were repaid in April 1998. The note holders also received, as consideration for entering into the note agreements, 22,857 shares of newly issued common stock, as restated, for a total value of $80,000. Between June and October 1998 Phage advanced to PhageTx a total of $332,000 as pre-payment on letters of intent to merge the two entities. Under the terms of the letters of intent, if a merger transaction was not completed within a specified period of time, the advances converted to common stock of PhageTx at a price of $1.00 per share. In November 1998, these advances were converted to PhageTx common stock. Upon restatement for the PhageTx Acquisition transaction effective March 25, 1999, this amount is treated as a contribution of capital to PhageTx by the Company. 14 PHAGE THERAPEUTICS INTERNATIONAL INC. 13 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 6. CAPITAL STOCK (cont'd...) During February 1999, pursuant to the letters of intent, the advances of $50,000 to PhageTx were converted to common stock of PhageTx. During February 1999, certain shareholder notes payable and expenses paid by shareholders on behalf of PhageTx were assigned by the shareholders to the Company. PhageTx issued to the Company 150,000 shares of PhageTx common stock in satisfaction of the debt of $150,000. Similar to the above transaction, this amount is treated as a contribution of capital to PhageTx by the Company upon restatement for the PhageTx Acquisition transaction. During April 1999 the Company sold an additional 187,500 shares of common stock at a price of $0.80 per share. Under the terms of private placement and investment banking agreements entered into by PhageTx in March 1998, upon the completion of certain placement milestones the placement agent was to receive (1) warrants for 300,000 shares of PhageTx common stock with an exercise price of $1.25 per share for a three-year term beginning at the first public trade of PhageTx stock; and (2) upon a merger with a public company or completion of an initial public offering the placement agent would receive 500,000 shares of PhageTx common stock. These agreements were terminated in June 1998. Based on completion of the PhageTx Acquisition transaction, the former placement agent asserted that the Company was liable under the aforementioned agreements to issue common shares and warrants in satisfaction of the stated terms. During July 1999, in settlement of the liability, the Company issued to the placement agent 71,429 shares of common stock, plus warrants to purchase 85,714 shares of common stock at an exercise price of $1.25 per share until March 25, 2001. Because these shares were issued in settlement of a debt owed by PhageTx, an amount of $80,000, calculated by multiplying the number of common shares issued by a price of $1.119 per share, has been recorded as consulting fees in general and administrative expense. In March 2000, the Company issued pursuant to a private placement 1,942,858 units at $0.70 per unit, for total proceeds of $1,360,000. Each unit consists of one common share of the Company and a warrant, which entitles the holder thereof, to purchase another common share of the Company at $1.25 per share until February 22, 2001 and $2.00 per share until February 22, 2002. Subsequent to year end, on February 12, 2001, these warrants were amended and extended from their expiry dates to June 2, 2001 and June 2, 2002. The private placement was issued in accordance with Regulation D, Rule 506 of the United States Securities Act of 1933, as amended. In October 2000, the Company entered into a securities purchase agreement with seven purchasers to purchase 4,285,714 units at $0.70 per unit for total proceeds of $3,000,000. Each unit consists of one common share of the Company and a warrant. For every one and a half warrants, the holder thereof, is entitled to purchase another common share of the Company at an exercise price of $0.70 per share. The exercise date of the warrants has not yet been determined by the Company, therefore, the warrants have not been issued. The Company has received $1,500,000. As payment for the first part of this agreement, the 2,142,857 common shares associated with this payment have been issued. At March 31, 2001, the Company has received the second payment of $1,500,000. The 2,142,857 common shares were issued in May 2001, in accordance with Regulation D, Rule 506 of the United States Securities Act of 1933, as amended. 15 PHAGE THERAPEUTICS INTERNATIONAL INC. 14 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 6. CAPITAL STOCK (cont'd...) Warrants ================================================================================ March 31, December 31, 2001 2000 ---------------- ---------------- Balance, beginning of period 2,028,572 85,714 Issued - 1,942,858 Exercised - - Expired (85,714) - ---------------- ---------------- Balance, end of period 1,942,858 2,028,572 ================================================================================ As at March 31, 2001 there were 1,942,858 warrants outstanding that are exercisable into commons shares as follows: ================================================================================ Number Exercise of Shares Price Expiry Date --------- --------- ------------ 1,942,858 $ 1.25 June 2, 2001 if not exercised, then at 2.00 June 2, 2002 ================================================================================ 7. STOCK OPTIONS Phage Therapeutics International Inc. Stock option plan In January 2000, the board of directors modified the existing stock option plan of the Company and adopted an incentive stock option plan providing for the granting of stock options to officers, directors, employees and key consultants of the Company and its subsidiaries or affiliates. Under the modified plan, the Company is authorized to issue options up to a total of 10% of the shares of the common stock of the Company outstanding from time to time. The options under the modified plan are non-assignable (except in the event of death) and are exercisable for a term of five years. Options granted under the modified plan terminate within 30 days, in respect of any optionee, in the event that such optionee ceases to be a full-time employee. The board of directors may, at its sole discretion, determine the time during which options shall vest and the method of vesting, or that no vesting restriction shall exist. SFAS 123, "Accounting for Stock-Based Compensation", encourages but does not require companies to record compensation cost for employee stock-based compensation plans at fair value. The Company has chosen to account for the employee stock-based compensation using APB 25, "Accounting for Stock Issued to Employees". Accordingly, compensation cost for stock options is measured as the excess, if any, of quoted market price of the Company's stock at the date of the grant over the option price. No stock-based compensation has resulted from the use of this standard. 16 PHAGE THERAPEUTICS INTERNATIONAL INC. 15 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 7. STOCK OPTIONS (cont'd...)

The weighted average fair value of options granted to employees, non-employees and consultants during March 31, 2000 was $0.67 per share. Had compensation cost been recognized on the basis of fair value pursuant to SFAS 123, net loss and loss per share would have been adjusted as follows: ================================================================================ Three Month Three Month Period Ended Period Ended March 31, March 31, 2001 2000 ----------------- ------------------ Net loss As reported $ (600,769) $ (168,747) ================ ================= Pro-forma $ (606,821) $ (174,799) ================ ================= Basic and diluted loss per share As reported loss per share $ (0.06) (0.02) ================ ================= Pro-forma $ (0.06) $ (0.02) ================================================================================ 17 PHAGE THERAPEUTICS INTERNATIONAL INC. 16 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 7. STOCK OPTIONS (cont'd...) Phage Therapeutics International Inc. (cont'd...) Stock option plan (cont'd...)

The Company granted Nil (2000 - 1,285,000) options to consultants and non-employees during the period, which are accounted for under SFAS 123 and EITF 96-18. The stock compensation recognized using FASB 123 for March 31, 2000 was $86,695, using the Black-Scholes option-pricing model. The options will be amortized over a two year period which is the expected period that the services will be performed by the consultants and non-employees. The stock compensation expense for the period was $14,439 (2000 - $4,785), of which $6,558 (2000 - $2,536) was allocated to general and administrative and $7,881 (2000 - $2,249) was allocated to research and experimentation. The assumptions used in calculating the fair value of options granted during the current period using the Black- Scholes option-pricing model are as follows: Risk free interest rate 6.434% - 6.590% Expected life of the options 2 years Expected volatility 2.18% Expected dividend yield - Phage Therapeutics, Inc. During 1997 PhageTx's Board of Directors adopted a Stock Option Plan under which an aggregate of 2,000,000 shares of common stock were reserved for grants to employees, advisors and consultants. Shareholder approval of the Plan was granted as of March 30, 1998. Options granted under this plan were designated as incentive or nonqualified at the discretion of the Plan Administrator. Generally, the options vest ratably over three and four-year periods. All options expire no later than ten years from the date of grant. Incentive stock options are exercisable at not less than the fair market value of the stock at the date of grant, and nonqualified stock options are exercisable at prices determined at the discretion of the Plan Administrator, but not less than 85% of the fair market value of the stock at the date of grant. 18 PHAGE THERAPEUTICS INTERNATIONAL INC. 17 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 7. STOCK OPTIONS (cont'd...) Phage Therapeutics Inc. (cont'd...) The Plan contains a clause specifying terms of the conversion of options on a stock for stock exchange. Under the Plan, if the shareholders of PhageTx receive capital stock of another corporation ("Exchange Stock") in exchange for their shares of common stock in any transaction involving a merger, all options granted under the Plan shall be converted into options to purchase shares of Exchange Stock unless PhageTx and the corporation issuing the Exchange Stock, in their sole discretion, determine that any or all such options granted under this Plan shall not be converted into options to purchase Exchange Stock, but instead shall terminate. The amount and price of converted options shall be determined by adjusting the amount and price of the options granted under the Plan in the same proportion as used for determining the number of shares of Exchange Stock the holders of the common stock receive in such merger, consolidation, acquisition of property or stock, separation or reorganization. Unless provided otherwise in the Optionee's original individual option agreement, the vesting schedule set forth in the option agreement shall accelerate, and reflect 100% vesting immediately prior to the conversion to an option for the Exchange Stock. As of the date of these financial statements, no corporate action has been taken with regard to the outstanding options by the Company's Board of Directors. In October 1999, management presented the Company with a proposal to exercise all outstanding options in a cashless or net exercise transaction, with subsequent conversion into common shares. The Company has not yet determined the resolution of this proposal, or how the outstanding options will be treated. In compliance with the terms of the PhageTx Plan, the vesting schedule for all remaining outstanding options has been assumed to accelerate and reflect 100% vesting as of the date of the PhageTx Acquisition.

As of March 31, 2001 all outstanding options were fully vested as a result of the PhageTx Acquisition transaction. No options granted have been exercised as of March 31, 2001. The weighted average contractual life of options outstanding as of March 31, 2001 was 6.6 years. 19 PHAGE THERAPEUTICS INTERNATIONAL INC. 18 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 7. STOCK OPTIONS (cont'd...) Phage Therapeutics, Inc. (cont'd...) The Company applies United States Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its Plan. Accordingly, no compensation expense has been recognized for incentive stock options issued in accordance with its stock-based compensation plan. Had compensation cost for incentive stock option awards under the Company's Plan been determined based upon the fair value at the grant date consistent with the methodology prescribed under United States Statement of Financial Accounting Standards No. 123, Accounting for Stock- Based Compensation, (SFAS 123) the Company's net loss and loss per share would have been adjusted as follows: ================================================================================ Three Month Three Month Period Ended Period Ended March 31, March 31, 2001 2000 ------------------------------------ Net loss As reported $ (600,769) $ (168,747) ================ ================= Pro-forma $ (600,769) $ (168,747) ================ ================= Basic and diluted loss per share As reported $ (0.06) $ (0.02) ================ ================= Pro-forma $ (0.06) $ (0.02) ================================================================================ 8. INCOME TAXES The Company's total deferred tax asset is as follows: Net tax benefit resulting from loss carry forward $ 1,953,776 Valuation allowance (1,953,776) ---------------- $ - ================= At December 31, 2000 the Company had net operating loss carryforwards for income tax purposes of approximately $5.7 million that will expire between 2012 and 2021. Since utilization of deferred tax assets resulting from loss carryforwards and temporary differences is dependent on future profits, which is not assured, a valuation allowance equal to the deferred taxes has been provided. Utilization of the Company's tax loss carryforwards may be subject to annual limitations if there is deemed to be a change in control. 20 PHAGE THERAPEUTICS INTERNATIONAL INC. 19 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 9. RELATED PARTY TRANSACTIONS During the period PhageTx paid or accrued wages of $30,000 (2000 - $Nil) and paid consulting fees of $Nil (2000 - $7,000) to the president and director of the Company. As at March 31, 2001, the Company owed $75,413 (December 31, 2000 - $75,413). During the period PhageTx paid or accrued wages of $21,000 (March 31, 2000 - $Nil) to the treasurer of the Company. On September 1, 1998, the Company entered into a management agreement with Stealth Investment Corp. ("Stealth") to provide day-to-day management services to the Company (the "Management Agreement"). A director and officer of the Company, is the sole shareholder and director of Stealth. The Management Agreement is terminable by either party with two months notice and provides for a base fee of $10,000 per month until October 31, 2000, thereafter increased to $15,000 per month plus related expenses. The Company paid or accrued during the period, management fees of $22,500 (2000 - $15,000), consulting fees of $22,500 (2000 - $15,000), office expenses of $3,000 (2000 - $9,357), office administration of $6,314 (2000 - $2,127) and investor relations of $1,868 (2000 - $2,102). As at March 31, 2001 the Company owed Stealth $58,164 (December 31, 2000 - $68,798). 10. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS Three Month Three Month Period Ended Period Ended March 31, March 31, 2001 2000 Cash paid for income taxes $ - $ - Cash paid for interest $ 12,000 $ - ======================================== ================= ================= There were no significant non-cash transactions for the periods ended March 31, 2001 and 2000. 11. COMMITMENTS AND CONTINGENCIES Lease Agreement On November 1, 2000, the Company signed a lease agreement for office and research facilities which expires November 30, 2005. The lease contains an option to renew for an additional 5 years. Minimum future lease payments under this agreement are as follows: March 31 2001 $ 59,377 2002 83,544 2003 86,906 2004 90,373 2005 85,555 ----------------- $ 405,755 21 PHAGE THERAPEUTICS INTERNATIONAL INC. 20 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 11. COMMITMENTS AND CONTINGENCIES (cont'd...) Lease Agreement (cont'd...) The Company was required to pay a security deposit of $75,000 as part of its lease agreement. The security deposit is a certificate of deposit at a financial institution in favor of the Company, but is pledged to the lessor if the Company defaults in its lease agreement. Contractual Agreements On September 11, 2000, the Company entered into an agreement with Intelligene Expressions, Inc. ("Intelligene") for contract services to scale up manufacturing for the Company's first bacteriophage product. Intelligene is an Alberta company with a laboratory located in Edmonton, Alberta, Canada. The total amount of the contract was for $520,000. The Company has paid $355,000 and the remaining $165,000 (of which $65,000 is prepaid) is to be paid as follows: Upon completion of Phase 5 $ 55,000 Upon completion of Phase 6 55,000 Upon completion of Phase 7 55,000 ----------------- $ 165,000 ================== The Company has agreed to several research and development contracts with various universities and research institutes. The Company is contracted to pay for this year $306,253, of which $146,649 has been paid and $102,492 is prepaid at March 31, 2001. In addition, the Company has agreed to a total of $549,115 in contracts which are based on performance, controlled by management of the Company, which could be completed more than a year from now. The Company has advanced $178,223 on these contracts and at March 31, 2001, $97,893 is prepaid. Contingencies An individual whom PhageTx engaged on a limited basis to assist with introductions related to raising private equity capital has asserted that certain private placement funds were received by PhageTx as a result of introductions made by that individual. The Company is in the process of determining the validity of the claims asserted. Should the claims be determined valid, PhageTx would be expected to pay approximately $10,000 in cash as a finder's fee, issue 35,000 PhageTx common shares, and issue warrants to purchase an additional 25,000 shares of common stock at $1.00 per share for a term of seven years. As the probability of outcome is not certain, no accrual has been made in the financial statements nor shares reserved in connection with this contingency. Prior to inception of PhageTx, a founder entered into a consulting agreement with an individual to assist with the setup of licensing arrangements between PhageTx and certain research institutions. A dispute has arisen regarding the amount of payment required under the consulting arrangement, which terminated in June 1997. The Company's exposure in relation to this consulting agreement is a cash amount owed of approximately $17,000, which has been accrued in the financial statements, 25,000 PhageTx common shares, and an option for 41,668 additional common shares of PhageTx. As the probability of outcome is not certain, no accrual has been made in the financial statements for the common shares and the option for additional common shares. 22 PHAGE THERAPEUTICS INTERNATIONAL INC. 21 (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MARCH 31, 2001 ================================================================================ 12. SUBSEQUENT EVENTS The following events occurred subsequent to period end: a) On April 1, 2001, the Company granted 670,000 stock options to employees, consultants and advisors. These stock options are exercisable at $0.75 per share until April 1, 2006. The stock options vest over a period from 1 year to 4 years. b) In May 2001, the Company issued 2,142,857 common shares in accordance with Regulation D, Rule 506 of the United States Securities Act of 1933, as amended. These shares relate to the 2,142,857 units the Company issued at $0.70 per unit for total proceeds of $1,500,000. c) In May 2001, the Company issued 4,284,714 warrants relating to the total 4,285,714 units at $0.70 per unit as disclosed in Note 6. For every one and one-half warrants, the holder thereof, is entitled to purchase another common share of the Company at $0.70 per share. The expiry dates of these warrants are: i) 2,142,857 warrants on August 15, 2001; and ii) 2,142,857 warrants on January 15, 2002. 23 ITEM 2. Management's Discussion and Analysis or Plan of Operation General The following discussion and analysis should be read in conjunction with the financial statements, including the notes thereto, appearing elsewhere in this document. Overview Since Phage switched its focus to biotechnology in August 1998, Phage has been involved in research and developing its bacteriophage therapeutic agents as pharmaceutical products. The products will be developed specifically for the treatment of antibiotic-resistant and other bacterial infectious agents. During this time, there have been no revenues from operations. Without revenues to offset expenditures, Phage has reported a loss in each of its years of existence. To date, Phage has financed its operations through raising capital through private placements and loans from shareholders. Plan of Operation Phage anticipates expending approximately $5,000,000 over the next twelve month period in pursuing its anticipated plan of operations. Phage anticipates covering these costs by additional equity financing. The Company anticipates the following expenditures over the next twelve months: 1. Repayment of Indebtedness $ 296,000 2. Personnel Costs (Salaries, Taxes & Benefits) $1,350,000 3. Intellectual Property Development $ 150,000 4. Pharmaceutical R&D: A. Manufacturing Development $ 0 B. Manufacturing Scale-Up $ 650,000 C. Analytical Methods Development $ 200,000 D. Formulations Development $ 75,000 E. Preclinical Safety and Efficacy Testing $ 385,000 F. Preclinical 'Proof of Principle' Tests $ 285,000 G. Clinical Supplies Manufacturing $ 100,000 H. CGMP Documentation $ 75,000 I. Initial Stability Studies $ 50,000 J. 'Phase I in Normals' Clinical Trials $ 100,000 K. Phase I/II Clinical Trials $ 100,000 L. Phase II Clinical Trials $ 0 5. FDA Regulatory Costs: A. Internal $ 100,000 B. Outsourced $ 125,000 6. Laboratory Operations: A. Internal $ 170,000 B. Outsourced $ 150,000 C. Work on Products 2 & 3 $ 45,000 7. Facilities (Rent, Telephones, Maintenance) $ 144,000 8. Equipment (Lab & Office) $ 200,000 9. Legal (Corporate & Securities) $ 50,000 10. Accounting (Corporate, Securities, Tax & Audit) $ 30,000 11. Investor & Public Relations $ 20,000 12. Business Operations $ 150,000 Total $5,000,000 24 Subsequent to March 31, 2001, the Company completed its securities purchase agreement ("Securities Purchase Agreement") which was entered into on October 23, 2000 with seven purchasers for $3,000,000 paid to Phage in exchange for 4,285,714 units ("Unit" or "Units"). Each "Unit" consisting of one share of Phage's common stock with a par value of $0.001 per share (the "Common Stock") and one Common Stock purchase warrant (the "Warrant"). For every one and a half Warrants the holder will entitle the holder to acquire one additional share of Common Stock of Phage at an exercise price of $0.70 per share. Phage has received the total $3,000,000 as payment and the remaining 2,142,857 Units have been issued as of May 2001. An additional $2,000,000 is anticipated from the exercise of the Warrants. The first set of Warrants expire August 15, 2000 which are exercisable for 1,428,571 shares of Common Stock at an exercise price of $1,000,000. The second set of Warrants expire January 15, 2002 for 1,428,571 shares of Common Stock at an exercise price of $1,000,000. These funds will go towards the operations of Phage. If the Company is unable to complete its further financing requirements, it will then modify its expenditures and plan of operations to coincide with the actual financing completed. It is anticipated that if there is any shortfall in raising capital to continue Phage's plan of operations, then Phage may be required to delay, scale back or eliminate some or all of its research and development programs or cease operations. Phage plans to cut-back its plan of operations by reducing the amount spent on personnel costs, and research and development, in particular, preclinical safety and efficacy testing and preclinical 'proof of principle' tests, and Phase I and II clinical trials. These tests can still be conducted with less funding. Phage anticipates that the financing raised to date will be used in the next twelve months as follows : 1. Repayment of Indebtedness $ 100,000 2. Personnel Costs (Salaries, Taxes & Benefits) $ 400,000 3. Intellectual Property Development $ 150,000 4. Pharmaceutical R&D(1): $ 0 A. Manufacturing Development B. Manufacturing Scale-Up $ 650,000 C. Analytical Methods Development $ 200,000 D. Formulations Development $ 75,000 E. Preclinical Safety and Efficacy Testing $ 180,350 F. Preclinical 'Proof of Principle' Tests $ 180,350 G. Clinical Supplies Manufacturing $ 100,000 H. CGMP Documentation $ 75,000 I. Initial Stability Studies $ 50,000 J. 'Phase I in Normals' Clinical Trials $ 100,000 K. Phase I/II Clinical Trials $ 0 L. Phase II Clinical Trials $ 0 5. FDA Regulatory Costs: A. Internal $ 100,000 B. Outsourced $ 125,000 6. Laboratory Operations: A. Internal $ 170,000 B. Outsourced $ 150,000 C. Work on Products 2 & 3 $ 45,000 7. Facilities (Rent, Telephones, Maintenance) $ 144,000 8. Equipment (Lab & Office) $ 200,000 9. Legal (Corporate & Securities) $ 50,000 10. Accounting (Corporate, Securities, Tax & Audit) $ 30,000 11. Investor & Public Relations $ 20,000 12. Business Operations $ 150,000 Total $3,444,700 1. The Pharmaceutical Research and Development is only for the first product candidate bacteriophage. The other two product candidates (for the treatment of TB and Pseudomonas aeruginosa) are in the early stages of development and very little cost, if any, is anticipated in the next twelve months for these two product candidates. The Company anticipates that these two additional product candidates will be ready for preclinical testing by the end of the last quarter of 2001. At that time, the Company will decide how much financing will go towards the testing of these two products. Phage plans to use more out-sourced contract research organizations to reduce overhead and to contain the burn rate, plus there is anticipated to be more flexibility derived from out-sourcing of the key pharmaceutical development and manufacturing activities. The net effect may be realized as an acceleration of the pharmaceutical development time frames, in that Phage should be able to focus more attention on the development of the first products, and less time on financing and corporate development activities. The major risks to this pharmaceutical development plan are related to the schedules of the contract research organizations, the ability of Phage to get into the queue at the most beneficial time for Phage's purposes, and the ability of the contract research organizations to perform to Phage's expectations. An additional risk may be Phage's ability to manage multiple out-sourced activities concurrently with the limited staff and advisors. Liquidity and Capital Resources The Company had cash, cash equivalents and prepaid expenses and other current assets of $ 1,795,941 as at the three month period ended March 31, 2001, compared with $ 1,052,854 at December 31, 2000. Cash provided by equity financing has been and is expected to continue to be the Company's primary source of funds. Since inception, the Company has had no revenue from operations. 26 The Company receives cash from the exercise or employee stock options and proceeds from the sale of stock by Phage Therapeutics International Inc., pursuant to the employee stock purchase plan. Since inception, the employee stock option exercises and proceeds from the sale of stock by Phage Therapeutics International Inc., pursuant to the employee stock purchase plan provided no of cash. Proceeds from the exercise of employee stock options will vary from period to period based upon, among other factors, fluctuations in the market value of the Company's stock relative to the exercise price of such options. Subsequent to March 31, 2001, the Company has received $55,000 from the exercise of stock options. Phage requires substantial capital in order to meet its ongoing corporate obligations and in order to continue and expand its current and strategic business plan. Initial working capital has been obtained by the private sale of Phage's Common Shares from December 1996 to present. Phage can meet its short term cash flow needs from the proceeds obtained from a recent sale of its Common Shares. In the long term, Phage may seek additional sources of capital, including an additional offering of its equity securities, an offering of debt securities or obtaining financing through a bank or other entity. This may not be available on a timely basis, in sufficient amounts or on terms acceptable to Phage. The inability of Phage to raise additional equity capital or borrow funds required to effect its business plan, may have a material adverse effect on Phage's financial condition and future prospects. Additionally, to the extent that further funding ultimately proves to be available, both debt and equity financing involve risks. Debt financing may require Phage to pay significant amounts of interest and principal payments, reducing the resources available to Phage's business operations. Some types of equity financing may be highly dilutive to Phage's stockholders' interest in Phage's assets and earnings. Any debt financing or other financing of securities senior to common stock will likely include financial and other covenants that will restrict Phage's flexibility. Research and development During the three months ended March 31, 2001, research and development expenses increased to $ 299,030 from $ 11,484 for the three month period ended March 31, 2000. This increase was primarily due to higher laboratory costs to scale up manufacturing for the Company's first bacteriophage product by the laboratory Intelligene Expressions, Inc. The Company entered an agreement with Intelligene Expressions, Inc. in September 11, 2000. The Company has already paid $355,000 to Intelligene Expressions, Inc. and will be paying an additional $55,000 upon completion of Phase 5, 6, and 7 for a total of $165,000. The Company has agreed to several research and development contracts with various universities and research institutes. The Company is contracted to pay for this year $306,253, of which $146,649 has been paid and $102,492 is prepaid at March 31, 2001. In addition, the Company has agreed to a total of $549,115 in contracts which are based on performance, controlled by management of the Company, which could be completed more than a year from now. The Company has advanced $178,223 on these contracts and at March 31, 2001, $97,893 is prepaid. General and administrative General and administrative expenses increased to $311,674 during the three months ended March 31, 2001 from $164,918 over the same period last year. This increase was primarily due to higher staff-related costs as the Company continues to hire new employees to support its existing products and prepares for anticipated new product development. Loss per period During the three months ended March 31, 2001, the Company had a loss for the period of $600,769 compared with a loss of $173,532 over the same period last year. This increase was due to higher expenses incurred by the Company with regard to research and development, and general and administrative expenses. The basic and diluted loss per share is $(0.06) for the three month period ended March 31, 2001 as compared to $(0.02) for the same period last year. Interest and other income During the three months ended March 31, 2001, interest and other income increased to $9,935 from $3,370 over the same period last year. This is due to interest received on cash and cash equivalents. Financial Outlook Estimates of future product sales, operating expenses and earnings per share are necessarily speculative in nature and 27 are difficult to predict with accuracy. The Company is providing this information as of the filing date of this Form 10-Q, and does not plan to update this information until its next Form 10-Q filing with the Securities and Exchange Commission and expressly disclaims any duty to update the information contained in this filing. Except for the historical information contained herein, the matters discussed herein are by their nature forward- looking. Investors are cautioned that forward-looking statements or projections made by the Company, including those made in this document, are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Reference is made in particular to forward-looking statements regarding earnings per share and expenses. Phage operates in a rapidly changing environment that involves a number or risks, some of which are beyond the Company's control. Future operating results and the Company's stock price may be affected by a number of factors, including, without limitation: (i) the results of preclinical and clinical trials; (ii) regulatory approvals or product candidates, (iii) intellectual property matters (patents); (iv) competition; (v) fluctuations in operating results and (vi) rapid growth of the Company. These risk factors are discussed and incorporated herein by reference to Exhibit 99 and the Company's 10SB, the latest amendment filed with the Securities and Exchange Commission on April 9, 2001. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Reference is made to the Index of Exhibits included herein. (b) Reports on Form 8-K. No Form 8-Ks have been filed during the three month period ended March 31, 2001. However, the Company wishes to state that as mentioned in the Management's Discussion and Analysis, the Company has received the total $3,000,00 from the Securities Purchase Agreement entered into with seven purchasers as of October 23, 2000. The purchasers have received 2,142,857 Units in December 2000 and received their additional 2,142,857 Units on May 3, 2001 for a total of 4,285,714 Units. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHAGE THERAPEUTICS INTERNATIONAL INC. ------------------------------------- (Registrant) Date: May 21, 2001 By: /s/ Richard Honour/s/ ----------------- ---------------------------------------------- RICHARD HONOUR Chief Executive Officer, President, Secretary and Director Date: May 21, 2001 By: /s/ Darren Pylot /s/ ---------------- ---------------------------------------------- DARREN PYLOT Chief Financial Officer and Director Date: May 21, 2001 By: /s/ Robert Miller /s/ ----------------- ---------------------------------------------- ROBERT MILLER Chairman of the Board of Directors & Director 28 PHAGE THERAPEUTICS INTERNATIONAL INC. INDEX TO EXHIBITS Exhibit No. Description 3.1 Articles of Incorporation filed on July 9, 1997 with the Florida Department of State(1); Certificate of Amendment filed August 19, 1999 with the Florida Department of State to increase authorized capital and change name(1); Certificate of Amendment filed March 18, 1999 with the Florida Department of State to Decrease its outstanding capital by 4:1(1). 3.2 By-laws as Adopted on October 7, 1998(1). 10.1 Advisory Agreements with John Majnarich, effective January 1, 2001 and Michael Maloney, effective January 1, 2001(1). Advisory Agreements with Seymour Froman effective January 1, 2001, Luiz Bermudez effective January 1, 2001, and Tyler Kokjohn effective December 1, 2000. 10.2 Confidential Disclosure Agreement - Standard Agreement signed by all employees, consultants and advisors(1). 10.3 Employee Agreements with: Richard Herman dated November 1, 2000; Richard Honour dated November 1, 2000; Tracy Honour dated November 1, 2000; Douglas Lee dated November 1, 2000; (2 Agreements) Kenneth Lehman dated November 1, 2000; and Larry Stylebo dated December 6, 2000(1). 10.4 Management Agreement dated November 1, 2000 between Phage Therapeutics International Inc. and Stealth Investments Corp(1). 10.5 Property Lease Agreement dated October 27, 2000 between Razore Land Company and Phage Therapeutics International Inc(1). 10.6 Consulting Agreement dated October 9, 2000 between Phage Therapeutics International Inc. and Deirdre E. Sweeney(1). 10.7 Stock Option Plan 2000(1) 10.8 Securities Purchase Agreement dated as of October 23, 2000(1). 21 List of Subsidiaries, State of Incorporation, and Names under which Subsidiary Does Business(1); Articles of Incorporation as filed with the State of Washington, Secretary of State on December 24, 1996(1); Articles of Amendment changing name as filed with the State of Washinton, Secretary of State on March 10, 1997(1); Articles of Amendment changing registered agent and name as filed with the State of Washington, Secretary of State on July 31, 1997(1). 29 99. Risk Factors of Phage Therapeutics International Inc. Documents Incorporated by Reference (1) Documents previously filed as exhibits to Form 10SB as filed on April 4, 2001 and incorporated herein by this reference. 30

PHAGE THERAPEUTICS INTERNATIONAL INC 10-Q