SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 2002
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( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 0-27179
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BioSyntech, Inc.
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(exact name of registrant as specified in its charter)
Nevada 88-0329399
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
475 Boulevard Armand-Frappier, Laval, Quebec, Canada H7V 4B3
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(Address of Principal Executive Offices)
(450) 686-2437
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(Issuers Telephone Number, Including Area Code)
Check whether the issuer (1) has filed all reports to be filed by
section 13 or 15(d) of the Exchange Act during the past 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.
(X) Yes ( ) No
APPLICABLE ONLY TO CORPORATE ISSUER
State the number of shares outstanding of each of the issuer's
classes of common equity as of the latest practicable date: [29,222,250] shares
of Common Stock as of August 12, 2002.
Transitional Small Business Disclosure Format (check one):
( ) Yes (X) No
BIOSYNTECH, INC.
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Interim Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002 and 3
March 31, 2002
Condensed Consolidated Statements of Operations for the Three- 4
Month Periods Ended June 30, 2002 and June 30, 2001
Condensed Statement of Stockholders' Equity (Deficiency) from 5
inception to June 30, 2002
Condensed Consolidated Statements of Cash Flows for the Three- 6
Month Periods Ended June 30, 2002 and June 30, 2001
Notes To Condensed Consolidated Interim Financial Statements 7
Item 2. Management's Discussion and Analysis 11
Risk Factors 16
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
BIOSYNTECH, INC.
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Interim Financial Statements
BioSyntech, Inc.
A development stage company
CONDENSED CONSOLIDATED BALANCE SHEETS
[See Basis of Presentation and Going Concern Assumption - note 2]
As of June 30, 2002 and March 31, 2002
[In Canadian dollars]
June 30, June 30, March 31,
2002 2002 2002
US$ C$ C$
[note 2] [note 2] [note 2]
[Unaudited] [Unaudited]
- ----------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents 1,070,565 1,623,191 443,145
Short-term investments 874,900 1,326,523 1,395,163
Receivables 59,912 90,838 78,853
Inventory 13,308 20,177 21,657
Investment tax credits receivable 165,588 251,064 213,064
Prepaid expenses 15,212 23,065 58,164
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2,199,485 3,334,858 2,210,046
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Property, plant and equipment 1,520,197 2,304,923 2,341,591
Deposits and other assets 311,860 472,842 19,452
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4,031,542 6,112,623 4,571,089
====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities 590,202 894,865 651,639
Due to stockholder, without interest and repayment terms 6,595 10,000 10,000
Deferred revenues -- -- 3,095
Current portion of long-term debt 26,382 40,000 40,000
Current portion of obligations under capital leases 18,655 28,284 26,891
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641,834 973,149 731,625
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Long-term debt [Note 4] 1,397,480 2,118,859 126,667
Obligations under capital leases 17,155 26,010 33,628
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2,056,469 3,118,018 891,920
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Stockholders' equity
Common stock [Note 3]
Par value $0.001
Authorized 100,000,000 common shares
Issued and outstanding
29,222,250 common shares 12,060,321 18,285,858 18,285,858
To be issued
30,000 common shares [15,000 as of March 31,2002] 11,754 17,822 11,009
Additional paid-in capital 1,897,259 2,876,624 2,587,691
Deficit accumulated during the development stage (11,994,261) (18,185,699) (17,205,389)
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1,975,073 2,994,605 3,679,169
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4,031,542 6,112,623 4,571,089
====================================================================================================
See accompanying notes
On behalf of the Board
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Director Director
3
BioSyntech, Inc.
A development stage company
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
[See Basis of Presentation and Going Concern Assumption - note 2]
Three-month periods ended June 30, 2002 and 2001
[In Canadian dollars] Unaudited
Cumulative from
inception to June 30, June 30, June 30,
June 30, 2002 2002 2002 2001
C$ US$ C$ C$
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[note 2]
Sales 626,302 23,726 35,973 1,428
Cost of sales 240,841 1,999 3,031 142
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385,461 21,727 32,942 1,286
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Research and development expenses 12,046,806 375,840 569,848 795,028
Investment tax credits (2,000,012) (25,063) (38,000) (52,072)
General and administrative expenses 8,826,875 233,280 353,699 668,654
Interest on long-term debt and capital lease
obligations 325,939 6,898 10,458 10,672
Depreciation of property, plant and equipment 591,757 30,996 46,996 44,969
Government grants (209,644) -- -- (14,000)
Interest income (639,826) (4,460) (6,763) (57,379)
(Gain) loss on foreign exchange (370,735) 50,794 77,014 213,043
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18,571,160 668,285 1,013,252 1,608,915
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Net loss and comprehensive loss for the period (18,185,699) (646,558) (980,310) (1,607,629)
Deficit accumulated during the development
stage, beginning of period -- (11,347,703) (17,205,389) (12,670,258)
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Deficit accumulated during the development
stage, end of period (18,185,699) (11,994,261) (18,185,699) (14,277,887)
===========================================================================================================
Weighted average number of common shares
outstanding 29,222,250 29,222,250 29,182,250
Basic and diluted loss per share (0.02) (0.03) (0.06)
===========================================================================================================
See accompanying notes
4
BioSyntech, Inc.
A development stage company
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIENCY) [Note 3]
[See Basis of Presentation and Going Concern Assumption - note 2]
From inception to June 30, 2002
[In Canadian dollars] Unaudited
Common Stock Common Stock Additional
issued and outstanding to be issued paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
$ $ $ $ $
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Balance, May 10, 1995 8,525,000 1 -- -- 1
Net loss 1996 [325 day period] -- -- -- (2,865) (2,865)
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Balance, March 31, 1996 8,525,000 1 -- (2,865) (2,864)
Net loss 1997 -- -- -- (9,332) (9,332)
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Balance, March 31, 1997 8,525,000 1 -- (12,197) (12,196)
Deemed common stock paid up as of January 31,
1998 and issued on August 3, 1998 -- 215,000 -- -- 215,000
Net loss 1998 -- -- -- (236,987) (236,987)
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Balance, March 31, 1998 8,525,000 215,001 -- (249,184) (34,183)
Deemed common stock issued for cash 1,746,579 1,083,108 -- -- 1,083,108
Deemed common stock issued in exchange
for services 1,940,000 1,455,000 -- -- 1,455,000
Deemed options granted to consultants -- -- 1,309,350 -- 1,309,350
Net loss 1999 -- (4,165,657) (4,165,657)
Deemed share issuance costs -- (90,200) -- -- (90,200)
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Balance, March 31, 1999 12,211,579 2,662,909 1,309,350 (4,414,841) (442,582)
Deemed common stock issued for cash 1,893,457 2,595,222 -- -- 2,595,222
Deemed common stock issued in exchange for
intellectual property 1,072,000 1,072,000 -- -- 1,072,000
Deemed options granted to consultants -- 2,662,909 406,560 -- 406,560
Net loss and comprehensive loss for the period
from April 1, 1999 to February 28, 2000 -- -- -- (2,850,977) (2,850,977)
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Deemed outstanding February 29, 2000 15,177,036 8,993,040 1,715,910 (7,265,818) 780,223
Acquisition of BioSyntech,Inc. by Bio Syntech Ltd. 12,095,000 2,873,848 -- -- 2,873,848
March 31, 2000, issuance 843,500 4,270,243 -- -- 4,270,243
Share issue costs -- (341,520) -- -- (341,520)
Net loss and comprehensive loss for the period
from February 29, 2000 to March 31, 2000 -- -- -- (389,306) (389,306)
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Balance, March 31, 2000 28,115,536 15,795,611 1,715,910 (7,655,124) 7,193,488
Share issuances 1,066,714 5,487,419 -- -- 5,487,419
Options granted to consultants -- -- 237,500 -- 237,500
Share issue costs -- (373,746) -- -- (373,746)
Net loss and comprehensive loss for the period
from April 1, 2000 to March 31, 2001 -- -- -- (5,015,134) (5,015,134)
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Balance, March 31, 2001 29,182,250 20,909,284 1,953,410 (12,670,258) 7,529,527
Common stock issued to a consultant in
exchange for services 40,000 39,483 -- -- 39,483
Common stock to be issued to a consultant in
exchange for services -- -- 15,000 11,009 -- -- 11,009
Exchangeable shares of the subsidiary of the
Company issued as part of a settlement -- -- 114,248 -- 114,248
Options granted to consultants -- -- 520,033 -- 520,033
Net loss and comprehensive loss for the period
from April 1, 2001 to March 31, 2002 -- -- -- (4,535,131) (4,535,131)
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Balance, March 31, 2002 29,222,250 18,285,858 15,000 11,009 2,587,691 (17,205,389) 3,679,169
Common stock to be issued to a consultant in
exchange for services [Note 3] -- -- 15,000 6,813 -- 6,813
Warrants issued to BDC [Note 3] -- -- 288,933 -- 288,933
Net loss and comprehensive loss for the period
from April 1, 2002 to June 30, 2002 -- -- -- (980,310) (980,310)
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29,222,250 18,285,858 30,000 17,822 2,876,624 (18,185,699) 2,994,605
===================================================================================================================================
US Dollars [Note 2]
Balance, June 30, 2002 12,060,321 11,754 1,897,259 (11,994,261) 1,975,073
===================================================================================================================================
See accompanying notes
5
BioSyntech, Inc.
A development stage company
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[See Basis of Presentation and Going Concern Assumption - note 2]
Three-month periods ended June 30, 2002 and 2001
[In Canadian dollars] Unaudited
Cumulative from
inception to
June 30, June 30, June 30, June 30,
2002 2002 2002 2001
C$ US$ C$ C$
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[note 2]
OPERATING ACTIVITIES
Net loss and comprehensive loss (18,185,699) (646,558) (980,310) (1,607,629)
Items not affecting cash
Depreciation 591,757 30,996 46,996 44,969
Services paid by the issuance of common stock to
be issued to a consultant 2,584,305 4,494 6,813 39,483
Exchangeable shares of the subsidiary of the
Company issued as part of a settlement 114,248 -- -- 114,248
Options granted to consultants 2,473,443 -- -- --
Accrued interest on long-term debt 2,192 1,446 2,192 --
Exchange loss (gain) (512,069) 4,923 7,464 178,783
Exchange loss (gain) on short-term investments 4,129 45,271 68,640 --
Changes in working capital assets and liabilities
Receivables (90,838) (7,904) (11,985) 109,172
Inventory (20,177) 976 1,480 (5,835)
Investment tax credits receivable (251,064) (25,063) (38,000) (52,072)
Prepaid expenses (23,065) 23,149 35,099 (3,973)
Deferred revenues -- (2,041) (3,095) 14,630
Accounts payable and accrued liabilities 686,394 46,924 71,146 (738,557)
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Cash flows used in operating activities (12,626,444) (523,387) (793,560) (1,906,781)
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INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,170,577) (6,803) (10,315) (13,142)
Purchase of short-term investments (1,589,258) -- -- (1,514,258)
Proceeds from maturing of short-term investments 258,606 -- -- --
Deposits and other assets (19,552) -- --
Changes in non-cash working capital balances related to
investing activities 27,513 5,019 7,610 (118,175)
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Cash flows used in investing activities (2,493,268) (1,784) (2,705) (1,645,575)
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FINANCING ACTIVITIES
Increase in long term debt 2,700,000 1,319,087 2,000,000 --
Repayment of long term debt (543,333) (6,595) (10,000) (3,333)
Proceeds of demand loan 581,845 -- -- --
Repayment of demand loan (581,845) -- -- --
Increase due to stockholder 30,394 -- -- --
Repayment due to stockholder (20,394) -- -- --
Repayment of obligations under capital leases (1,671,697) (4,106) (6,225) (8,247)
Proceeds from issuance of shares of Bio Syntech Ltd.
prior to the reverse acquisition 3,890,068 -- -- --
Proceeds from issuance of common shares of BioSyntech,
Inc. prior to the reverse acquisition 3,399,980 -- -- --
Repurchase of common stock of BioSyntech, Inc.
prior to the reverse acquisition (506,380) -- -- --
Proceeds from issuance of common shares of BioSyntech,
Inc. after the reverse acquisition 9,757,662 -- -- --
Share issue costs (805,466) -- -- --
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Cash flows from financing activities 16,230,834 1,308,386 1,983,775 (11,580)
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Effect of exchange rate changes on cash and cash equivalents 512,069 (4,923) (7,464) (178,783)
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Net increase (decrease) in cash and cash equivalents 1,623,191 778,292 1,180,046 (3,742,719)
Cash and cash equivalents, beginning of period -- 292,273 443,145 6,643,370
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Cash and cash equivalents, end of period 1,623,191 1,070,565 1,623,191 2,900,651
================================================================================================================================
See accompanying notes
6
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 2002 Unaudited
[In Canadian dollars]
1. ORGANIZATION AND OPERATIONS OF THE COMPANY
The Company, which is a development stage company, has been engaged primarily in
research and development since its inception in 1995. The Company develops
advanced biomaterials specializing in tissue engineering and therapeutic
delivery focusing on the repair of damaged tissue in the human body like bone or
cartilage. The Company is also engaged in the development of advanced injectable
biomaterials for the delivery of cells and genetic material and biotherapeutic
agents. The Company also develops instrumentation products. The Company
currently has products at different stages of development, including the
pre-clinical trial stage. The Company has limited revenues to date and they have
come almost entirely from sales of instrumentation products.
2. BASIS OF PRESENTATION AND GOING CONCERN ASSUMPTION
The condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information, and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B, on a going concern basis which presumes the realization of
assets and the discharge of liabilities in the normal course of business for the
foreseeable future. Accordingly, these condensed consolidated financial
statements do not include any adjustments to amounts and classifications of
assets and liabilities that might be necessary should the Company be unable to
continue its business in the normal course.
The Company has incurred net losses each year since its inception and
anticipates that losses will continue for the foreseeable future. As of June 30,
2002, the Company's accumulated deficit was $18,185,699. The Company's ability
to continue as a going concern is uncertain and is dependent principally upon
its ability to obtain further financing to complete research and development
projects and market products, achieve profitable operations, and to generate
positive cash flows from operations. The outcome of these uncertainties cannot
be predicted at this time.
It is expected that additional funds will continue to be required for an
indefinite period as no estimate can be made as to when the Company will achieve
profitability. The Company continues to limit operating costs and capital
expenditures based on its estimated cash requirements and financing available.
Management continues to negotiate further financing. The success of these
negotiations is dependent on a number of items outside the Company's control and
there is substantial uncertainty about the Company's ability to successfully
complete these negotiations.
In the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments, consisting only of normal recurring accruals
considered necessary to present fairly the financial position as of June 30,
2002, the results of operations and cash flows for the three-month period ended
June 30, 2002. The balance sheet at March 31, 2002 has been derived from the
7
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 2002 Unaudited
[In Canadian dollars]
2. BASIS OF PRESENTATION AND GOING CONCERN ASSUMPTION
[CONT'D]
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
financial statements and notes thereto included in the Company's annual report
on Form 10-KSB for the fiscal year ended March 31, 2002.
US dollar amounts presented on the condensed consolidated balance sheet and the
condensed consolidated statements of operations, stockholders' equity
(deficiency) and cash flows are provided for convenience of reference only and
are based on the closing exchange rate at June 30, 2002, which was $1.5162
Canadian dollar per US dollar.
The accompanying unaudited condensed consolidated financial statements include
the accounts of BioSyntech, Inc., Bio Syntech Canada Inc. and Biosyntech Europe
S.A.R.L. Biosyntech Europe S.A.R.L. has a year-end of December 31. All
intercompany transactions and balances have been eliminated in these condensed
consolidated financial statements.
3. STOCKHOLDERS' EQUITY
Common stock to be issued to a consultant in exchange for services
On January 10, 2002, the Company signed an agreement with RCG Capital Markets
Group Inc. ["RCG"] expiring in July 2003. Under the agreement, RCG serves as the
exclusive financial relations counsel for the Company in the United States. As
part of this agreement, RCG is compensated in cash and in common shares of the
Company. For the first seven-month period, the Company must issue a total of
35,000 common shares and pay in cash US$21,000 in exchange for the services
provided and US$6,000 per month subsequently until the end of the agreement. The
contract is cancellable by either party, subject to terms and conditions, after
the conclusion of the initial seven-month period. As of June 30, 2002, the
Company has to issue 30,000 common shares in exchange for services. These shares
have not been issued yet and, consequently, they are shown as "Common stock to
be issued". The fair value of these shares, in the amount of $17,822, was
charged to general and administrative expenses, of which $11,009 was charged
during the three-month period ended March 31, 2002 and $6,813 was charged during
the three-month period ended June 30, 2002.
8
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 2002 Unaudited
[In Canadian dollars]
3. STOCKHOLDERS' EQUITY [CONT'D]
Stock options and warrants
BioSyntech Inc.
As a part of the agreement signed with RCG, the Company has granted RCG, subject
to Board of Directors' approval, an option to purchase 200,000 shares of common
stock of the Company, in exchange for services, at an exercise price of US$0.60
of which options to purchase 20,000 shares of common stock immediately vested at
the date of the agreement. These options are shown as "Additional paid-in
capital". The fair value of the 20,000 options was charged to general and
administrative expenses in the amount of $16,623 during the three-month period
ended March 31, 2002. The vesting dates of the other options are conditional
upon the rendering of specified services. The options can be exercised over a
six-year period.
On June 26, 2002, Bio Syntech Canada Inc., the Company's wholly-owned
subsidiary, concluded a loan agreement with Business Development Bank of Canada
["BDC"] for a total of $2,500,000, as described in Note 4. As part of the
agreement, the Company has issued warrants to purchase 1,000,000 common shares
at a strike price of US$0.33 per share to BDC. These warrants can be exercised
over a five-year term from the date of issuance.
The fair value of the warrants issued to BDC at the date of grant has been
capitalized as debt issue costs under the caption "Deposits and other assets"
with an offsetting credit to additional paid-in capital. The amount of $288,933
will be amortized as additional interest expense over the life of the related
indebtedness. The fair value of these warrants at the date of grant was
estimated using the Black-Scholes option pricing model.
As of June 30, 2002, options to purchase 65,000 shares of the common stock of
the Company were cancelled because more than 90 days had elapsed since the
departure date of some employees.
Bio Syntech Canada Inc.
As of June 30, 2002, options to purchase 10,000 Class A shares of Bio Syntech
Canada Inc. were cancelled because more than 90 days had elapsed since the
departure date of some employees.
9
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 2002 Unaudited
[In Canadian dollars]
4. LONG-TERM DEBT
On June 26, 2002, Bio Syntech Canada Inc., the Company's wholly-owned
subsidiary, concluded a loan agreement with Business Development Bank of Canada
["BDC"] for a total of $2,500,000 of which $2,000,000 was received as of June
30, 2002 and $500,000 is held in escrow subject to finalization of certain
registration requirements for the security interest. The debt is collateralized
by all of the Company's assets not otherwise encumbered. The loan bears interest
at 10% compounded annually. The principal amount together with all accrued
interest is due on February 16, 2006. Partial or full payment, without penalty,
is allowed before the maturity date of the loan.
5. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the
presentation adopted for the quarter ended June 30, 2002.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The discussion in this report on Form 10-QSB contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors" in this Report, as well as those risks discussed
elsewhere in this report. The discussion and analysis below should be read in
conjunction with our Unaudited Condensed Consolidated Interim Financial
Statements and the Notes thereto included elsewhere in this report.
We are an advanced biomaterials company specialized in tissue repair
and therapeutic delivery. Our main focus is the repair of damaged tissue in the
human body like bone or cartilage, and the delivery of therapeutic agents to
their site of action. We are also engaged in the development of advanced
injectable biomaterials for the delivery of cells and genetic material. We have
had limited revenues to date and they have been generated almost entirely by
sales in our instrumentation products, which we are developing. The continuation
of our future operations is dependent upon our receiving the financing necessary
to complete research and development projects and market our products. We are
unsure whether we can complete the research and development of our products, or
if we complete them whether we can successfully market them or generate
sufficient revenues to fund our future operations or additional research,
development and marketing. In addition, major technological changes can occur
quickly in the biotechnological and pharmaceutical industries. The development
by competitors of technologically improved or different products may make our
products obsolete or noncompetitive. Based on our current operating plan, we
believe that our financial resources are sufficient to meet our planned
activities through fiscal year 2003 but it is expected that additional funds
will continue to be required for an indefinite period as no estimate can be made
as to when the Company will achieve profitability. (See Liquidity and Capital
Resources)
To date, we have incurred substantial losses from operations, and as
of June 30, 2002, had an accumulated deficit of $18,185,699. We expect to incur
substantial operating expenses in the future to support our product development
efforts and expand our technical and management personnel and organization,
subject to obtaining financing.
CURRENCY EXCHANGE RATES
All dollar amounts stated in this quarterly report are in Canadian
dollars, except where otherwise specifically indicated. The following table sets
forth, for the dates indicated, the rates at the specific date for the Canadian
dollar per one U.S. dollar, each expressed in Canadian dollars and based on the
noon buying rate, except for the rate at the end of the period which is the
closing rate, in New York City for cable transfers in Canadian dollars as
certified for customs purposes by the Bank of Canada:
Rate at filing date (August 16, 2002) 1.5601
2002 2001
---- ----
Rate at end of period (June 30) 1.5162 1.514
Period High for the period Low for the period
- ------ ------------------- ------------------
July 2002 1.5512 1.5407
June 2002 1.5349 1.5276
May 2002 1.5531 1.5469
April 2002 1.5843 1.5792
March 2002 1.5899 1.5838
February 2002 1.5986 1.5931
11
Period Average for the period
- ------ ----------------------
Three Month Period Ended June 30, 2002 1.5543
Three Month Period Ended June 30, 2001 1.5411
Fiscal year ended March 31, 2002 1.5655
Fiscal year ended March 31, 2001 1.5040
SUMMARY OF CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements is in conformity with
United States Generally Accepted Accounting Principles and requires estimates
and assumptions that affect the reporting of assets, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities. Certain of
our accounting policies are critical to understanding our financial statements
because their application places significant demands on management's judgment,
with financial reporting results relying on estimates of matters that are
inherently uncertain.
We believe that the critical accounting policies described in the
following paragraphs affect the most significant estimates and assumptions used
in the preparation of our consolidated financial statements. For all these
policies, we caution that future events rarely develop exactly as estimated, and
the best estimates routinely require adjustment.
REVENUE RECOGNITION
Product revenue is recognized when persuasive evidence of an
arrangement exists, the product is delivered, there are no future performance
obligations, the purchase price is fixed and determinable, and collectibility is
reasonably assured. Amounts billed in advance of satisfying revenue recognition
criteria are differed until such time as the related product has been delivered.
Service revenue is recognized when the services have been rendered.
GOVERNMENT ASSISTANCE
Government assistance in connection with research and development
activities is recognized as reduction of expenses in the year that the related
expenditure is incurred. Canadian federal and provincial investment tax credits
are accounted for using the cost reduction method which recognizes the credits
as a reduction of the cost of the related assets or expenditures in the year in
which the credits are earned and when there is reasonable assurance of their
recovery.
LONG-LIVED ASSETS
Long-lived assets, principally property and equipment, are reviewed
and evaluated for impairment whenever events or changes in circumstances
indicate that the carrying value of the assets may not be fully recoverable. The
recoverability of such assets is measured by comparing the carrying value to the
potential future cash flows to be generated by the respective assets. If these
factors indicate that the assets are considered impaired, the impairment to be
recognized is measured as the excess of the carrying value over the calculated
potential future discounted cash flows.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's
condensed consolidated statements of operations for the three-month periods
ended June 30, 2002 and 2001 (in thousands of CDN$).
12
Three-month
Periods
Ended June 30,
2002 2001
-------------------
Sales $ 35.9 $ 1.4
Cost of Sales 3.0 0.1
-------------------
Gross Profit $ 32.9 $ 1.3
Operating Expenses
Research and Development $ 569.8 $ 795.0
Investment Tax Credits (38.0) (52.1)
General and Administrative (Net of Grants) 353.7 654.7
Depreciation of Property, Plant and Equipment 47.0 45.0
-------------------
Total Operating Expenses $ 932.5 $1,442.6
-------------------
Loss from Operations $ 899.6 $1,441.3
-------------------
Interest Income (6.8) (57.4)
Interest Expense 10.5 10.7
Loss on Foreign Exchange 77.0 213.0
-------------------
Net Loss $ 980.3 $1,607.6
-------------------
SALES
During the three-month period ended June 30, 2002, the Company had
sales of $35,973 (sale of products and research service revenues) and a net loss
of $980,310 compared to sales of $1,428 and a net loss of $1,607,629 for the
three-month period ended June 30, 2001. The increase in sales is primarily due
to the revenue related to sale of research service revenues.
Loss per share was $0.03 for the three-month period ended June 30,
2002, compared to $0.06 for the three-month period ended June 30, 2001.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
Research and development expenses were $569,848 for the three-month
period ended June 30, 2002 compared to $795,028 for the three-month period ended
June 30, 2001. The decrease of $225,180 is primarily attributable to a reduction
of personnel in research and affiliated expenses, and lower expenses for (i) the
acquisition of research and development equipment and (ii) pre-clinical
toxicological studies.
INVESTMENT TAX CREDITS
The Company claims an investment tax credit on all allowable
research and development expenses. The amount for the three-month period ended
June 30, 2002 is $38,000 compared to $52,072 for the three-month period ended
June 30, 2001, representing a decrease of $14,072. The decrease is directly
attributable to a lower level of allowable research and development expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expenses (net of grants) were $353,699
for the three-month period ended June 30, 2002 compared to $654,654 for the
three-month period ended June 30, 2001, representing a decrease of $300,955. The
decrease is principally attributable to a decrease in professional fees, a
reduction of administrative personnel, a decrease in expenses related to (i)
maintenance of our principal place of business, (ii) marketing and (iii) tax on
capital, savings resulting from our efforts to reduce operating costs offset by
an increase in expenses related to investors and a decrease in labor grants.
13
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Depreciation expense was $46,996 for the three-month period ended
June 30, 2002 compared to $44,969 for the three-month period ended June 30,
2001, representing an increase of $2,027. The increase was principally
attributable to the increased amount of fixed assets during the period compared
to the amount during the same period for the previous fiscal year.
INTEREST INCOME AND INTEREST EXPENSE
Interest income represents income earned on our cash and cash
equivalents. Interest income for the three-month period ended June 30, 2002 was
$6,763 compared to $57,379 for the three-month period ended June 30, 2001,
representing a decrease of $50,616. The decrease is primarily due to a higher
level of cash on hand and on our short-term investments during the same period
for the previous year as a result of the private placements realized at the end
of fiscal year ended March 31, 2001 and during the three-month period ended June
30, 2001.
Interest expense was $10,458 for the three-month period ended June
30, 2002 compared to $10,672 for the three-month period ended June 30, 2001,
representing a slight decrease of $214.
LOSS ON FOREIGN EXCHANGE
Loss on foreign exchange was $77,014 for the three-month period
ended June 30, 2002 compared to a loss of $213,043 for the three-month period
ended June 30, 2001 representing a decrease of $136,029. The change is a result
of (i) lesser amount of cash on hand and short-term investments denominated in
USD during the period and (ii) higher variation in the closing CDN to USD
foreign exchange rate from the beginning and the end of each three-month periods
(from 1.5763 at March 31, 2001 to 1.514 at June 30, 2001 and from 1.5942 at
March 31, 2002 to 1.5162 at June 30, 2002).
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN UNCERTAINTY
We have limited operating history as a biotechnology company and
have not made significant sales of our products. Therefore, our revenues are
difficult to predict. Our cash position on June 30, 2002 was $2,949,714
(including cash and cash equivalents and short-term investments).
On June 26, 2002, Bio Syntech Canada Inc., the Company's
wholly-owned subsidiary, concluded a loan agreement with Business Development
Bank of Canada ["BDC"] for a total of $2,500,000 of which $2,000,000 was
received and $500,000 is held in escrow subject to finalization of certain
registration requirements for the security interest. The debt is collateralized
by all of the Company's assets not otherwise encumbered. The terms of repayment
of the loan are: the principal amount, together with the compound interest at a
corporate rate of 10% annually shall be due on February 15, 2006; thereafter and
in case of default, the interest rate will be 25%. Partial or full payment,
without penalty, is allowed before the maturity date of the BDC Loan. As a part
of the agreement, the Company has issued warrants to purchase 1,000,000 shares
of common stock, $.001 par value of the Company (the "Common Stock") at US$0.33
per share. The warrants are exercisable for a period of five years from the date
of issuance. BDC shall be entitled to exercise warrants on a "cashless basis" so
that they would not be subject to any restriction on transfer. The exercise of
the BDC warrants on a "cashless basis" shall not encompass any obligation on the
part of the Company to redeem the said warrants.
Management also plans to continue to pursue various financing
alternatives, including on-going negotiations for co-development agreements and
bank credit facility to raise the required financing. We are currently in
discussion with the National Bank of Canada for additional financing. We
received a formal offer from National Bank of Canada for a line of credit of
$1,200,000 but we have no agreement, commitment or understanding in connection
with this line of credit. The success of these negotiations is dependant on a
number of items which we cannot control and we are unable to predict whether we
will be able to successfully complete additional transactions with any financial
institution or investors to raise part of any of our additional financing
requirements.
14
We also plan to continue with our program of limiting our operating
costs and capital expenditures. Based on our current operating plan, including
with our cost-cutting measures, and assuming we receive the additional $500,000
and we receive the $1,200,000 line of credit from the National Bank of Canada,
our management estimates that our cash and cash equivalents on hand and
short-term investments balances are sufficient to fund our projected operating
expenses and capital expenditures through the end of the fiscal year 2003.
EMPLOYEE COUNT
As of August 12, 2002, BioSyntech had 28 employees, of whom 18 were
engaged on research and development and 10 were engaged in corporate,
administrative and quality assurance activities. Except for one employee in our
research and development team who is involved in the manufacturing of the Mach1,
we have no other employees involved in the manufacturing of our products. We
anticipate our total employee count to be approximately 30 employees by the end
of fiscal year 2003.
15
RISK FACTORS
WE OPERATE IN A RAPIDLY CHANGING ENVIRONMENT THAT INVOLVES A NUMBER
OF RISKS, SOME OF WHICH ARE BEYOND OUR CONTROL. THE FOLLOWING DISCUSSION
HIGHLIGHTS THE MOST MATERIAL OF THE RISKS.
ADDITIONAL FINANCING WILL BE REQUIRED TO CONTINUE OUR OPERATIONS
BEYOND FISCAL YEAR 2003 AND WE WILL NEED SUBSTANTIAL FUNDS BEFORE WE ARE
PROFITABLE.
Our wholly-owned subsidiary recently entered into a loan agreement
providing for borrowings of up to $2,500,000, $2,000,000 of which has been
advanced to such subsidiary. We are also currently discussing additional sources
of financing. We have received a proposal from a banking institution for a line
of credit of $1,200,000, but we currently have no commitment, agreement or
understanding regarding this additional financing. Based on our current
operating plan, assuming receipt of the additional $500,000 escrowed funds and
an additional $1,200,000 line of credit from the National Bank of Canada, we
estimate that the cash on hand will fund our operations through fiscal year
2003. We expect, however, that additional funds will be required to continue
operating for an indefinite period since we cannot estimate when the Company
will become profitable. If we do not receive additional financing, we will
reassess our operating plan to reduce expenses on an ongoing basis. For a more
detailed discussion on our recent financing transactions, please see "Part I,
Item 2. Management's Discussion and Analysis or Plan of Operation - Liquidity,
Capital Resources and Going Concern Uncertainty" section.
In addition, we need to raise substantial amounts of money if we are
ever to become profitable. If sufficient financing is unavailable on a timely
basis, we will have to curtail development programs or transfer rights in
products that could later prove to be of great value. The financing we require
and when we will spend it, will depend, in part, on:
o How our research and development programs, including clinical
trials, progress;
o How much time and expense will be required to receive FDA
approval for our product candidates;
o The cost of building, operating and maintaining manufacturing
facilities;
o The number of product candidates we pursue;
o The amount of time and money we need to prosecute and enforce
patent rights;
o How competing technological and market developments affect our
product candidates; and
o The cost of obtaining licenses to use technology owned by others.
SINCE OUR INCEPTION, WE HAVE INCURRED LOSSES AND WE EXPECT THAT WE
WILL INCUR MORE LOSSES FOR THE FORESEEABLE FUTURE. WE MAY NEVER BECOME
PROFITABLE.
As of June 30, 2002 our accumulated deficit was $18,185,699. We had
net operating losses of $980,310 and $4,535,131 for the three-month period ended
June 30, 2002 and fiscal year ended March 31, 2002, respectively. These losses
represent mainly research and development costs and general and administrative
expenses. We expect to have substantial additional expenses over the next
several years as our research and development activities and the process of
seeking regulatory approval of our products, including clinical trials,
accelerate. We expect that our expenses will result in additional losses,
because we do not expect to have significant revenues, from the sale of products
for the next several years.
16
Our future profitability depends, in part, on:
o Obtaining regulatory approval for our products;
o Entering into agreements to develop and commercialize products;
o Developing the capacity to manufacture and market products or
entering into agreements with others to do so;
o Market acceptance of our products;
o The ability to obtain additional funding from our collaborative
partners and lending institutions; and
o The ability to achieve certain product development milestones.
We may not achieve any or all of these goals and are unable to
predict whether we will ever achieve significant revenues or profits. Even if we
receive regulatory approval for one or more of our products, we may not achieve
significant commercial success.
THERE ARE FACTORS BEYOND OUR CONTROL THAT MAY PREVENT OUR DELIVERY
TECHNOLOGIES FROM PRODUCING SAFE, USEFUL OR COMMERCIALLY VIABLE PRODUCTS.
ACCORDINGLY, WE MAY NEVER BECOME PROFITABLE.
To be profitable, we must develop, manufacture and market our
products, either alone or by collaborating with others. This process could take
several years and we may never be successful in bringing our product candidates
to the market. Additionally, our successes in pre-clinical and early clinical
trials do not ensure that large scale clinical trials will be successful.
Clinical results are frequently susceptible to varying interpretations that may
delay, limit or prevent further clinical development or regulatory approvals.
Our products may:
o Be shown to be ineffective or to cause harmful side effects;
o Fail to receive regulatory approval on a timely basis or at all;
o Be hard to manufacture on a large scale;
o Be uneconomical;
o Not be pursued by our collaborative partners;
o Not be prescribed by doctors or accepted by patients; or
o Infringe on proprietary rights of another party.
IF THE FOOD AND DRUG ADMINISTRATION DOES NOT APPROVE OR
SIGNIFICANTLY DELAYS THE APPROVAL OF OUR THERAPEUTIC DELIVERY PRODUCTS, WE MAY
BE UNABLE TO CONTINUE OPERATIONS.
FDA approval is required to manufacture and market pharmaceutical
products in the United States. The process to receive this approval is extensive
and includes pre-clinical testing and clinical trials to demonstrate safety and
efficacy, and a review of the manufacturing process to ensure compliance with
good manufacturing practices. This process can last many years and be very
costly and still be unsuccessful. The length of time necessary to complete
clinical trials and receive approval for product marketing by regulatory
authorities varies significantly by product and indication and is difficult to
predict. If the FDA does not approve or significantly delays the approval of our
therapeutic delivery products, we may be unable to continue operations. FDA
approval can be delayed, limited or denied for many reasons, including:
17
o A product candidate may not be safe or effective;
o Data from pre-clinical testing and clinical trials can be
interpreted by FDA officials in different ways than we interpret
it;
o The FDA might not approve our manufacturing processes or
facilities;
o The FDA may change its approval policies or adopt new
regulations; and
o A product candidate may not be approved for all the uses we
requested.
Countries other than the United States, including Canada, have
similar requirements. The process of getting approvals in foreign countries is
subject to delay and failure for the same reasons.
We do not have any product that has been approved by the FDA. We
are currently in the process of filing a pre-submission package for BST-InPod
with the FDA. Upon successful completion of the required pre-clinical studies
for the BST-InPod, we will file an Investigational Device Exemption ("IDE")
application with the FDA. We also file an Investigational Testing application
for BST-InPod with the Health Protection Branch of Health Canada. We plan to
make the same applications for the following products as well:
o BST-CarGel
o BST-Fill; and
o Arthro-BST
We will be allowed to conduct human clinical trials in the
United States if our IDE application is approved by the FDA, and in Canada if
our application is approved by the Health Protection Branch of Health Canada.
IF OUR PRESENT AND FUTURE ARRANGEMENTS WITH OUR COLLABORATORS AND
LICENSEES ARE UNSUCCESSFUL, WE MAY BE UNABLE TO CONTINUE OPERATIONS DUE TO
SUBSTANTIAL ADDITIONAL OPERATING COSTS.
We are designing delivery systems for medications and drug products
that are protected by our licensees' or collaborators' patents. In some cases,
we depend on these parties to conduct pre-clinical testing and clinical trials
and in the future, we may seek to have these parties fund our development
programs. Our agreements with our collaborators currently do not provide for
financing. If we are unable to reach satisfactory agreements with our
collaborators or with third parties, we would incur substantial additional costs
and would experience substantial delay in commercializing most of our products.
Some of our collaborators can terminate their agreements with us for no reason
and on limited notice. We are unsure whether any of these relationships will
continue.
Our present plans call for us to develop the capabilities to
manufacture our own products in commercial quantities. We may rely upon our
collaborators and or licensees for the marketing and sales of our products.
We have limited means of enforcing our collaborators' or licensees'
performance or of controlling the resources they devote to our programs. If a
collaborator fails to perform, the research, development or commercialization
program on which it is working will be delayed. If this happens, we may have to
stop the program entirely.
Disputes may arise between us and a collaborator and may involve the
issue of which of us owns the technology that is developed during a
collaboration. A potential dispute could delay the program or result in
expensive arbitration or litigation, which we might not win. A collaborator may
choose to use its own or other technology to deliver its drug or cell product.
Our collaborators could merge with or be acquired by another company or
experience financial or operational difficulties that could adversely affect our
programs.
18
We could become involved in a costly litigation to protect our
proprietary rights. We may also be prevented from selling our products.
The following factors are important to our success:
o Receiving patent protection for our product candidates and those
of our collaborators;
o Maintaining our trade secrets;
o Not infringing on the proprietary rights of others; and
o Preventing others from infringing our proprietary rights.
We can protect our proprietary rights from unauthorized use by third
parties only if these rights are covered by valid and enforceable patents or are
effectively maintained as trade secrets. We try to protect our proprietary
position by filing United States, Canadian, and foreign patent applications
related to our proprietary technology, inventions and improvements that are
important to the development of our business. The laws of certain foreign
countries, however, may not protect our intellectual property rights to the same
extent as the laws of the United States and Canada.
The patent position of biopharmaceutical companies involves complex
legal and factual questions. Enforceability of patents cannot be projected with
certainty. Patents, if issued, may be challenged, invalidated or circumvented.
Any patents that we own or license to others may provide no protection against
competitors. Our pending and future patent applications or those that we license
from third parties, may not result in patents being issued. If patents do issue,
they may not provide us with proprietary protection or competitive advantages
against competitors with similar technology. In addition, others may also
independently develop similar technologies or duplicate any technology that we
have developed.
We also rely on trade secrets, know-how and technology, which we try
to protect by entering into confidentiality agreements with parties that have
access to it, including our corporate partners, collaborators, employees and
consultants. Any of these parties may breach the agreement and disclose our
confidential information or our competitors might learn of the information in
some other way.
Protecting our proprietary rights involves a significant level of
resources. Although we have provided for the costs of applying for patents and
trade marks, our results of operations may be materially affected if we are
involved in a costly litigation in the process of protecting our proprietary
rights. We may also be prevented from selling our products if such litigation
ensues.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS.
The testing and marketing of bio-therapeutic and medical products,
even after FDA approval, have an inherent risk of product liability. Although we
anticipate we will obtain product liability insurance coverage for a limited
amount at the time that our operations warrant it, we are unsure whether it will
be available at reasonable terms. However, our profitability will be affected by
a successful product liability claim in excess of any insurance coverage that
may be in effect at that time.
FOREIGN EXCHANGE FLUCTUATIONS OF THE CANADIAN DOLLAR MAY AFFECT OUR
FINANCIAL PERFORMANCE, BECAUSE IT IS NOT COST-EFFECTIVE FOR US TO ENTER INTO
FORWARD CONTRACTS OR CURRENCY OPTIONS.
We expect a substantial portion of our revenues to be based on sales
and services rendered to come from the United States, while a significant amount
of our operating expenses will be incurred in Canada. As a result, our financial
performance will be affected by fluctuations in the value of the United States
dollar to the Canadian dollar. At the present time, we have no plan or policy to
utilize forward contracts or currency options to minimize this exposure, and
19
even if these measures are implemented, we are unsure whether these arrangements
will be available, be cost effective or be able to fully offset future currency
risks.
OUR COMMON STOCK CURRENTLY IS, AND MAY CONTINUE TO BE, SUBJECT TO
ADDITIONAL REGULATIONS APPLICABLE TO LOWER PRICED SECURITIES THAT MAY REDUCE THE
TRADING VOLUME OF OUR SHARES AND MAY ALSO REDUCE YOUR ABILITY TO RESELL THE
SHARES LATER.
Our Common Stock is, and may continue to be, subject to a number of
regulations that can affect its price and your ability to sell it. For example,
Rule 15g-9 under the Exchange Act applies to our Common Stock. This rule imposes
sales practice requirements on broker-dealers that sell low priced securities to
persons other than established customers and institutional accredited investors.
For transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction.
In addition, under United States securities regulations, penny
stocks generally are equity securities with a price of less than US$5.00 per
share other than securities registered on certain national securities exchanges
or quoted on the Nasdaq Stock Market. For any transaction involving a penny
stock, unless exempt, the penny stock rules require the delivery, prior to the
transaction, of a disclosure schedule prescribed by the Securities and Exchange
Commission relating to the penny stock market. The broker-dealer must also
disclose the commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities. Finally, monthly
statements must be sent disclosing recent price information on the limited
market in penny stocks. Consequently, the penny stock rules may restrict the
ability of broker-dealers to sell our Common Stock. These requirements may
reduce the level of trading activity in any secondary market for our Common
Stock and may adversely affect the ability of broker-dealers to sell our
securities.
20
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 26, 2002, as a part of the terms of the BDC Loan, the
Company issued warrants to purchase 1,000,000 shares of Common Stock at US$0.33
per share (the "Warrants"). The Warrants are exercisable for a period of five
years from the date of issuance. BDC is entitled to exercise the Warrants on a
"cashless basis" so that they would not be subject to any restriction on
transfer. The exercise of the Warrants on a "cashless basis" shall not include
any obligation on the part of the Company to redeem the Warrants. The issuance
of the Warrants was made in reliance on the exemption contained in Section 4(2)
of the Securities Act of 1933, as amended. For more information relating to the
issuance of the Warrants, see the Current Report of the Company on Form 8-K
filed with the Securities and Exchange Commission on July 15, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Statement under oath of Chief Executive
Officer dated August 8, 2002 filed herewith.
The Company presently does not have any
Chief Financial Officer. The Company has
commenced the hiring process for a new Chief
Financial Officer.
(b) Reports on Form 8-K
None
21
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.
BIOSYNTECH, INC.
Dated: August 16, 2002
By: /s/ Amine Selmani
-------------------
Name: Amine Selmani
Title: Chief Executive Officer and President
By: /s/ Lucie Duval
----------------
Name: Lucie Duval
Title: Controller
