U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
--------------------------------------------
( ) TRANSACTION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from to
--------------------- ---------------------
Commission File Number: 0-27179
-------
BioSyntech, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 88-0329399
-------- ------------
(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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(Issuer's Telephone Number, Including Area Code)
APPLICABLE ONLY TO CORPORATE ISSUERS
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 October 31, 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 September 30, 2002 and 3
March 31, 2002
Condensed Consolidated Statements of Operations for the Three- 4
Month Periods Ended September 30, 2002 and September 30, 2001
Condensed Consolidated Statements of Operations for the Six-Month 5
Periods Ended September 30, 2002 and September 30, 2001
Condensed Statement of Stockholders' Equity (Deficiency) from 6
inception to September 30, 2002
Condensed Consolidated Statements of Cash Flows for the Three- 7
Month Periods Ended September 30, 2002 and September 30, 2001
Condensed Consolidated Statements of Cash Flows for the
Six-Month Periods Ended September 30, 2002 and September
30, 2001 8
Notes To Condensed Consolidated Interim Financial Statements 9
Item 2. Management's Discussion and Analysis 13
Risk Factors 18
Item 3. Controls and Procedures 22
Part II. OTHER INFORMATION
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
2
BIOSYNTECH, INC.
Item 1. Unaudited Condensed Consolidated Interim Financial Statements
Condensed Consolidated Financial Statements
BioSyntech, Inc.
[a development stage company] - Unaudited
Quarter ended September 30, 2002
BioSyntech, Inc.
A development stage company
CONDENSED CONSOLIDATED BALANCE SHEETS
[See Basis of Presentation and Going Concern Assumption - note 2]
As of September 30, 2002 and March 31, 2002
[In Canadian dollars]
September 30, September 30, March 31,
2002 2002 2002
US$ C$ C$
- -----------------------------------------------------------------------------------------------------
[note 2] [note 2] [note 2]
[Unaudited] [Unaudited]
ASSETS
Current assets
Cash and cash equivalents 1,443,659 2,291,375 443,145
Short-term investments -- -- 1,395,163
Receivables 54,782 86,950 78,853
Inventory 12,712 20,177 21,657
Investment tax credits recoverable 182,122 289,064 213,064
Prepaid expenses 34,151 54,204 58,164
- ----------------------------------------------------------------------------------------------------
1,727,426 2,741,770 2,210,046
- ----------------------------------------------------------------------------------------------------
Property, plant and equipment 1,423,395 2,259,213 2,341,591
Deposits and other assets 311,733 494,783 19,452
- ----------------------------------------------------------------------------------------------------
3,462,554 5,495,766 4,571,089
====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities 398,296 632,176 651,639
Due to stockholder, without interest and repayment terms 6,300 10,000 10,000
Deferred revenues -- -- 3,095
Current portion of long-term debt 25,202 40,000 40,000
Current portion of obligations under capital leases 16,394 26,020 26,891
- ----------------------------------------------------------------------------------------------------
446,192 708,196 731,625
- ----------------------------------------------------------------------------------------------------
Long-term debt [Note 4] 1,669,485 2,649,807 126,667
Obligations under capital leases 13,690 21,729 33,628
- ----------------------------------------------------------------------------------------------------
2,129,367 3,379,732 891,920
- ----------------------------------------------------------------------------------------------------
Stockholders' equity
Common stock [Note 3]
Par value $0.001
Authorized 100,000,000 common shares
Issued and outstanding
29,222,250 common shares 11,520,828 18,285,858 18,285,858
To be issued
35,000 common shares [15,000 as of March 31,2002] 13,862 22,002 11,009
Additional paid-in capital 1,814,088 2,879,320 2,587,691
Deficit accumulated during the development stage (12,015,591) (19,071,146) (17,205,389)
- ----------------------------------------------------------------------------------------------------
1,333,187 2,116,034 3,679,169
- ----------------------------------------------------------------------------------------------------
3,462,554 5,495,766 4,571,089
====================================================================================================
See accompanying notes
On behalf of the Board
- ------------------------- ----------------------
Director Director
3
BioSyntech, Inc.
A development stage company
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
[See Basis of Presentation and Going Concern Assumption - note 2]
Three-month periods ended September 30, 2002 and 2001
[In Canadian dollars] Unaudited
Cumulative from
inception to
September 30, September 30, September 30, September 30,
2002 2002 2002 2001
C$ US$ C$ C$
- --------------------------------------------------------------------------------------------------------------
[note 2]
Sales 666,202 25,139 39,900 53,080
Cost of sales 243,895 1,924 3,054 15,100
- ---------------------------------------------------------------------------------------------------------
422,307 23,215 36,846 37,980
- ---------------------------------------------------------------------------------------------------------
Research and development expenses 12,576,167 333,519 529,362 645,034
Investment tax credits recoverable (2,038,012) (23,942) (38,000) (43,992)
General and administrative expenses 9,221,181 248,429 394,306 475,773
Interest on long-term debt and capital lease
obligations 419,114 58,704 93,175 8,625
Depreciation of property, plant and equipment 638,869 29,682 47,112 45,047
Government grants (234,541) (15,686) (24,897) (18,420)
Interest income (652,549) (8,016) (12,723) (34,474)
Gain on foreign exchange (436,776) (41,609) (66,042) (143,766)
- ---------------------------------------------------------------------------------------------------------
19,493,453 581,081 922,293 933,827
- ---------------------------------------------------------------------------------------------------------
Net loss and comprehensive loss for the period (19,071,146) (557,866) (885,447) (895,847)
Deficit accumulated during the development
stage, beginning of period -- (11,457,725) (18,185,699) (14,277,887)
- ---------------------------------------------------------------------------------------------------------
Deficit accumulated during the development
stage, end of period (19,071,146) (12,015,591) (19,071,146) (15,173,734)
=========================================================================================================
Weighted average number of common shares 29,222,250 29,222,250 29,182,250
outstanding
Basic and diluted loss per share (0.02) (0.03) (0.03)
=========================================================================================================
See accompanying notes
4
BioSyntech, Inc.
A development stage company
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
[See Basis of Presentation and Going Concern Assumption - note 2]
Six-month periods ended September 30, 2002 and 2001
[In Canadian dollars] Unaudited
Cumulative from
inception to
September 30, September 30, September 30, September 30,
2002 2002 2002 2001
C$ US$ C$ C$
- -------------------------------------------------------------------------------------------------------------
[note 2]
Sales 666,202 47,803 75,873 54,508
Cost of sales 243,895 3,834 6,085 15,242
- ---------------------------------------------------------------------------------------------------------
422,307 43,969 69,788 39,266
- ---------------------------------------------------------------------------------------------------------
Research and development expenses 12,576,167 692,547 1,099,210 1,440,062
Investment tax credits recoverable (2,038,012) (47,883) (76,000) (96,064)
General and administrative expenses 9,221,181 471,221 747,922 1,144,427
Interest on long-term debt and capital lease
obligations 419,114 65,293 103,633 19,297
Depreciation of property, plant and equipment 638,869 59,292 94,108 90,016
Government grants (234,541) (15,634) (24,814) (32,420)
Interest income (652,549) (12,277) (19,486) (91,853)
(Gain) loss on foreign exchange (436,776) 6,913 10,972 69,277
- ---------------------------------------------------------------------------------------------------------
19,493,453 1,219,472 1,935,545 2,542,742
- ---------------------------------------------------------------------------------------------------------
Net loss and comprehensive loss for the period (19,071,146) (1,175,503) (1,865,757) (2,503,476)
Deficit accumulated during the development
stage, beginning of period -- (10,840,088) (17,205,389) (12,670,258)
- ---------------------------------------------------------------------------------------------------------
Deficit accumulated during the development
stage, end of period (19,071,146) (12,015,591) (19,071,146) (15,173,734)
=========================================================================================================
Weighted average number of common shares
outstanding 29,222,250 29,222,250 29,182,250
Basic and diluted loss per share 0.04 0.06 0.09
=========================================================================================================
See accompanying notes
5
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 September 30, 2002
[In Canadian dollars] Unaudited
Common Stock Common Stock
issued and outstanding To be issued Additional paid- Accumu-
---------------------- ------------ in lated
Shares Amount Shares Amount capital deficit Total
$ $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, May 10, 1995 8,525,000 1 -- -- 1
Net loss 1996 [325 day period] -- -- -- (2,865) (2,865)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 8,525,000 1 -- (2,865) (2,864)
Net loss 1997 -- -- -- (9,332) (9,332)
- ------------------------------------------------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------------------------------------
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 -- -- 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)
- ------------------------------------------------------------------------------------------------------------------------------------
Deemed outstanding February 29, 2000 15,177,036 6,330,131 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)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 28,115,536 13,132,702 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)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 29,182,250 18,246,375 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)
- ------------------------------------------------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 29,222,250 18,285,858 30,000 17,822 2,876,624 (18,185,699) 2,994,605
Common stock to be issued to a consultant in
exchange for services [Note 3] -- -- 5,000 4,180 -- -- 4,180
Options granted to consultants [Note 3] -- -- 2,696 -- 2,696
Net loss and comprehensive loss for the period
from July 1, 2002 to September 30, 2002 -- -- -- (885,447) (885,447)
- ------------------------------------------------------------------------------------------------------------------------------------
29,222,250 18,285,858 35,000 22,002 2,879,320 (19,071,146) 2,116,034
====================================================================================================================================
US Dollars [Note 2]
Balance, September 30, 2002 11,520,828 13,862 1,814,088 (12,015,591) 1,333,187
====================================================================================================================================
See accompanying notes
6
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 September 30, 2002 and 2001
[In Canadian dollars] Unaudited
Cumulative from
inception to
September 30, September 30, September 30, September 30,
2002 2002 2002 2001
C$ US$ C$ C$
- --------------------------------------------------------------------------------------------------------------------------
[note 2]
OPERATING ACTIVITIES
Net loss and comprehensive loss (19,071,146) (557,866) (885,447) (895,847)
Items not affecting cash
Depreciation of property, plant and equipment 638,869 29,682 47,112 45,047
Amortization of debt issue costs 37,711 23,759 37,711 --
Services paid by the issuance of common stock to be issued to
a consultant 2,588,485 2,634 4,180 --
Exchangeable shares of the subsidiary of the
Company issued as part of a settlement 114,248 -- -- --
Options granted to consultants 2,476,139 1,699 2,696 --
Accrued interest on long-term debt 53,140 32,099 50,948 --
Exchange loss (gain) (544,284) (20,297) (32,215) (86,622)
Exchange loss (gain) on short-term investments 4,129 -- -- (64,511)
Changes in working capital assets and liabilities
Receivables (86,950) 2,450 3,888 (19,664)
Inventory (20,177) -- -- (35,210)
Investment tax credits recoverable (289,064) (23,942) (38,000) (43,992)
Prepaid expenses (54,204) (19,619) (31,139) 4,940
Deferred revenues -- -- -- 28,092
Accounts payable and accrued liabilities 509,593 (111,392) (176,801) (12,804)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows related to operating activities (13,643,511) (640,793) (1,017,067) (1,080,571)
- --------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,171,979) (883) (1,402) (8,928)
Purchase of short-term investments (1,589,258) -- -- --
Proceeds from maturing of short-term investments 1,585,129 835,763 1,326,523 --
Deposits and other assets (18,452) 693 1,100 --
Changes in non-cash working capital balances related to
investing activities 1,390 (16,459) (26,123) (25,479)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows related to investing activities (1,193,170) 819,114 1,300,098 (34,407)
- --------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in long term debt 3,190,000 308,720 490,000 --
Repayment of long term debt (553,333) (6,300) (10,000) (10,000)
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 (1,678,242) (4,124) (6,545) (5,371)
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)
Debt issue costs (120,517) (75,931) (120,517) --
- --------------------------------------------------------------------------------------------------------------------------
Cash flows related to financing activities 16,583,772 222,365 352,938 (15,371)
- --------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 544,284 20,297 32,215 86,622
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,291,375 420,983 668,184 (1,043,727)
Cash and cash equivalents, beginning of period -- 1,022,676 1,623,191 2,900,651
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 2,291,375 1,443,659 2,291,375 1,856,924
==========================================================================================================================
See accompanying notes
7
BioSyntech, Inc.
A development stage company
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
[See Basis of Presentation and Going Concern Assumption - note 2]
Six-month periods ended September 30, 2002 and 2001
[In Canadian dollars] Unaudited
Cumulative from
inception to
September 30, September 30, September 30, September 30,
2002 2002 2002 2001
C$ US$ C$ C$
- ---------------------------------------------------------------------------------------------------------------------------
[note 2]
OPERATING ACTIVITIES
Net loss and comprehensive loss (19,071,146) (1,175,503) (1,865,757) (2,503,476)
Items not affecting cash
Depreciation of property, plant and equipment 638,869 59,292 94,108 90,016
Amortization of debt issue costs 37,711 23,759 37,711 --
Services paid by the issuance of common stock to be issued to
a consultant 2,588,485 6,926 10,993 39,483
Exchangeable shares of the subsidiary of the
Company issued as part of a settlement 114,248 -- -- 114,248
Options granted to consultants 2,476,139 1,699 2,696 --
Accrued interest on long-term debt 53,140 33,480 53,140 --
Exchange loss (gain) (544,284) (15,594) (24,751) 92,161
Exchange loss (gain) on short-term investments 4,129 43,246 68,640 (64,511)
Changes in working capital assets and liabilities
Receivables (86,950) (5,101) (8,097) 89,508
Inventory (20,177) 933 1,480 (41,045)
Investment tax credits recoverable (289,064) (47,883) (76,000) (96,064)
Prepaid expenses (54,204) 2,495 3,960 967
Deferred revenues -- (1,950) (3,095) 42,722
Accounts payable and accrued liabilities 509,593 (66,567) (105,655) (751,361)
=========================================================================================================================
Cash flows related to operating activities (13,643,511) (1,140,768) (1,810,627) (2,987,352)
=========================================================================================================================
INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,171,979) (7,382) (11,717) (22,070)
Purchase of short-term investments (1,589,258) -- -- (1,514,258)
Proceeds from maturing of short-term investments 1,585,129 835,763 1,326,523 --
Deposits and other assets (18,452) 693 1,100 --
Changes in non-cash working capital balances related to
investing activities 1,390 (11,664) (18,513) (143,654)
=========================================================================================================================
Cash flows related to investing activities (1,193,170) 817,410 1,297,393 (1,679,982)
=========================================================================================================================
FINANCING ACTIVITIES
Increase in long term debt 3,190,000 1,568,801 2,490,000 --
Repayment of long term debt (553,333) (12,601) (20,000) (13,333)
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 (1,678,242) (8,046) (12,770) (13,618)
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) -- --
Debt issue costs (120,517) (75,931) (120,517) --
- -------------------------------------------------------------------------------------------------------------------------
Cash flows related to financing activities 16,583,772 1,472,223 2,336,713 (26,951)
- -------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 544,284 15,594 24,751 (92,161)
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,291,375 1,164,459 1,848,230 (4,786,446)
Cash and cash equivalents, beginning of period -- 279,200 443,145 6,643,370
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 2,291,375 1,443,659 2,291,375 1,856,924
=========================================================================================================================
See accompanying notes
8
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 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
September 30, 2002, the Company's accumulated deficit was $19,071,146. 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
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
September 30, 2002, the results of operations and cash flows for the three-month
period and the six-month period ended September 30, 2002. The balance sheet at
9
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2002 Unaudited
[In Canadian dollars]
2. BASIS OF PRESENTATION AND GOING CONCERN ASSUMPTION
[Cont'd]
March 31, 2002 has been derived from the audited financial statements at that
date but does not include all 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 September 30, 2002, which was $1.5872
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 September 30, 2002, the
Company had to issue 35,000 common shares in exchange for services rendered.
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
$22,002, was charged to general and administrative expenses, of which $11,009
was charged during the three-month period ended March 31, 2002, $6,813 was
charged during the three-month period ended June 30, 2002 and $4,180 was charged
during the three-month period ended September 30, 2002.
10
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 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 granted RCG 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 the 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. As of September 30, 2002,
180,000 options are subject to Board of Directors' approval.
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 an exercise 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.
On August 22, 2002, the Company granted options to purchase 370,000 common
shares to employees at an exercise price of $0.62. The Company also granted
options to purchase 30,000 common shares to a consultant in exchange for
services at an exercise price of US$0.40. These options can be exercised over a
seven-year period beginning on January 1, 2003. The fair value of the options
granted to the consultant will be charged to research and development expenses
over the life of the related contract with an offsetting credit to additional
paid-in capital. The fair value of these options at the date of grant was
estimated using the Black-Scholes option pricing model. During the three-month
period ended September 30, 2002, the amount of $2,696 was charged to research
and development expenses.
On August 22, 2002, the Company also granted options to purchase 100,000 common
shares at an exercise price of $0.62 to a director of the Board. These options
can be exercised over a five-year period from the date of grant.
11
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2002 Unaudited
[In Canadian dollars]
3. STOCKHOLDERS' EQUITY [CONT'D]
On October 17, 2002, the Company granted options to purchase 50,000 common
shares at an exercise price of $0.63 to a director of the Board. These options
can be exercised over a five-year period from the date of grant.
On October 18, 2002, the Company granted options to purchase 125,000 common
shares at an exercise price of $0.63 to employees. These options can be
exercised over a six-year period beginning on January 1, 2003.
During the three-month period ended September 30, 2002, options to purchase
10,000 common shares of the common stock of the Company were forfeited because
more than 90 days had elapsed since the departure date of some employees.
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 $2,490,000 was received as of September 30, 2002
and $10,000 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.
The debt issue costs were capitalized and are shown as "Deposit and other
assets." The debt issue costs represent a total amount of $225,234, excluding
the warrants discussed in note 3, which will be amortized as additional interest
expense over the life of the related indebtedness. As at September 30, 2002, an
amount of $120,517 had been paid by the Company.
12
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 specializing 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 September 30, 2002, we had an accumulated deficit of $19,071,146. 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 our 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 (November 19, 2002) 1.5852
======
2002 2001
---- ----
Rate at end of period (September 30) 1.5872 1.5785
Period High for the period Low for the period
- ------ ------------------- ------------------
October 2002 1.5810 1.5739
September 2002 1.5789 1.5712
August 2002 1.5724 1.5632
13
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
Period Average for the period
- ------ ----------------------
Three Month Period Ended September 30, 2002 1.5580
Three Month Period Ended September 30, 2001 1.5461
Six Month Period Ended September 30, 2002 1.5562
Six Month Period Ended September 30, 2001 1.5436
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 deferred 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.
14
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 September 30, 2002 and 2001, and the six-month periods ended September 30,
2002 and 2001 (in thousands of CDN$).
Three-month Six-month
Periods Periods
Ended September 30, Ended September 30,
2002 2001 2001 2002
-------------------------------------------
Sales $ 39.9 $ 53.1 $ 75.9 $ 54.5
Cost of Sales 3.0 15.1 6.1 15.2
-------- ---------- ---------- ----------
Gross Profit $ 36.9 $ 38.0 $ 69.8 $ 39.3
Operating Expenses
Research and Development $ 529.4 $ 645.0 $ 1,099.2 1,440.1
Investment Tax Credits (38.0) (44.0) (76.0) (96.1)
General and Administrative (Net of Grants) 369.4 457.4 723.1 1,112.0
Depreciation of Property, Plant and Equipment 47.1 45.0 94.1 90.0
-------- ---------- ---------- ----------
Total Operating Expenses $ 907.9 $ 1,103.4 $ 1,840.4 $ 2,546.0
-------- ---------- ---------- ----------
Loss from Operations $ 871.0 $ 1,065.4 $ 1,770.6 $ 2,506.7
-------- ---------- ---------- ----------
Interest Income (12.7) (34.4) (19.4) (91.8)
Interest Expense 93.2 8.6 103.6 19.3
Loss (Gain) on Foreign Exchange (66.1) (143.8) 11.0 69.3
-------- ---------- ---------- ----------
Net Loss $ 885.4 $ 895.8 $ 1,865.8 $ 2,503.5
-------- ---------- ---------- ----------
Sales
During the three-month period ended September 30, 2002, the Company
had sales of $39,900 (sale of products and research service revenues) and a net
loss of $885,447 compared to sales of $53,080 and a net loss of $895,847 for the
three-month period ended September 30, 2001. The decrease in sales is primarily
due to lower revenue related to sale of products. During the six-month period
ended September 30, 2002, the Company had sales of $75,873 (sale of products and
research service revenues) and a net loss of $1,865,757 compared to sales of
$54,508 and a net loss of $2,503,476 for the six-month period ended September
30, 2001.
Loss per share was $0.03 for the three-month periods ended September
30, 2002 and 2001. Loss per share was $0.06 for the six-month period ended
September 30, 2002 compared to $0.09 for the six-month period ended September
30, 2001.
Operating Expenses
Research and development
Research and development expenses were $529,362 for the three-month
period ended September 30, 2002 compared to $645,034 for the three-month period
ended September 30, 2001. The decrease of $115,672 is primarily attributable to
a reduction of personnel in research and affiliated expenses and lower expenses
for (i) the corporate collaborators, (ii) the acquisition of research and
development equipment and (iii) own in-house programs offset by increases of the
cost of pre-clinical toxicological studies and royalties to Polyvalor.
Research and development expenses were $1,099,210 for the six-month
period ended September 30, 2002 compared to $1,440,062 for the six-month period
ended September 30, 2001, representing a decrease of $340,852. The decrease in
the six-month period is primarily attributable to a reduction of personnel in
15
research and affiliated expenses, and lower expenses for (i) the acquisition of
research and development equipment, (ii) the corporate collaborators, (iii)
pre-clinical toxicological studies and (iv) own in-house programs during the
period offset by the increase of royalties to be paid to Polyvalor.
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
September 30, 2002 is $38,000 compared to $43,992 for the three-month period
ended September 30, 2001, representing a decrease of $5,992. The amount for the
six-month period ended September 30, 2002 is $76,000 compared to $96,064 for the
six-month period ended September 30, 2001, representing a decrease of $20,064.
The decreases in the three-month period and in the six-month period ended
September 30, 2002 are directly attributable to a lower level of allowable
research and development expenses.
General and administrative
General and administrative expenses (net of grants) were $369,409
for the three-month period ended September 30, 2002 compared to $457,353 for the
three-month period ended September 30, 2001, representing a decrease of $87,944.
The decrease is principally attributable to a reduction of administrative
personnel, a decrease in expenses related to (i) investors, (ii) tax on capital
and (iii) maintenance of our principal place of business, savings resulting from
our efforts to reduce operating costs and an increase in labor grants offset by
slight increases in professional fees and expenses related to marketing.
General and administrative expenses (net of grants) were $723,108
for the six-month period ended September 30, 2002 compared to $1,112,007 for the
six-month period ended September 30, 2001, representing a decrease of $388,899.
The decrease in the six-month period 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) tax
on capital and (iii) marketing and investor expenses due to the Company's
efforts to reduce operating costs offset by a decrease in labor grants during
the period.
Depreciation of Property, Plant and Equipment
Depreciation expense was $47,112 for the three-month period ended
September 30, 2002 compared to $45,047 for the three-month period ended
September 30, 2001, representing a slight increase of $2,065. Depreciation
expense was $94,108 for the six-month period ended September 30, 2002 compared
to $90,016 for the six-month period ended September 30, 2001, representing an
increase of $4,092. The increases in the three-month period and in the six-month
period ended September 30, 2002 were principally attributable to the increased
amount of property, plant and equipment during the two periods compared to the
amount of property, plant and equipment during the same two periods of the last
fiscal year.
Interest Income and Interest Expense
Interest income represents income earned on our cash and cash
equivalents and short-term investments. Interest income for the three-month
period ended September 30, 2002 was $12,723 compared to $34,474 for the
three-month period ended September 30, 2001, representing a decrease of $21,751.
Interest income for the six-month period ended September 30, 2002 was $19,486
compared to $91,853 for the six-month period ended September 30, 2001,
representing a decrease of $72,367. The decreases in the three-month period and
in the six-month period ended September 2002 are primarily due to a higher level
of cash on hand and short-term investments during the same periods in the
previous year as a result of the private placements realized at the end of
fiscal year ended March 31, 2001.
Interest expense was $93,175 for the three-month period ended
September 30, 2002 compared to $8,625 for the three-month period ended September
30, 2001, representing an increase of $84,550. Interest expense was $103,633 for
the six-month period ended September 30, 2002 compared to $19,297 for the
six-month period ended September 30, 2001, representing an increase of $84,336.
The increases in the three-month period and in the six-month period ended
September 30, 2002 were mostly attributable to the interest expenses and to the
16
amortization of the debt issue costs related to the Business Development Bank of
Canada ("BDC") loan concluded at the end of the three-month period ended June
30, 2002.
Loss (Gain) on Foreign Exchange
Gain on foreign exchange was $66,042 for the three-month period
ended September 30, 2002 compared to a gain of $143,766 for the three-month
period ended September 30, 2001, representing a decrease of $77,724. The change
is a result of (i) a lesser amount of cash on hand and short-term investments
denominated in USD during the period and (ii) a higher variation in the closing
CDN to USD foreign exchange rate from the beginning and the end of each
three-month period (from 1.514 at June 30, 2001 to 1.5785 at September 30, 2001
and from 1.5162 at June 30, 2002 to 1.5872 at September 30, 2002).
Loss on foreign exchange was $10,972 for the six-month period ended
September 30, 2002 compared to a loss of $69,277 for the six-month period ended
September 30, 2001, representing a decrease of $58,305. The change is a result
of a lesser amount of cash on hand and short-term investments denominated in USD
during the period offset by a lower variation in the closing CDN to USD foreign
exchange rate from the beginning and the end of each three-month period (from
1.5763 at March 31, 2001 to 1.5785 at September 30, 2001 and from 1.5942 at
March 31, 2002 to 1.5872 at September 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 September 30, 2002 was $2,291,375
(including cash equivalents).
On June 26, 2002, Bio Syntech Canada Inc., our wholly-owned
subsidiary, concluded a loan agreement with the BDC for a total of $2,500,000 of
which $2,490,000 was received and $10,000 is held in escrow subject to
finalization of certain registration requirements for the security interest. The
debt is collateralized by all of our assets not otherwise encumbered. The terms
of repayment of the loan are: the principal amount, together with the compound
interest at a 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. This agreement contained customary negative and affirmative covenants
including those relating to capital expenditures. As a part of the agreement, we
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 it 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 said warrants.
Management also plans to continue to pursue various financing
alternatives, including on-going negotiations for co-development agreements and
a 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 the 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 dependent 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.
We also plan to continue with our program of limiting our operating
costs and capital expenditures. Based on our current operating plan, including
our cost-cutting measures, and assuming we receive the additional $10,000 held
in escrow and 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 are sufficient to fund our projected operating expenses
and capital expenditures through the end of the fiscal year 2003. There can be
no assurance, however, that the above-mentioned line of credit will be received
from the National Bank of Canada.
17
For information regarding options granted as of September 30, 2002,
refer to Note 3 of the Notes to Condensed Consolidated Financial Statements.
Employee Count
As of November 19, 2002, BioSyntech had 28 employees, of which 19
were engaged in research and development and 9 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.
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
with BDC providing for borrowings of up to $2,500,000, of which $2,490,000 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 $10,000 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. There can be no assurance that the above-mentioned line
of credit will be received from the National Bank of Canada. 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 - 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.
18
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 September 30, 2002 our accumulated deficit was $19,071,146. We
had net operating losses of $885,447 and $4,535,131 for the three-month period
ended September 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.
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 unsuccessful. The length of time necessary to complete clinical
trials and receive approval for product marketing by regulatory authorities
19
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:
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.
20
WE COULD BECOME INVOLVED IN 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
trademarks, our results of operations may be materially affected if we are
involved in 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 and 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 even if these measures are implemented, we are unsure whether
these arrangements will be available, cost effective or be able to fully offset
future currency risks.
21
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.
Item 3. Controls and Procedures
As of November 14, 2002, our President and the Chief Executive
Officer supervised and participated in an evaluation of the effectiveness of the
design and operations of our disclosure control and procedures (as defined in
Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934). Our
President & Chief Executive Officer has concluded that, based on his
evaluation as of a date within 90 days of the filing of this Form 10-QSB, our
disclosure controls and procedures were effective as of September 30, 2002.
There has been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
his evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 5. Other Information.
On October 7, 2002, we terminated our relationship with Ernst
& Young LLP ("Ernst & Young"), our independent
auditors previously engaged to audit our financial
statements, effective with the date of completion of the
review by Ernst & Young of our financial statements for
the period ended September 30, 2002. Our Current Report on
Form 8-K, filed with the Securities and Exchange Commission
on October 15, 2002, is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - Ex. 99.1 - Statement under oath of Chief
Executive Officer dated November 19, 2002 filed herewith. We
presently do not have any Chief Financial Officer. We are in
the hiring process for a new Chief Financial Officer.
(b) Reports on Form 8-K
22
(1) On July 15, 2002, we filed a Current Report on Form 8-K
dated June 26, 2002 reporting the loan and the issuance
of warrant to BDC on Item 5 - Other Information.
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: November 19, 2002
By: /s/ Amine Selmani
----------------------------------
Name: Amine Selmani
Title: Chief Executive Officer and
President
By: /s/ Lucie Duval
----------------------------------
Name: Lucie Duval
Title: Chief Accounting Officer
and Controller
23
Certification of Principal Executive Officer
Section 302 Certification
I, Mr. Amine Selmani, President and Chief Executive Officer of BioSyntech Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of BioSyntech
Inc.;
2. Based on my knowledge, this quarterly report on Form 10-QSB does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of BioSyntech Inc. as of, and for, the periods presented
in this quarterly report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for BioSyntech Inc. and I have:
a) designed such disclosure controls and procedures to ensure
that material information relating to BioSyntech Inc.,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of BioSyntech Inc.'s disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to BioSyntech
Inc.'s auditors and the audit committee of BioSyntech Inc.'s board
of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect BioSyntech
Inc.'s ability to record, process, summarize and report
financial data and have identified for BioSyntech Inc.'s
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in BioSyntech
Inc.'s internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 19, 2002 /s/ Amine Selmani
-------------------------------
Amine Selmani
President and Chief Executive Officer
