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 December 31, 2002
-------------------------------------
( ) TRANSACTION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from to
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Commission File Number: 0-27179
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BioSyntech, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer 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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(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: 29,357,250 shares
of Common Stock as of February 14, 2003.
Transitional Small Business Disclosure Format (check one):
( ) Yes (X) No
BIOSYNTECH, INC.
TABLE OF CONTENTS
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Interim Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2002 3
and March 31, 2002
Condensed Consolidated Statements of Operations for the Three- 4
Month Periods Ended December 31, 2002 and December 31, 2001
Condensed Consolidated Statements of Operations for the Nine-Month 5
Periods Ended December 31, 2002 and December 31, 2001
Condensed Statement of Stockholders' Equity from 6
inception to December 31, 2002
Condensed Consolidated Statements of Cash Flows for the Three- 7
Month Periods Ended December 31, 2002 and December 31, 2001
Condensed Consolidated Statements of Cash Flows for the Nine-Month 8
Periods Ended December 31, 2002 and December 31, 2001
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 2. Changes in Securities and Use of Proceeds 22
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
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 December 31, 2002 and March 31, 2002
[In Canadian dollars]
December 31, December 31, March 31,
2002 2002 2002
US$ C$ C$
- -----------------------------------------------------------------------------------------------------
[Unaudited] [Unaudited]
[note 2]
ASSETS
Current assets
Cash and cash equivalents 957,278 1,510,202 443,145
Short-term investments -- -- 1,395,163
Receivables 48,625 76,711 78,853
Inventory 26,679 42,089 21,657
Investment tax credits recoverable 77,333 122,000 213,064
Prepaid expenses 61,881 97,623 58,164
- -----------------------------------------------------------------------------------------------------
1,171,796 1,848,625 2,210,046
- -----------------------------------------------------------------------------------------------------
Property, plant and equipment 1,402,314 2,212,291 2,341,591
Deposits and other assets 290,600 458,451 19,452
- -----------------------------------------------------------------------------------------------------
2,864,710 4,519,367 4,571,089
=====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities 356,539 562,476 651,639
Due to stockholder, without interest and repayment terms 6,339 10,000 10,000
Deferred revenues 25,449 40,149 3,095
Current portion of long-term debt 25,355 40,000 40,000
Current portion of obligations under capital leases 14,562 22,973 26,891
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428,244 675,598 731,625
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Long-term debt [Note 3] 1,713,089 2,702,568 126,667
Obligations under capital leases 11,343 17,895 33,628
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2,152,676 3,396,061 891,920
- -----------------------------------------------------------------------------------------------------
Stockholders' equity
Common stock [Note 4]
Par value $0.001
Authorized 100,000,000 common shares
Issued and outstanding
29,222,250 common shares 11,590,934 18,285,858 18,285,858
To be issued
35,000 common shares [15,000 as of March 31,2002] 13,947 22,002 11,009
Additional paid-in capital 1,829,069 2,885,540 2,587,691
Deficit accumulated during the development stage (12,721,916) (20,070,094) (17,205,389)
- -----------------------------------------------------------------------------------------------------
712,034 1,123,306 3,679,169
- -----------------------------------------------------------------------------------------------------
2,864,710 4,519,367 4,571,089
=====================================================================================================
See accompanying notes
On behalf of the Board
- --------------------------------- --------------------
Director Director
3
BioSyntech, Inc.
A development stage company
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
[See Basis of Presentation and Going Concern Assumption - note 2]
Three-month periods ended December 31, 2002 and 2001
[In Canadian dollars] Unaudited
Cumulative from
inception to
December 31, December 31, December 31, December 31,
2002 2002 2002 2001
C$ US$ C$ C$
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[note 2]
Sales and Services 690,026 15,101 23,824 187,905
Cost of sales 243,933 24 38 79,606
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446,093 15,077 23,786 108,299
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Research and development expenses 13,075,286 316,379 499,120 655,833
Investment tax credits recoverable (2,120,519) (52,299) (82,507) (42,000)
General and administrative expenses 9,677,299 289,121 456,118 772,009
Government grants (234,541) -- -- (7,500)
Interest on long-term debt and capital lease
obligations 522,757 65,697 103,643 6,365
Depreciation of property, plant and equipment 685,940 29,837 47,071 45,148
Interest income (661,483) (5,663) (8,934) (20,594)
(Gain) loss on foreign exchange (428,552) 5,212 8,223 (75,237)
- -----------------------------------------------------------------------------------------------------------
20,516,187 648,284 1,022,734 1,334,024
- -----------------------------------------------------------------------------------------------------------
Net loss and comprehensive loss for the period (20,070,094) (633,207) (998,948) (1,225,725)
Deficit accumulated during the development
stage, beginning of period -- (12,088,709) (19,071,146) (15,173,734)
- -----------------------------------------------------------------------------------------------------------
Deficit accumulated during the development
stage, end of period (20,070,094) (12,721,916) (20,070,094) (16,399,459)
===========================================================================================================
Weighted average number of common shares
outstanding 29,222,250 29,222,250 29,222,250
Basic and diluted loss per share (0.02) (0.03) (0.04)
===========================================================================================================
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]
Nine-month periods ended December 31, 2002 and 2001
[In Canadian dollars] Unaudited
Cumulative from
inception to
December 31, December 31, December 31, December 31,
2002 2002 2002 2001
C$ US$ C$ C$
- -----------------------------------------------------------------------------------------------------------
[note 2]
Sales and Services 690,026 63,195 99,697 242,413
Cost of sales 243,933 3,881 6,123 94,848
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446,093 59,314 93,574 147,565
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Research and development expenses 13,075,286 1,013,140 1,598,330 2,095,895
Investment tax credits recoverable (2,120,519) (100,474) (158,507) (138,064)
General and administrative expenses 9,677,299 763,210 1,204,040 1,916,436
Government grants (234,541) (15,729) (24,814) (39,920)
Interest on long-term debt and capital lease
obligations 522,757 131,387 207,276 25,662
Depreciation of property, plant and equipment 685,940 89,490 141,179 135,164
Interest income (661,483) (18,015) (28,420) (112,447)
(Gain) loss on foreign exchange (428,552) 12,167 19,195 (5,960)
- ----------------------------------------------------------------------------------------------------------
20,516,187 1,875,176 2,958,279 3,876,766
- ----------------------------------------------------------------------------------------------------------
Net loss and comprehensive loss for the period (20,070,094) (1,815,862) (2,864,705) (3,729,201)
Deficit accumulated during the development
stage, beginning of period -- (10,906,054) (17,205,389) (12,670,258)
- ----------------------------------------------------------------------------------------------------------
Deficit accumulated during the development
stage, end of period (20,070,094) (12,721,916) (20,070,094) (16,399,459)
==========================================================================================================
Weighted average number of common shares
outstanding 29,222,250 29,222,250 29,182,250
Basic and diluted loss per share 0.06 0.10 0.13
==========================================================================================================
See accompanying notes
5
BioSyntech, Inc.
A development stage company
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY [Note 4]
[See Basis of Presentation and Going Concern Assumption - note 2]
From inception to December 31, 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)
- ------------------------------------------------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------------------------------------
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)
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6
BioSyntech, Inc.
A development stage company
Unaudited
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (CONTINUED)
EQUITY [Note 4]
[See Basis of Presentation and Going Concern Assumption - note 2]
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, 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 4] -- -- 15,000 6,813 -- -- 6,813
Warrants issued to BDC [Note 4] -- -- 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 4] -- -- 5,000 4,180 -- -- 4,180
Options granted to consultants [Note 4] -- -- 2,696 -- 2,696
Net loss and comprehensive loss for the period
from July 1, 2002 to September 30, 2002 -- -- -- (885,447) (885,447)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2002 29,222,250 18,285,858 35,000 22,002 2,879,320 (19,071,146) 2,116,034
Options granted to consultants [Note 4] -- -- -- -- 6,220 -- 6,220
Net loss and comprehensive loss for the period
from October 1, 2002 to December 31, 2002 -- -- -- -- -- (998,948) (998,948)
- ------------------------------------------------------------------------------------------------------------------------------------
29,222,250 18,285,858 35,000 22,002 2,885,540 (20,070,094) 1,123,306
====================================================================================================================================
US Dollars [Note 2]
Balance, December 31, 2002 11,590,934 13,947 1,829,069 (12,721,916) 712,034
====================================================================================================================================
See accompanying notes
6-A
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 December 31, 2002 and 2001
[In Canadian dollars] Unaudited
Cumulative from
inception to
December 31, December 31, December 31, December 31,
2002 2002 2002 2001
C$ US$ C$ C$
- --------------------------------------------------------------------------------------------------------------------------
[note 2]
OPERATING ACTIVITIES
Net loss and comprehensive loss (20,070,094) (633,207) (998,948) (1,225,725)
Items not affecting cash
Depreciation of property, plant and equipment 685,940 29,837 47,071 45,148
Amortization of debt issue costs 74,030 23,022 36,319 --
Services paid by the issuance of common stock to be issued to
a consultant 2,588,485 -- -- --
Exchangeable shares of the subsidiary of the
Company issued as part of a settlement 114,248 -- -- --
Options granted to consultants 2,482,359 3,943 6,220 503,410
Accrued interest on long-term debt 115,901 39,783 62,761 --
Exchange loss (gain) (535,603) 5,503 8,681 (18,661)
Exchange loss on short-term investments 4,129 -- -- --
Changes in working capital assets and liabilities
Receivables (76,711) 6,490 10,239 40,012
Inventory (42,089) (13,889) (21,912) 52,169
Investment tax credits recoverable (122,000) 105,897 167,064 (42,000)
Prepaid expenses (97,623) (27,523) (43,419) 2,686
Deferred revenues 40,149 25,449 40,149 (42,722)
Accounts payable and accrued liabilities 491,505 (11,466) (18,088) (226,552)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows related to operating activities (14,347,374) (446,161) (703,863) (912,235)
- --------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,172,128) (94) (149) 8,809
Purchase of short-term investments (1,589,258) -- -- --
Proceeds from maturing of short-term investments 1,585,129 -- -- 1,578,769
Deposits and other assets (18,452) -- -- --
Changes in non-cash working capital balances related to
investing activities -- (881) (1,390) 189
- --------------------------------------------------------------------------------------------------------------------------
Cash flows related to investing activities (1,194,709) (975) (1,539) 1,587,767
- --------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in long term debt 3,190,000 -- -- --
Repayment of long term debt (563,333) (6,339) (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 (1,685,123) (4,362) (6,881) (5,640)
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 (170,726) (31,826) (50,209) --
- --------------------------------------------------------------------------------------------------------------------------
Cash flows related to financing activities 16,516,682 (42,527) (67,090) (15,640)
- --------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 535,603 (5,503) (8,681) 18,661
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,510,202 (495,166) (781,173) 678,553
Cash and cash equivalents, beginning of period -- 1,452,444 2,291,375 1,856,924
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 1,510,202 957,278 1,510,202 2,535,477
==========================================================================================================================
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]
Nine-month periods ended December 31, 2002 and 2001
[In Canadian dollars] Unaudited
Cumulative from
inception to
December 31, December 31, December 31, December 31,
2002 2002 2002 2001
C$ US$ C$ C$
- --------------------------------------------------------------------------------------------------------------------------
[note 2]
OPERATING ACTIVITIES
Net loss and comprehensive loss (20,070,094) (1,815,862) (2,864,705) (3,729,201)
Items not affecting cash
Depreciation of property, plant and equipment 685,940 89,490 141,179 135,164
Amortization of debt issue costs 74,030 46,926 74,030 --
Services paid by the issuance of common stock to be issued to
a consultant 2,588,485 6,968 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 2,482,359 5,652 8,916 503,410
Accrued interest on long-term debt 115,901 73,467 115,901 --
Exchange loss (gain) (535,603) (10,186) (16,070) 73,500
Exchange loss (gain) on short-term investments 4,129 43,509 68,640 (64,511)
Changes in working capital assets and liabilities
Receivables (76,711) 1,358 2,142 129,520
Inventory (42,089) (12,950) (20,432) 11,124
Investment tax credits recoverable (122,000) 57,722 91,064 (138,064)
Prepaid expenses (97,623) (25,013) (39,459) 3,653
Deferred revenues 40,149 23,488 37,054 --
Accounts payable and accrued liabilities 491,505 (78,438) (123,743) (977,913)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows related to operating activities (14,347,374) (1,593,869) (2,514,490) (3,899,587)
- --------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,172,128) (7,522) (11,866) (13,261)
Purchase of short-term investments (1,589,258) -- -- (1,514,258)
Proceeds from maturing of short-term investments 1,585,129 840,848 1,326,523 1,578,769
Deposits and other assets (18,452) 697 1,100 --
Changes in non-cash working capital balances related to
investing activities -- (12,616) (19,903) (143,465)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows related to investing activities (1,194,709) 821,407 1,295,854 (92,215)
- --------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in long term debt 3,190,000 1,578,348 2,490,000 --
Repayment of long term debt (563,333) (19,016) (30,000) (23,333)
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 (1,685,123) (12,456) (19,651) (19,258)
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 (170,726) (108,219) (170,726) --
- --------------------------------------------------------------------------------------------------------------------------
Cash flows related to financing activities 16,516,682 1,438,657 2,269,623 (42,591)
- --------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 535,603 10,186 16,070 (73,500)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,510,202 676,381 1,067,057 (4,107,893)
Cash and cash equivalents, beginning of period -- 280,897 443,145 6,643,370
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 1,510,202 957,278 1,510,202 2,535,477
==========================================================================================================================
See accompanying notes
8
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 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 December
31, 2002, the Company's accumulated deficit was $20,070,094. 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
December 31, 2002, the results of operations and cash flows for the three-month
period and the nine-month period ended December 31, 2002. The balance sheet at
9
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 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 and cash
flows are provided for convenience of reference only and are based on the
closing exchange rate at December 31, 2002, which was $1.5776 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. All intercompany transactions and balances have been eliminated in
these condensed consolidated financial statements.
3. 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 has been received as of December 31,
2002 and $10,000 is held in escrow until certain registration requirements for
the security interest have been finalized. 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 4, which is being amortized as additional
interest expense over the life of the related indebtedness. As of December 31,
2002, the Company has paid a total of $170,726.
10
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2002 Unaudited
[In Canadian dollars]
4. 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 consultant 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 December 31, 2002, the
Company had not issued the 35,000 common shares due to RCG and had recorded this
obligation as "Common stock to be issued" in its condensed consolidated
financial statements as of December 31, 2002. On February 5, 2003, the Company
issued 35,000 shares of common stock. 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. At the end of
the initial seven-month, the contract was cancelled.
STOCK OPTIONS AND WARRANTS
BioSyntech Inc.
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 3. As part of the
agreement, the Company issued warrants to purchase 1,000,000 common shares at an
exercise price of US$0.33 per share to BDC. These warrants are currently
exercisable 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
11
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2002 Unaudited
[In Canadian dollars]
4. STOCKHOLDERS' EQUITY [CONT'D]
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 is
calculated at the time when services are provided by the consultant, using the
Black-Scholes option-pricing model. During the three-month period ended December
31, 2002, the amount of $6,220 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 one of its directors. These options can
be exercised over a five-year period from the date of grant.
On October 17, 2002, the Company granted options to purchase 50,000 common
shares at an exercise price of $0.63 to one of its directors. 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 an aggregate of
125,000 common shares at an exercise price of $0.63 to certain employees. These
options can be exercised over a six-year period beginning on January 1, 2003.
During the three-month periods ended June 30, 2002, September 30, 2002 and
December 31, 2002, options to purchase 65,000, 10,000 and 100,000 shares of the
common stock of the Company, respectively, were forfeited because more than 90
days had elapsed since the departure date of some employees.
Bio Syntech Canada Inc.
During the three-month period ended June 30, 2002, options to purchase 10,000
Class A shares of Bio Syntech Canada Inc. were forfeited because more than 90
days had elapsed since the departure date of some employees.
On December 31, 2002, options to purchase 152,000 Class A shares of the Bio
Syntech Canada Inc. expired.
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 we will achieve profitability. (See Liquidity and Capital Resources)
To date, we have incurred substantial losses from operations, and as
of December 31, 2002, we had an accumulated deficit of $20,070,094. 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 (February 19, 2003) 1.5142
2002 2001
---- ----
Rate at end of period (December 31) 1.5776 1.5928
Period High for the period Low for the period
- ------ ------------------- ------------------
January 2003 1.5447 1.5379
December 2002 1.5620 1.5559
November 2002 1.5748 1.5686
13
October 2002 1.5810 1.5739
September 2002 1.5789 1.5712
August 2002 1.5724 1.5632
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 December 31, 2002 1.5695
Three Month Period Ended December 31, 2001 1.5804
Nine Month Period Ended December 31, 2002 1.5606
Nine Month Period Ended December 31, 2001 1.5559
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.
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. Due to the uncertainty of the claim being accepted by taxation
authorities as filed, accounting for research and development tax credits
requires estimates made by management.
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.
Significant judgments are made when estimating the recoverability of such assets
as it 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 our condensed
consolidated statements of operations for the three-month periods ended December
31, 2002 and 2001, and the nine-month periods ended December 31, 2002 and 2001
(in thousands of CDN$).
Three-month Nine-month
Periods Periods
Ended December 31, Ended December 31,
2002 2001 2002 2001
---- ---- ---- ----
Sales and Services $ 23.8 $ 187.9 $ 99.7 $ 242.4
Cost of Sales -- 79.6 6.1 94.8
--------------------------------------------
$ 23.8 $ 108.3 $ 93.6 $ 147.6
Operating Expenses
Research and Development $ 499.1 $ 655.8 $ 1,598.3 $ 2,095.9
Investment Tax Credits (82.5) (42.0) (158.5) (138.1)
General and Administrative (Net of Grants) 456.1 764.5 1,179.2 1,876.5
Depreciation of Property, Plant and Equipment 47.1 45.1 141.2 135.2
--------------------------------------------
Total Operating Expenses $ 919.8 1,423.4 $ 2,760.2 $ 3,969.5
--------------------------------------------
Loss from Operations $ 896.0 1,315.1 $ 2,666.6 $ 3,821.9
--------------------------------------------
Interest Income (8.9) (20.6) (28.4) (112.4)
Interest Expense 103.6 6.4 207.3 25.7
Loss (Gain) on Foreign Exchange 8.2 (75.2) 19.2 (6.0)
--------------------------------------------
Net Loss $ 998.9 1,225.7 $ 2,864.7 $ 3,729.2
--------------------------------------------
Sales and Services
During the three-month period ended December 31, 2002, we had sales
of $23,824 (sale of products and research service revenues) and a net loss of
$998,948 compared to sales of $187,905 and a net loss of $1,225,725 for the
three-month period ended December 31, 2001. During the nine-month period ended
December 31, 2002, we had sales of $99,697 (sale of products and research
service revenues) and a net loss of $2,864,705 compared to sales of $242,413 and
a net loss of $3,729,201 for the nine-month period ended December 30, 2001. For
both periods, the decreases in sales and services are primarily due to lower
revenue related to sale of products.
Loss per share was $0.03 for the three-month period ended December
31, 2002 compared to $0.04 for the three-month period ended December 31, 2001.
Loss per share was $0.10 for the nine-month period ended December 31, 2002
compared to $0.13 for the nine-month period ended December 31, 2001.
Operating Expenses
Research and development
Research and development expenses were $499,120 for the three-month
period ended December 31, 2002 compared to $655,833 for the three-month period
ended December 31, 2001. The decrease of $156,713 is primarily attributable to a
reduction in compensation expenses related to options granted to consultants and
lower expenses for (i) the research and development activities with our
corporate collaborators, (ii) the acquisition of research and development
equipment, (iii) our own in-house programs and (iv) the royalties fees to be
paid to Polyvalor offset by the increases of the cost of pre-clinical
toxicological studies and the purchases of chemical products.
Research and development expenses were $1,598,330 for the nine-month
period ended December 31, 2002 compared to $2,095,895 for the nine-month period
ended December 31, 2001, representing a decrease of $497,565. The decrease in
15
the nine-month period is primarily attributable to a reduction of the number of
personnel in research and development and other related expenses, a reduction in
compensation expenses related to options granted to consultants and lower
expenses for (i) the research and development activities with our corporate
collaborators, (ii) the acquisition of research and development equipment and
(iii) our own in-house programs during the period offset by the increases of the
cost of pre-clinical toxicological studies and the royalties fees to be paid to
Polyvalor.
Investment tax credits
We claim an investment tax credit on all our allowable research and
development expenses. The amount for the three-month period ended December 31,
2002 was $82,507 compared to $42,000 for the three-month period ended December
31, 2001, representing an increase of $40,507. The amount for the nine-month
period ended December 31, 2002 was $158,507 compared to $138,064 for the
nine-month period ended December 31, 2001, representing an increase of $20,443.
The increases in the three-month period and in the nine-month period ended
December 31, 2002 are directly attributable to a higher level of eligible
research and development expenses.
General and administrative
General and administrative expenses (net of grants) were $456,118
for the three-month period ended December 31, 2002 compared to $764,509 for the
three-month period ended December 31, 2001, representing a decrease of $308,391.
The decrease is principally attributable to a reduction in compensation expenses
related to options granted to consultants, a reduction of administrative
personnel, a decrease in expenses related to the tax on capital offset by the
increases in expenses related to communications with our stockholders and
maintenance of our principal place of business, increases in professional fees
and expenses related to marketing.
General and administrative expenses (net of grants) were $1,179,226
for the nine-month period ended December 31, 2002 compared to $1,876,516 for the
nine-month period ended December 31, 2001, representing a decrease of $697,290.
The decrease in the nine-month period is principally attributable to a reduction
in compensation expenses related to options granted to consultants, a decrease
in professional fees, a reduction of administrative personnel, a decrease in
expenses related to (i) tax on capital, (ii) marketing expenses and (iii)
maintenance of our principal place of business due to our efforts to reduce
operating costs offset by an increase in expenses related to communications with
our stockholders during the period.
Depreciation of Property, Plant and Equipment
Depreciation expense was $47,071 for the three-month period ended
December 31, 2002 compared to $45,148 for the three-month period ended December
31, 2001, representing a slight increase of $1,923. Depreciation expense was
$141,179 for the nine-month period ended December 31, 2002 compared to $135,164
for the nine-month period ended December 31, 2001, representing an increase of
$6,015. The increases in the three-month period and in the nine-month period
ended December 31, 2002 were principally attributable to the increased amount of
property, plant and equipment we held during the two periods compared to the
amount of property, plant and equipment we held 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 December 31, 2002 was $8,934 compared to $20,594 for the
three-month period ended December 31, 2001, representing a decrease of $11,660.
Interest income for the nine-month period ended December 31, 2002 was $28,420
compared to $112,447 for the nine-month period ended December 31, 2001,
representing a decrease of $84,027. The decreases in the three-month period and
in the nine-month period ended December 31, 2002 are primarily due to a higher
level of cash on hand and short-term investments during the same periods in the
fiscal year ended March 31, 2001.
Interest expense was $103,643 for the three-month period ended
December 31, 2002 compared to $6,365 for the three-month period ended December
31, 2001, representing an increase of $97,278. Interest expense was $207,276 for
the nine-month period ended December 31, 2002 compared to $25,662 for the
16
nine-month period ended December 31, 2001, representing an increase of $181,614.
The increases in the three-month period and in the nine-month period ended
December 31, 2002 were primarily attributable to the interest expenses and to
the amortization of the debt issue costs related to the loan from the Business
Development Bank of Canada ("BDC") consummated on June 26, 2002.
Loss (Gain) on Foreign Exchange
Loss on foreign exchange was $8,223 for the three-month period ended
December 31, 2002 compared to a gain of $75,237 for the three-month period ended
December 31, 2001, representing a decrease of $83,460. The decrease 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 1.5785 at September 30, 2001 to 1.5928 at December 31, 2001 and from
1.5872 at September 30, 2002 to 1.5776 at December 31, 2002).
Loss on foreign exchange was $19,195 for the nine-month period ended
December 31, 2002 compared to a gain of $5,960 for the nine-month period ended
December 31, 2001, representing a decrease of $25,155. The decrease 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 1.5928 at December 31, 2001 and from 1.5942 at March
31, 2002 to 1.5776 at December 31, 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 as of December 31, 2002 was $1,510,202
(including cash equivalents).
On June 26, 2002, Bio Syntech Canada Inc., our wholly-owned
subsidiary, concluded a loan agreement with BDC for a total of $2,500,000 (the
"BDC Loan") of which $2,490,000 has been received and $10,000 is held in escrow
until certain registration requirements for the security interest have been
finalized. The debt is collateralized by all of our assets not otherwise
encumbered. The terms of repayment of the loan are: the principal amount plus
all accrued interests at a rate of 10% compounded annually shall be due on
February 15, 2006; thereafter and in case of default, the interest rate shall be
25%. Partial or full payment, without penalty, is allowed before the maturity
date of the BDC Loan. This agreement contains affirmative and negative covenants
customary of such loans including, but not limited to, those relating to
limitations on capital expenditures. As an inducement for BDC to make the BDC
Loan, we issued warrants to purchase 1,000,000 shares of our common stock, $.001
par value (the "Common Stock"), at US$0.33 per share. Such warrants are
exercisable for a period of five years from the date of issuance. BDC is also
entitled to exercise such warrants on a "cashless basis" so that it would not be
subject to any restriction on transfer. The exercise of the such warrants on a
"cashless basis" shall not include any obligation on our part 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
discussing additional financing with the National Bank of Canada. We received a
formal offer from them for a line of credit of $1,200,000 but we have not
entered into any agreement in connection with such potential 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 are also seeking
to raise up to $3,000,000 through a private placement consisting of our common
stock and warrants to purchase our common stock. To date, the private placement
has not been consummated and there can be no assurance that we will be able to
raise any money in the private placement.
We also plan to continue with our program of limiting our operating
costs and capital expenditures. Based on our current operating plan, and
assuming we receive the $3,000,000 from the private placement, 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
17
expenses and capital expenditures through the end of the fiscal year 2004. There
can be no assurance, however, that the above-mentioned private placement and
line of credit will be received from the investors and the National Bank of
Canada.
On December 4, 2002, we increased the number of authorized shares of
Common Stock reserved for issuance under our stock option plan to 5,000,000
shares. For information regarding options granted as of December 31, 2002, refer
to Note 4 of the Notes to Condensed Consolidated Financial Statements.
Employee Count
As of February 7, 2003, we have 26 employees, of which 17 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
Mach-1(TM) Mechanical Tester, we have no other employees involved in the
manufacturing of our products. We anticipate our total employee count to remain
constant until 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 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 agreement regarding
this additional financing. We are also seeking to raise up to $3,000,000 through
a private placement consisting of our common stock and warrants to purchase our
common stock. Based on our current operating plan, assuming receipt of the
private placement of $3,000,000, the additional $10,000 of the BDC Loan held in
escrow and an additional $1,200,000 line of credit from the National Bank of
Canada, we believe that our financial resources are sufficient to meet our
planned activities through fiscal year 2004 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 we will achieve profitability. There can be no assurance that
either the private placement or the line of credit will be consummated. 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.
Moreover, the consummation of the private placement will result in additional
dilution to our existing shareholders.
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
18
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 December 31, 2002 our accumulated deficit was $20,070,094. We
had net operating losses of $998,948 and $4,535,131 for the three-month period
ended December 31, 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 Completing the research and development related to our products;
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
19
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
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-Dermon; 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
20
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.
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 are
issued, 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
21
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.
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 February 7, 2003, our President and 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 and
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 December 31, 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 15, 2003, we issued 100,000 shares of common stock in
exchange of Class A exchangeable shares issued as part of the judgement in a
lawsuit by a former employee. The fair market value of the 100,000 shares was
recorded at $114,248, representing the fair market value of such shares of
Common stock as of March 31, 2002, the date when the judgement was rendered.
These securities were issued in accordance with the exemption contained in
Section 4 (2) of the Securities Act of 1933, as amended.
On February 5, 2003, we issued 35,000 shares of our common stock to
RCG Capital Markets Group Inc. ("RCG") in payment for services rendered. The
fair market value of the 35,000 shares was recorded at $22,002 during the
three-month periods ended March 31, 2002, June 30, 2002 and September 30, 2002.
Such shares were recorded as "Common Stock to be Issued" in our books and
records as of December 31, 2002. These securities were issued in accordance with
the exemption contained in Section 4 (2) of the Securities Act of 1933, as
amended.
22
ITEM 4. SUBMISSION FOR MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of our stockholders on December 4, 2002, the
stockholders (i) elected two Class II directors to our board of directors to
serve for a three-year term and until their successors have been elected and
qualify; (ii) approved an amendment to our employee stock option plan to
increase the total number of shares of our common stock available for issuance
under such option plan from 3,900,000 shares to 5,000,000 shares; and (iii)
ratified the appointment of KPMG LLP as our independent auditors for the fiscal
year ending March 31, 2003.
(1) The votes received by each director nominee elected as Class II
directors are as follows:
Nominee For Against Abstain
------- --- ------- -------
Monique Lefebvre 15,464,793 None 1,050
Gilles Cloutier 15,464,793 None 1,050
The other members of our board of directors are Dr. Amine Selmani ,
Messrs. Serge Savard and Claude LeDuc.
(2) The votes received for the approval of an amendment to our stock
option incentive plan.
For Against Abstain
--- ------- -------
15,247,293 218,550 None
(3) The votes received for the ratification of the appointment of
KPMG LLP as our independent auditors for the fiscal year ending
March 31, 2003.
For Against Abstain
--- ------- -------
15,464,873 950 20
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.
As of January 3, 2003, BioSyntech has abolished the position
held by Dr. Ajay Gupta and therefore terminated the employment of
Dr. Gupta. Furthermore, Dr. Gupta has resigned from all positions
held by him as an officer of the Company. There is currently no
disagreement between us and Dr. Gupta. Dr. Gupta will continue to
serve as a consultant for the Company. Dr. Amine Selmani, President
and Chief Executive Officer, believes that this decision was taken
for the best interest of BioSyntech and will not have any material
adverse effect on our operations.
On June 26, 2002, the Company, BDC, Dr. Amine Selmani and
9083-1496 Quebec Inc. entered into an Investors Rights Agreement
wherein all the parties to the agreement agreed to vote all their
shares of Common Stock to elect the director nominee of BDC a member
of our board of directors within five business days, if possible, of
BDC's request. BDC also has the right to appoint at any time and
from time to time an observer to our board of directors. As of the
date of this report, BDC has not nominated a director. Although BDC
also has not appointed an observer, it has sent a representative to
each of the two most recent meetings of our board of directors.
23
From October through November 2002, Monique Lefebvre, our
director, served as our consultant to assist us in our search for a
Chief Financial Officer and introducing us to venture capitalists
who may be interested in investing in our operations. Ms. Lefebvre
received $6,000 as compensation for her services as a consultant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - Ex. 99.1 - Statement under oath of Chief Executive
Officer dated February 19, 2003 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
(1) On October 7, 2002, we filed a Current Report on Form 8-K
dated October 7, 2002 reporting the termination of Ernst &
Young as our independent auditors.
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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: February 19, 2003
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
25
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: February 19, 2003 /s/ Amine Selmani
-------------------------------
Amine Selmani
President and Chief
Executive Officer
