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, 2003
---------------------------
( ) TRANSACTION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from _________ to ________
Commission File Number: 0-27179
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BIOSYNTECH, INC.
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(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)
Check whether the issuer(1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorted period that issuer was required to file such report), and (2) has
been subject tot such filing requirements for the part 90 days.
Yes [X] No [ ]
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: 31,896,250 shares
of Common Stock as of November 7, 2003.
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, 2003 and 3
March 31, 2003
Condensed Consolidated Statements of Operations for the Three- 4
Month Periods Ended September 30, 2003 and September 30, 2002
Condensed Consolidated Statements of Operations for the Six- 5
Month Periods Ended September 30, 2003 and September 30, 2002
Condensed Statement of Stockholders' Equity (Deficiency) from 6
inception to September 30, 2003
Condensed Consolidated Statements of Cash Flows for the Three- 8
Month Periods Ended September 30, 2003 and September 30, 2002
Condensed Consolidated Statements of Cash Flows for the Six- 9
Month Periods Ended September 30, 2003 and September 30, 2002
Notes To Condensed Consolidated Interim Financial Statements 10
Item 2. Management's Discussion and Analysis 16
Risk Factors 22
Item 3. Controls and Procedures 25
Part II. OTHER INFORMATION
Item 1. Legal proceedings 26
Item 2. Changes in securities and use of proceeds 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
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
As of September 30, 2003 and March 31, 2003
[In Canadian dollars]
September 30 September 30 March 31,
2003 2003 2003
US$ C$ C$
- ---------------------------------------------------------------------------------------------------------
[Unaudited] [Unaudited]
[note 2]
ASSETS
Current assets
Cash and cash equivalents 881,320 1,189,694 800,038
Accounts receivable 30,590 41,293 35,732
Inventory 42,045 56,756 47,467
Investment tax credits 167,420 226,000 154,000
Prepaid expenses 65,125 87,912 51,869
- -------------------------------------------------------------------------------------------------------
1,186,500 1,601,655 1,089,106
- -------------------------------------------------------------------------------------------------------
Property, plant and equipment 1,540,113 2,078,999 2,165,243
Deposits and other assets 473,659 639,392 650,804
- -------------------------------------------------------------------------------------------------------
3,200,272 4,320,046 3,905,153
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable and accrued liabilities 465,707 628,658 681,884
Due to stockholder, without interest and repayment terms 7,408 10,000 10,000
Unsecured convertible debenture (note 4) 555,597 750,000 --
Deferred revenues 28,630 38,648 44,154
Current portion of long-term debt 29,632 40,000 40,000
Current portion of obligations under capital leases 11,921 16,092 19,690
- -------------------------------------------------------------------------------------------------------
1,098,895 1,483,398 795,728
- -------------------------------------------------------------------------------------------------------
Long-term debt 2,132,656 2,878,873 2,753,965
Obligations under capital leases 4,176 5,637 13,938
- -------------------------------------------------------------------------------------------------------
3,235,727 4,367,908 3,563,631
- -------------------------------------------------------------------------------------------------------
Stockholders' equity (deficiency) (note 5)
Common stock
Par value $0.001
Authorized 100,000,000 common shares
Issued and outstanding
31,796,250 common shares 14,377,318 19,407,941 18,307,860
Additional paid-in capital 2,262,259 3,053,823 2,891,760
Deficit accumulated during the development stage (16,675,032) (22,509,626) (20,858,098)
- -------------------------------------------------------------------------------------------------------
(35,455) (47,862) 341,522
- -------------------------------------------------------------------------------------------------------
Basis of presentation and going concern assumption (note 2)
Contingency (note 7)
Subsequent event (note 8)
Financing (note 9)
- -------------------------------------------------------------------------------------------------------
3,200,272 4,320,046 3,905,153
- -------------------------------------------------------------------------------------------------------
See accompanying notes
On behalf of the Board
- -------------------------- ----------------------------
Director Director
3
BioSyntech, Inc.
A development stage company
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three-month periods ended September 30, 2003 and 2002 Unaudited
[In Canadian dollars]
Cumulative from
inception to
September 30,
2003 2003 2003 2002
C$ US$ C$ C$
- ---------------------------------------------------------------------------------------------------------
[note 2]
Revenues
Sales and services 713,866 4,233 5,714 16,529
Research and development contracts 141,311 -- -- 23,371
- ---------------------------------------------------------------------------------------------------------
855,177 4,233 5,714 39,900
- ---------------------------------------------------------------------------------------------------------
Expenses
Cost of sales and services 310,742 2,135 2,882 3,054
Research and development 14,243,463 320,340 432,427 529,362
Investment tax credits (2,224,519) (30,373) (41,000) (38,000)
General and administrative 10,584,215 254,557 343,626 394,306
Government grants (250,644) -- -- (24,897)
Interest on long-term debt and capital lease
obligations 680,051 65,434 88,330 55,464
Depreciation of property, plant and equipment 828,123 35,553 47,993 47,100
Amortization of patents and trademarks 21,618 2,871 3,876 12
Amortization of debt issue costs 175,290 24,714 33,362 37,711
Interest income (671,012) (2,471) (3,336) (12,723)
(Gain) loss on foreign exchange (332,524) (2,513) (3,392) (66,042)
- ---------------------------------------------------------------------------------------------------------
23,364,803 670,247 904,768 925,347
- ---------------------------------------------------------------------------------------------------------
Net loss for the period (22,509,626) (666,014) (899,054) (885,447)
Deficit accumulated during the development
stage, beginning of period -- (16,009,017) (21,610,572) (18,185,699)
- ---------------------------------------------------------------------------------------------------------
Deficit accumulated during the development
stage, end of period (22,509,626) (16,675,031) (22,509,626) (19,071,146)
=========================================================================================================
Weighted average number of common shares
outstanding 30,232,109 30,232,109 29,222,250
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
Six-month periods ended September 30, 2003 and 2002 Unaudited
[In Canadian dollars]
Cumulative from
inception to
September 30,
2003 2003 2003 2002
C$ US$ C$ C$
- ---------------------------------------------------------------------------------------------------------
[note 2]
Revenues:
Sales and services 713,866 67,122 90,608 29,004
Research and development contracts 141,311 -- -- 46,869
- ---------------------------------------------------------------------------------------------------------
855,177 67,122 90,608 75,873
- ---------------------------------------------------------------------------------------------------------
Expenses
Cost of sales 310,742 30,377 41,006 6,085
Research and development 14,243,463 591,402 798,333 1,099,210
Investment tax credits (2,224,519) (53,337) (72,000) (76,000)
General and administrative 10,584,215 464,713 627,316 747,922
Government grants (250,644) -- -- (24,814)
Interest on long-term debt and capital lease
obligation 680,051 122,810 165,781 65,922
Depreciation of property, plant and equipment 828,123 70,615 95,323 94,083
Amortization of patents and trademarks 21,618 5,580 7,533 25
Amortization of debt issue costs 175,290 49,369 66,643 37,711
Interest income (671,012) (4,158) (5,613) (19,486)
(Gain) loss on foreign exchange (332,524) 13,197 17,814 10,972
- ---------------------------------------------------------------------------------------------------------
23,364,803 1,290,568 1,742,136 1,941,630
- ---------------------------------------------------------------------------------------------------------
Net loss for the period (22,509,626) (1,223,446) (1,651,528) (1,865,757)
Deficit accumulated during the development
stage, beginning of period -- (15,451,585) (20,858,098) (17,205,389)
=========================================================================================================
Deficit accumulated during the development
stage, end of period (22,509,626) (16,675,031) (22,509,626) (19,071,146)
- ---------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding 29,797,070 29,797,070 29,222,250
Basic and diluted loss per share 0.04 0.06 0.06
=========================================================================================================
See accompanying notes
5
BioSyntech, Inc.
A development stage company
CONDENSED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIENCY)
From inception to September 30, 2003 Unaudited
[In Canadian dollars]
Common Stock Common Stock
issued and outstanding Paid-up and not issued Additional
---------------------- ---------------------- paid-in Accumulated
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
Common stock issued for cash 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 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 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 issued to a
consultant in exchange
for services 35,000 22,002 (15,000) (11,009) -- -- 10,993
6
CONDENSED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIENCY) (continued)
From inception to September 30, 2003 Unaudited
[In Canadian dollars]
Common Stock Common Stock
issued and outstanding Paid-up and not issued Additional
---------------------- ---------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
$ $ $ $ $
- -----------------------------------------------------------------------------------------------------------------------------
Warrants granted to a debtor -- -- 288,933 -- 288,933
Options granted to consultants -- -- -- -- 15,136 15,136
Common stock issued in exchange
for exchangeable shares
issued as a part of settlement 100,000 -- -- -- -- -- --
Net loss 2003 -- -- -- -- -- (3,652,709) (3,652,709)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2003 29,357,250 18,307,860 -- -- 2,891,760 (20,858,098) 341,522
Options granted to consultants
(note 5) -- -- -- -- 62,258 62,258
Net loss for the period from
April 1, 2003 to June 30,
2003 -- -- -- -- -- (752,474) (752,474)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 29,357,250 18,307,860 -- -- 2,954,018 (21,610,572) (348,694)
Options granted to consultants
[note 5] -- -- -- -- 99,805 -- 99,805
Common stock issued for cash
[note 5] 2,439,000 1,126,574 -- -- -- -- 1,126,574
Share issue costs [note 5] -- (26,493) -- -- -- -- (26,493)
Net loss for the period from
July 1, 2003 to September
30, 2003 -- -- -- -- -- (899,054) (899,054)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2003 31,796,250 19,407,941 -- -- 3,053,823 (22,509,626) (47,862)
=============================================================================================================================
US Dollars [note 2]
Balance, September 30, 2003 14,377,318 2,262,259 (16,675,032) (35,455)
=============================================================================================================================
See accompanying notes
7
BioSyntech, Inc.
A development stage company
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-month periods ended September 30, 2003 and 2002
[In Canadian dollars] Unaudited
Cumulative from
inception to
September 30, September 30, September 30, September 30,
2003 2003 2003 2002
C$ US$ C$ C$
- ---------------------------------------------------------------------------------------------------------------------------
[note 2]
OPERATING ACTIVITIES
Net loss (22,509,626) (666,014) (899,054) (885,447)
Adjustments for:
Depreciation of property, plant and equipment 828,123 35,553 47,993 47,100
Amortization of patents and trademarks 21,618 2,871 3,876 12
Amortization of debt issue costs 175,290 24,714 33,362 37,711
Services paid by the issuance of common stock 2,588,485 -- -- 4,180
Exchangeable shares of the subsidiary of the
Company issued as part of a settlement 114,248 -- -- --
Options granted to consultants 2,650,642 73,935 99,805 2,696
Accrued interest on long-term debt 322,206 52,823 71,306 50,948
Exchange loss (gain) (429,061) (251) (339) (32,215)
Exchange loss on short-term investments 4,129 -- -- --
Changes in operating assets and liabilities
Accounts receivable (41,293) 22,382 30,213 3,888
Inventory (56,756) (3,775) (5,096) --
Investment tax credits (226,000) (30,373) (41,000) (38,000)
Prepaid expenses (87,912) (5,632) (7,602) (31,139)
Deferred revenues 38,648 -- -- --
Accounts payable and accrued liabilities 611,677 (59,466) (80,273) (176,801)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows related to operating activities (15,995,582) (553,233) (746,809) (1,017,067)
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,180,689) (6,360) (8,586) (27,525)
Purchase of short-term investments (1,589,258) -- -- --
Proceeds from maturing of short-term investments 1,585,129 -- -- 1,326,523
Deposits, patents and trademarks (322,082) (18,779) (25,350) 1,100
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows related to investing activities (1,506,900) (25,139) (33,936) 1,300,098
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in short-term debt 750,000 555,597 750,000 --
Increase in long-term debt 3,190,000 -- -- 490,000
Repayment of long-term debt (593,333) (7,408) (10,000) (10,000)
Net increase in due to stockholder 10,000 -- -- --
Repayment of obligations under capital leases (1,704,262) (3,171) (4,280) (6,545)
Proceeds from issuance of shares 18,174,284 834,561 1,126,574 --
Repurchase of common stock of BioSyntech, Inc.
prior to the reverse acquisition (506,380) -- -- --
Share issue costs (831,959) (19,626) (26,493) --
Debt issue costs (225,235) (19,201) (25,920) (120,517)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows related to financing activities 18,263,115 1,340,752 1,809,881 352,938
- ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 429,061 251 339 32,215
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,189,694 762,631 1,029,475 668,184
Cash and cash equivalents, beginning of period -- 118,689 160,219 1,623,191
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 1,189,694 881,320 1,189,694 2,291,375
===========================================================================================================================
See accompanying notes
8
BIOSYNTECH, INC.
A development stage company
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six-month periods ended September 30, 2003 and 2002
[In Canadian dollars] Unaudited
Cumulative from
inception to
September 30, September 30, September 30, September 30,
2003 2003 2003 2002
C$ US$ C$ C$
- ---------------------------------------------------------------------------------------------------------------------------
[note 2]
OPERATING ACTIVITIES
Net loss (22,509,626) (1,223,446) (1,651,528) (1,865,757)
Adjustments for:
Depreciation of property, plant and equipment 828,123 70,615 95,323 94,083
Amortization of patents and trademarks 21,618 5,580 7,533 25
Amortization of debt issue costs 175,290 49,369 66,643 37,711
Services paid by the issuance of common stock 2,588,485 -- -- 10,993
Exchangeable shares of the subsidiary of the
Company issued as part of a settlement 114,248 -- -- --
Options granted to consultants 2,650,642 120,056 162,063 2,696
Accrued interest on long-term debt 322,206 107,347 144,908 53,140
Exchange loss (gain) (429,061) 22,039 29,750 (24,751)
Exchange loss on short-term investments 4,129 -- -- 68,640
Changes in operating assets and liabilities
Accounts receivable (41,293) (4,120) (5,561) (8,097)
Inventory (56,756) (6,881) (9,289) 1,480
Investment tax credits (226,000) (53,337) (72,000) (76,000)
Prepaid expenses (87,912) (26,700) (36,043) 3,960
Deferred revenues 38,648 (4,079) (5,506) (3,095)
Accounts payable and accrued liabilities 611,677 (20,593) (27,799) (105,655)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows related to operating activities (15,995,582) (964,150) (1,301,506) (1,810,627)
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,180,689) (6,360) (8,586) (30,230)
Purchase of short-term investments (1,589,258) -- -- --
Proceeds from maturing of short-term investments 1,585,129 -- -- 1,326,523
Deposits, patents and trademarks (322,082) (46,495) (62,764) 1,100
- ------------------------------------------------------------------------------------------------------------------------
Cash flows related to investing activities (1,506,900) (52,855) (71,350) 1,297,393
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in short-term debt 750,000 555,597 750,000 --
Increase in long-term debt 3,190,000 -- -- 2,490,000
Repayment of long-term debt (593,333) (14,816) (20,000) (20,000)
Net increase in due to stockholder 10,000 -- -- --
Repayment of obligations under capital leases (1,704,262) (8,815) (11,899) (12,770)
Proceeds from issuance of shares 18,174,284 834,561 1,126,574 --
Repurchase of common stock of BioSyntech, Inc.
prior to the reverse acquisition (506,380) -- -- --
Share issue costs (831,959) (19,626) (26,493) --
Debt issue costs (225,235) (19,201) (25,920) (120,517)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows related to financing activities 18,263,115 1,327,700 1,792,262 2,336,713
- ------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 429,061 (22,039) (29,750) 24,751
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,189,694 288,656 389,656 1,848,230
Cash and cash equivalents, beginning of period -- 592,664 800,038 443,145
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 1,189,694 881,320 1,189,694 2,291,375
========================================================================================================================
See accompanying notes
9
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2003 Unaudited
[In Canadian dollars]
1. ORGANIZATION AND OPERATIONS OF THE COMPANY
The Company, which is a development stage company, is 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 such
revenues have principally come 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. For the
six-month period ended September 30, 2003 and the year ended March 31, 2003,
losses amounted to $1,651,528 and $3,652,709 respectively and accumulated
deficit was $22,509,626 as at September 30, 2003. Furthermore, the Company has
not completed the development of any product that can generate the level of
sales necessary to enable the Company to continue its operations without outside
financing. 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, as to
which no assurance can be given.
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 any negotiations for future financings.
10
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2003 Unaudited
[In Canadian dollars]
2. BASIS OF PRESENTATION AND GOING CONCERN ASSUMPTION [Cont'd]
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, 2003, the results of operations and cash flows for the three-month
period and the six-month period ended September 30, 2003. The balance sheet at
March 31, 2003 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, 2003.
US dollar amounts presented on the condensed consolidated balance sheets 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, 2003, which was $1.3499
Canadian dollar per US dollar.
The accompanying unaudited condensed consolidated financial statements include
the accounts of BioSyntech, Inc., Bio Syntech Canada Inc. and the accounts of
Biosyntech Europe S.A.R.L. All intercompany transactions and balances have been
eliminated.
3. STOCK-BASED COMPENSATION
The Company applies the intrinsic value method for options granted to employees.
Had compensation cost for the Company's stock options been determined based on
the fair value at the grant date, the Company's pro forma net loss and loss per
share would be as follows:
Cumulative from Three-month Three-month Three-month
Inception to period ended period ended period ended
September 30, September 30, September 30, September 30,
2003 2003 2003 2002
C$ US$ C$ C$
- --------------------------------------------------------------------------------------------------------
[Note 2]
Net loss, as reported (22,509,626) (666,014) (899,054) (885,447)
Total stock-based employee compensation
expense determined under fair value based
method 3,971,560 90,325 121,930 296,389
---------------------------------------------------------
Pro forma net loss (26,481,186) (756,339) (1,020,984) (1,181,836)
=========================================================
11
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2003 Unaudited
[In Canadian dollars]
3. STOCK-BASED COMPENSATION [CONT'D]
Cumulative from Three-month Three-month Three-month
Inception to period ended period ended period ended
September 30, September 30, September 30, September 30,
2003 2003 2003 2002
C$ US$ C$ C$
- ----------------------------------------------------------------------------------------------------
[Note 2]
Loss per share:
Basic and diluted - as reported $ 0.02 $ 0.03 $ 0.03
Basic and diluted - pro forma $ 0.03 $ 0.03 $ 0.04
Cumulative from Six-month Six-month Six-month
Inception to period ended period ended period ended
September 30, September 30, September 30, September 30,
2003 2003 2003 2002
C$ US$ C$ C$
- ----------------------------------------------------------------------------------------------------
[Note 2]
Net loss, as reported (22,509,626) (1,223,446) (1,651,528) (1,865,757)
Total stock-based employee
compensation expense
determined under fair value
based method 3,971,560 110,127 148,660 393,400
---------------------------------------------------------------------
Pro forma net loss (26,481,186) (1,333,573) (1,800,188) (2,259,157)
Loss per share:
Basic and diluted - as reported $ 0.04 $ 0.06 $0.06
Basic and diluted - pro forma $ 0.04 $ 0.06 $0.08
The effects of applying the fair value based method for the pro forma
disclosures are not representative of the effects expected on reported net
earnings in future years, since valuations are based on highly subjective
assumptions about the future, including stock price volatility and exercise
patterns.
4. UNSECURED CONVERTIBLE DEBENTURE
On July 8, 2003, the Company issued to a shareholder, an unsecured convertible
debenture of $750,000 maturing on July 8, 2004 and bearing interest at an annual
rate of 7%, payable on a monthly basis. The debenture is convertible into shares
of common stock of the Company on the maturity date or any business day
thereafter until the debenture has been repaid in full. The number of shares to
be issued upon conversion shall be determined by using a conversion rate equal
to US$0.35 per share, based on the exchange rate for US dollars published by the
Bank of Canada for the business day prior to the conversion date.
12
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2003 Unaudited
[In Canadian dollars]
5. STOCKHOLDERS' EQUITY (DEFICIENCY)
COMMON STOCK ISSUED FOR CASH
On August 29, 2003, the Company issued 813 Units at a price of US$1,000 per unit
pursuant to a private placement. Each unit is comprised of 3,000 common shares
of the Company and 3,000 share purchases warrants. Each warrant entitles its
holder to subscribe to one common share of the Company at a price of US$1.00 for
a period of eighteen-months from the date of the closing.
STOCK OPTIONS
BIOSYNTECH INC.
On November 29, 2001, the Company has granted options to purchase 957,500 common
shares to consultants. Some of these options vest over a three-year period from
the date of grant. The fair value of the options was calculated from time to
time when services are rendered, using the Black-Scholes option-pricing model.
As a result, $27,463 and $6,865 were recorded under research and development
expenses during the three-month period ended June 30, 2003 and the three-month
period ended September 30, 2003, respectively.
On May 8, 2003, the Company also granted options to purchase 100,000 common
shares to consultants in exchange for services to be rendered over a
twelve-month period starting on April 1, 2003 at an exercise price of US$0.32.
These options vest immediately and can be exercised over a five-year period
beginning on May 8, 2003. The fair value of the options is $34,795, which was
calculated at the date of grant, using the Black-Scholes option-pricing model.
During the three-month period ended June 30, 2003, $4,350 was recorded under
research and development expenses, $4,350 was recorded under administrative
expenses and $26,095 was presented under prepaid expenses. During the
three-month period ended September 30, 2003, $4,313 was recorded under research
and development expenses, $4,313 was recorded under administrative expenses and
$16,874 is still presented under prepaid expenses.
On August 14, 2003, the Company also granted options to purchase 595,000 common
shares to employees at an exercise price of $0.49. These options can be
exercised over a five-year period beginning on January 1, 2004. The Company also
granted options to purchase 290,000 common shares to consultants in exchange for
services rendered at an exercise price of US$0.35. These options vest
immediately and can be exercised over a five-year period beginning on August 14,
2003. The fair value of the options is $92,940, which was calculated at the date
of grant, using the Black-Scholes option-pricing model. During the three-month
period ended September 30, 2003, $92,940 was recorded under research and
development expenses.
13
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2003 Unaudited
[In Canadian dollars]
5. STOCKHOLDERS' EQUITY (DEFICIENCY) [CONT'D]
STOCK OPTIONS
BIOSYNTECH INC.
During the three-month period ended June 30, 2003, options to purchase 40,000
shares of the common stock of the Company were forfeited because the options
were not exercised within 90 days after the termination date of some employees.
During the three-month period ended September 30, 2003, options to purchase
80,000 shares of the common stock of the Company were forfeited because the
options were not exercised within 90 days after the termination date of some
employees.
6. COMPARATIVE FIGURES
Certain of the 2002 comparative figures have been reclassified to conform with
the basis of presentation adopted in the current quarter.
7. CONTINGENCY
On September 26, 2003, one of our former employees, Alain C. Geahchan instituted
a proceeding against the Company alleging that his employment was terminated
without cause and claiming an amount of $130,000 in damages on account of a
twelve months indemnity in lieu of notice, fringe benefits, moral damage and
estimated losses from the cancellation of his stock options. Mr. Geahchan's
employment was terminated for cause and we are vigorously contesting his claims.
8. SUBSEQUENT EVENT
In October 2003, BioSyntech, Inc. has entered into an agreement with a Canadian
underwriter under which the latter has agreed to act as agent of the Corporation
for an initial public offering in Canada of a yet to be determined number of
units for total minimum gross proceeds of CDN $5 Million and maximum gross
proceeds of CDN $10 Million. This transaction is subject to certain conditions
including normal regular pre-approval, the signing of a formal agency agreement
and the shares of the Corporation being accepted for listing on a Canadian
Exchange. The securities will be offered on a best efforts basis in the
Provinces of British Columbia, Alberta, Manitoba, Ontario and Quebec.
14
BioSyntech, Inc.
A development stage company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2003 Unaudited
[In Canadian dollars]
9. FINANCING
On September 29, 2003, the Company accepted a letter of intent from
Investissement Quebec for a participating loan amounting to $2,500,000 as part
of the funding required to commercialize certain products. Such loan will be
disbursed in tranches upon completion of certain milestones or conditions to be
met. However, terms and conditions of the loan are under negotiation. In
addition, the letter of intent is subject to conditions and approval by certain
government authorities.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The discussion in this report on Form 10-QSB contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors" in this Report, as well as those risks discussed
elsewhere in this report. The discussion and analysis below should be read in
conjunction with our Unaudited Condensed Consolidated Interim Financial
Statements and the Notes thereto included elsewhere in this report.
We are an advanced biomaterials company specialized in tissue repair
and therapeutic delivery. Our main focus is the repair of damaged tissue in the
human body like bone or cartilage, and the delivery of therapeutic agents to
their site of action. We are also engaged in the development of advanced
injectable biomaterials for the delivery of cells and genetic material. We have
had limited revenues to date and they have been generated almost entirely by
sales of instrumentation products and our ultrapure chitosan, called Ultrasan.
The continuation of our 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 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, assuming we conclude the
loan agreement with Investissement Quebec of $2,500,00, raise minimum gross
proceeds of $5,000,000 from a planned initial public offering in Canada and the
additional $10,000 from the loan from the Business Development Bank of Canada
held in escrow, we believe that our financial resources are sufficient to meet
our planned activities through fiscal year 2005. We expect, however, 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 September 30, 2003, we had an accumulated deficit of $22,509,626. 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 14, 2003) 1.3038
2003 2002
---- ----
Rate at end of period (September 30) 1.3499 1.5872
16
Period High for the period Low for the period
- ------ ------------------- ------------------
October 2003 1.3281 1.3191
September 2003 1.3696 1.3594
August 2003 1.4023 1.3915
July 2003 1.3876 1.3761
June 2003 1.3591 1.3474
May 2003 1.3908 1.3789
April 2003 1.4639 1.4543
March 2003 1.4801 1.4714
February 2003 1.5161 1.5092
Period Average for the period
- ------ ----------------------
Three Month Period Ended September 30, 2003 1.3801
Three Month Period Ended September 30, 2002 1.5580
Six Month Period Ended September 30, 2003 1.3893
Six Month Period Ended September 30, 2002 1.5562
Fiscal year ended March 31, 2003 1.5479
Fiscal year ended March 31, 2002 1.5655
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.
PATENTS AND TRADEMARKS
The costs associated with the acquisition and application for
patents and trademarks have been capitalized and are being amortized on the
straight-line basis over 20 years for patents and 10 years for trademarks. The
Company regularly reviews the carrying value of patents and impairments is
recognized when the expected future operating cash flows derived from the
patents is less than their carrying value.
17
RESULTS OF OPERATIONS
The following table sets forth certain items in our condensed
consolidated statements of operations for the three-month and six-month periods
ended September 30, 2003 and 2002 (in thousands of CDN$).
Three-month Six-month
Periods Periods
Ended September 30, Ended September 30,
2003 2002 2003 2002
REVENUES
Sales and Services $ 5.7 $ 16.5 $ 90.6 $ 29.0
Research and development contracts - 23.4 - 46.9
--------------------------- ---------------------------
Total Revenues $ 5.7 $ 39.9 $ 90.6 $ 75.9
EXPENSES
Cost of Sales and Services $ 2.9 $ 3.0 $ 41.0 $ 6.1
Research and Development 432.4 529.3 798.3 1,099.2
Investment Tax Credits (41.0) (38.0) (72.0) (76.0)
General and Administrative (Net of Grants) 343.6 369.4 627.3 723.1
Depreciation of Property, Plant and Equipment 48.0 47.1 95.3 94.1
Amortization of Patents and Trademarks 3.9 - 7.5 -
Amortization of Debt Issue Costs 33.4 37.7 66.7 37.7
Interest Income (3.3) (12.7) (5.6) (19.5)
Interest Expense 88.3 55.5 165.8 65.9
(Gain) Loss on Foreign Exchange (3.4) (66.0) 17.8 11.0
--------------------------- ---------------------------
Total Expenses $ 904.8 $ 925.3 $1,742.1 $1,941.6
Net Loss $ 899.1 $ 885.4 $1,651.5 $1,865.7
=========================== ===========================
REVENUES
During the three-month period ended September 30, 2003, we had
revenues of $5,714 and a net loss of $899,054 compared to revenues of $39,900
and a net loss of $885,447 for the three-month period ended September 30, 2002.
The decrease in revenues is due to a decrease in research and development
contracts. During the six-month period ended September 30, 2003, we had revenues
of $90,608 and a net loss of $1,651,528 compared to revenues of $75,873 and a
net loss of $1,865,757 for the six-month period ended September 30, 2002. The
increase in revenues is due to an increase in sales of instrumentation devices.
Loss per share was $0.03 for each of the three-month periods ended September 30,
2003 and 2002. Loss per share was $0.06 for each of the six-month periods ended
September 30, 2003 and 2002.
RESEARCH AND DEVELOPMENT
Research and development expenses were $432,427 for the three-month
period ended September 30, 2003 compared to $529,362 for the three-month period
ended September 30, 2002, or a decrease of $96,935. Research and development
expenses were $798,333 for the six-month period ended September 30, 2003
compared to $1,099,210 for the six-month period ended September 30, 2002, or a
decrease of $300,877. The decreases were primarily attributable to the reduced
cost of pre-clinical toxicological studies, the lower expenses for royalties
fees for technological rights and for the acquisition of research and
development equipment and the transfer of a larger part of our research and
development at Ecole Polytechnique de Montreal ("Ecole Polytechnique") offset by
18
the increases in compensation expenses related to options granted to
consultants. Some 15 people of Ecole Polytechnique are working almost
exclusively on our projects and are remunerated through them.
INVESTMENT TAX CREDITS
We claim an investment tax credit on all our eligible research and
development expenses. The amount we accrued for the three-month period ended
September 30, 2003 is $41,000 compared to $38,000 for the three-month period
ended September 30, 2002, representing an increase of $3,000. The amount we
accrued for the six-month period ended September 30, 2003 is $72,000 compared to
$76,000 for the six-month period ended September 30, 2002, representing a
decrease of $4,000. The change in investment tax credits is directly
attributable to the level of eligible research and development expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expenses (net of grants) were $343,626
for the three-month period ended September 30, 2003 compared to $369,409 for the
three-month period ended September 30, 2002, representing a decrease of $25,783.
The decrease is principally attributable to a decrease in expense related to
professional fees, a reduction of administrative personnel, a decrease in
expenses related to marketing partially offset by a decrease in government
grants, the incurrence of directors and officers insurance, the increase of the
tax on capital, the increase in compensation expenses related to options granted
to consultants and to communications with our stockholders.
General and administrative expenses (net of grants) were $627,316
for the six-month period ended September 30, 2003 compared to $723,108 for the
six-month period ended September 30, 2002, representing a decrease of $95,792.
The decrease is principally attributable to a decrease in expense related to
professional fees, a reduction of administrative personnel, a decrease in
expenses related to communications with our stockholders and to marketing
partially offset by a decrease in government grants, the incurrence of directors
and officers insurance, the increases in compensation expenses related to
options granted to consultants and the increases of the expenses related to the
tax on capital and to maintenance of our principal place of business.
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Depreciation expense was $47,993 for the three-month period ended
September 30, 2003 compared to $47,100 for the three-month period ended
September 30, 2002, representing a slight increase of $893. Depreciation expense
was $95,323 for the six-month period ended September 30, 2003 compared to
$94,083 for the six-month period ended September 30, 2002, representing a slight
increase of $1,240. The increases in the three-month and six-month periods ended
September 30, 2003 were principally attributable to the increased amount of
property, plant and equipment we held during the period compared to the amount
of property, plant and equipment we held during the same period of the last
fiscal year.
AMORTIZATION OF PATENTS AND TRADEMARKS
Amortization expense was $3,876 for the three-month period ended
September 30, 2003 compared to $12 for the three-month period ended September
30, 2002, representing an increase of $3,864. Amortization expense was $7,533
for the six-month period ended September 30, 2003 compared to $25 for the
six-month period ended September 30, 2002, representing an increase of $7,508.
The increases were attributable to the amortization of our capitalization of the
costs associated with the acquisition and application for patents and trademarks
during the fiscal year 2003 and during the three-month and six-month periods
ended September 30, 2003.
AMORTIZATION OF DEBT ISSUE COSTS
Amortization of debt issue costs was $33,362 for the three-month
period ended September 30, 2003 compared to $37,711 for the three-month period
ended September 30, 2002, representing a decrease of $4,349. During the
three-month period ended September 30, 2002, we recorded amortization of debt
issue costs related to the BDC Loan including the period since the consumption
date being June 26, 2002.
Amortization of debt issue costs was $66,643 for the six-month
period ended September 30, 2003 compared to $37,711 for the six-month period
ended September 30, 2002, representing an increase of $28,932. The increase was
attributable to the amortization of our new debt issue costs related to the BDC
Loan (as discussed in more detail in the Liquidity, Capital Resources and Going
Concern Uncertainty Section of this report).
19
INTEREST INCOME AND INTEREST EXPENSE
Interest income represents income earned on our cash and cash
equivalents. Interest income for the three-month period ended September 30, 2003
was $3,336 compared to $12,723 for the three-month period ended September 30,
2002, representing a decrease of $9,387. Interest income for the six-month
period ended September 30, 2003 was $5,613 compared to $19,486 for the six-month
period ended September 30, 2002, representing a decrease of $13,873. The
decreases in the three-month and the six-month periods ended September 30, 2003
were primarily due to a lower level of cash on hand and short-term investments
compared to the same period in the fiscal year ended March 31, 2003.
Interest expense was $88,330 for the three-month period ended
September 30, 2003 compared to $55,464 for the three-month period ended
September 30, 2002 representing an increase of $32,866. Interest expense was
$165,781 for the six-month period ended September 30, 2003 compared to $65,922
for the six-month period ended September 30, 2002 representing an increase of
$99,859. The increases in the three-month and the six-month periods ended
September 30, 2003 were primarily attributable to the interest expenses related
to the loan from BDC Loan and the Shareholder Loan (as discussed in more detail
in the Liquidity, Capital Resources and Going Concern Uncertainty Section of
this report).
GAIN/LOSS ON FOREIGN EXCHANGE
Gain on foreign exchange was $3,392 for the three-month period ended
September 30, 2003 compared to a gain of $66,042 for the three-month period
ended September 30, 2002, representing a decrease of $62,650. 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 the
three-month period ended September 30, 2002 (from 1.5162 at June 30, 2002 to
1.5872 at September 30, 2002 and from 1.3475 at June 30, 2003 to 1.3499 at
September 30, 2003).
Loss on foreign exchange was $17,814 for the six-month period ended
September 30, 2003 compared to a loss of $10,972 for the six-month period ended
September 30, 2002, representing an increase of $6,842. The increase 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 the six-month period
ended September 30, 2003 (from 1.5942 at March 31, 2002 to 1.5872 at September
30, 2002 and from 1.4678 at March 31, 2003 to 1.3499 at September 30, 2003).
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 September 30, 2003 was $1,189,694
(including cash equivalents) as compared to $800,038 as of March 31, 2003.
On June 26, 2002, Bio Syntech Canada Inc., our wholly-owned
subsidiary, concluded a loan agreement with Business Development Bank of Canada
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 secured by a $2,500,000
hypothec covering moveable and immovable property excluding patents, a first
ranking hypothec on land and building and a moveable hypothec on accounts
receivable. The terms of repayment of the loan are: the principal amount plus
all accrued interest at a corporate rate of 10% compounded monthly shall be due
on February 15, 2006, 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
20
limitations on capital expenditures. As part of the agreement, we issued
warrants to purchase 1,000,000 shares of our common stock, $.001 per value at
US$0.33 per share to BDC. These warrants are currently exercisable at any time
over a five-year term from the date of issuance. If market value exceeds the
exercise price, BDC shall have the option to exercise the warrants on a net
issue basis by obtaining a number of shares equivalent to the difference between
the market value and the exercise price.
On July 8, 2003, we obtained a $750,000 loan from our Chief
Executive Officer and President (the "Shareholder Loan"). In exchange for the
loan, we issued an unsecured convertible debenture in the principal amount of
$750,000 which matures on July 8, 2004 and bears interest at an annual rate of
7%, payable on monthly basis. The debenture is convertible into shares of our
common stock on the maturity date or any business day thereafter until the
debenture has been repaid in full. The number of shares to be issued upon
conversion shall be determined by using a conversion rate equal to USD$0.35 per
share, based on the exchange rate for US dollars published by the Bank of Canada
for the business day prior to the conversion date.
On August 29, 2003, we issued 813 Units at a price of US$1,000 per
unit pursuant to a private placement and raised $1,126,574. Each unit is
comprised of 3,000 shares of our common stock and warrants to purchase 3,000
shares of our common stock at an exercise price of US$1.00 per share of common
stock until March 1, 2005.
On September 29, 2003, we accepted a letter of intent from
Investissement Quebec for a participating loan amounting to $2,500,000 as part
of the funding required to commercialize certain products. Such loan will be
disbursed in tranches upon completion of certain milestone or conditions to be
met. However, terms and conditions of the loan are under negotiation. In
addition, the letter of intent is subject to conditions and approval by certain
government authorities.
On October 2003, we entered into an agreement with a Canadian
underwriter to act as our agent for our proposed initial public offering in
Canada to raise $5,000,000 to $10,000,000 gross proceeds (the "Proposed Canada
IPO"). As of the date of this report, we still need to determine the nature and
the amount of our securities to be sold. The Proposed Canada IPO is subject to
certain conditions including normal regular pre-approval, the signing of a
formal agency agreement and the acceptance for our securities for listing on a
Canadian Exchange. Our securities will be offered on a best efforts basis in the
Provinces of British Columbia, Alberta, Manitoba, Ontario and Quebec.
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. The success of these
negotiations is dependant on a number of items, which we cannot control, and we
are unable to predict whether we will be able to successfully complete
additional transactions with any financial institution or investors to raise
part of any of our additional financing requirements.
We also plan to continue with our program of limiting our operating
costs and capital expenditures. Based on our current operating plan, assuming we
conclude the loan agreement with Investissement Quebec of $2,500,000, receive
minimum gross proceeds of $5,000,000 from the Proposed Canada IPO and the
additional $10,000 held in escrow, our management estimates that our cash and
cash equivalents on hand will be sufficient to fund our projected operating
expenses and capital expenditures through the end of the fiscal year 2005. There
can be no assurance, however, that the Proposed Canada IPO will be completed. If
we do not receive additional financing from the Proposed Canada IPO or
otherwise, we will reassess our operating plan to reduce expenses on an ongoing
basis.
EMPLOYEE COUNT
As of November 3, 2003, we had 20 employees, of whom 14 were engaged
in research and development and 6 were engaged in corporate and administrative
activities. Except for one employee in our research and development team who is
involved in the manufacture of the Mach-1, we have no other employees involved
in the manufacture of our products. We anticipate our total employee count to be
approximately 24 employees by the end of fiscal year 2004. Furthermore, we have
transferred a larger part of our research and development at Ecole Polytechique.
21
Some 15 people at Ecole Polytechique are working almost exclusively on our
projects and are remunerated through them. One of our employees working at Ecole
Polytechique, our Vice-President Discovery, was awarded a Canada Research Chair
in Cartilage Tissue Engineering.
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.
On June 26, 2002, our wholly-owned subsidiary entered into a loan
agreement with Business Development Bank of Canada providing for borrowings of
up to $2,500,000, of which $2,490,000 has been advanced to such subsidiary. On
July 8, 2003, we obtained a $750,000 loan from our Chief Executive Officer and
President. In exchange for the loan, we issued him a convertible debenture in
the principal amount of $750,000 which matures on July 8, 2004 and bears
interest at an annual rate of 7%, payable on monthly basis. On August 29, 2003,
we issued 813 Units at a price of US$1,000 per unit pursuant to a private
placement and raised $1,126,574.
On September 29, 2003, we accepted a letter of intent from
Investissement Quebec for a participating loan amounting to $2,500,000 as part
of the funding required to commercialize certain products. Such loan will be
disbursed in tranches upon completion of certain milestone or conditions to be
met. However, terms and conditions of the loan are under negotiation. In
addition, the letter of intent is subject to conditions and approval by certain
government authorities.
We are also currently discussing additional sources of financing,
such as raising a maximum of $10,000,000 through the Proposed Canada IPO (as
discussed in more detail in the Liquidity, Capital Resources and Going Concern
Uncertainty Section of this report). Based on our current operating plan,
assuming conclusion of the loan agreement with Investissement Quebec of
$2,500,000, receipt of the initial public offering in Canada of a minimum gross
proceeds of $5,000,000 and the additional $10,000 of the loan from the Business
Development Bank of Canada held in escrow, we believe that our financial
resources are sufficient to meet our planned activities through fiscal year 2005
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 the initial public offering in
Canada will be consummated. If we do not receive additional financing from the
Proposed Canada IPO or otherwise, 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 completion of the initial public offering in Canada 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
o The cost of obtaining licenses to use technology owned by
others.
22
SINCE OUR INCEPTION, WE HAVE INCURRED LOSSES AND WE EXPECT THAT WE
WILL INCUR MORE LOSSES FOR THE FORESEEABLE FUTURE; THEREFORE, WE HAVE DOUBTS
ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. WE MAY NEVER BECOME
PROFITABLE.
As of September 30, 2003 our accumulated deficit was $22,509,626. We
had net operating losses of $899,054 and $3,652,709 for the three-month period
ended September 30, 2003 and the fiscal year ended March 31, 2003, 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. The independent accountant's report on our financial
statements for the fiscal year ended March 31, 2003 states that our recurring
operating losses and generated negative cash flows from operations raise
substantial doubt about our ability to continue as a going concern. 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 Obtaining additional funding from our collaborative partners;
and
o Achieving 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 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
23
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.
WE COULD BECOME INVOLVED IN A COSTLY LITIGATION TO PROTECT OUR
PROPRIETARY RIGHTS. WE MAY ALSO BE PREVENTED FROM SELLING OUR PRODUCTS.
The following factors are important to our success:
o Receiving patent protection for our product candidates and those
of our collaborators;
o Maintaining our trade secrets;
o Not infringing on the proprietary rights of others; and
o Preventing others from infringing our proprietary rights.
We can protect our proprietary rights from unauthorized use by third
parties only if these rights are covered by valid and enforceable patents or are
effectively maintained as trade secrets. We try to protect our proprietary
position by filing United States, Canadian, and foreign patent applications
related to our proprietary technology, inventions and improvements that are
important to the development of our business. The laws of certain foreign
countries, however, may not protect our intellectual property rights to the same
extent as the laws of the United States and Canada.
The patent position of biopharmaceutical companies involves complex
legal and factual questions. Enforceability of patents cannot be projected with
certainty. Patents, if issued, may be challenged, invalidated or circumvented.
Any patents that we own or license to others may provide no protection against
competitors. Our pending and future patent applications or those that we license
from third parties, may not result in patents being issued. If patents do issue,
they may not provide us with proprietary protection or competitive advantages
against competitors with similar technology. In addition, others may also
independently develop similar technologies or duplicate any technology that we
have developed.
We also rely on trade secrets, know-how and technology, which we try
to protect by entering into confidentiality agreements with parties that have
access to it, including our corporate partners, collaborators, employees and
consultants. Any of these parties may breach the agreement and disclose our
confidential information or our competitors might learn of the information in
some other way.
Protecting our proprietary rights involves a significant level of
resources. Although we have provided for the costs of applying for patents and
trademarks, our results of operations may be materially affected if we are
involved in a costly litigation in the process of protecting our proprietary
rights. We may also be prevented from selling our products if such litigation
ensues.
24
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS.
The testing and marketing of bio-therapeutic and medical products,
even after FDA approval, have an inherent risk of product liability. Although we
anticipate we will obtain product liability insurance coverage for a limited
amount at the time that our operations warrant it, we are unsure whether it will
be available at reasonable terms. However, our profitability will be affected by
a successful product liability claim in excess of any insurance coverage that
may be in effect at that time.
FOREIGN EXCHANGE FLUCTUATIONS OF THE CANADIAN DOLLAR MAY AFFECT OUR
FINANCIAL PERFORMANCE, BECAUSE IT IS NOT COST-EFFECTIVE FOR US TO ENTER INTO
FORWARD CONTRACTS OR CURRENCY OPTIONS.
We expect a substantial portion of our revenues to be based on sales
and services rendered to come from the United States, while a significant amount
of our operating expenses will be incurred in Canada. As a result, our financial
performance will be affected by fluctuations in the value of the United States
dollar to the Canadian dollar. At the present time, we have no plan or policy to
utilize forward contracts or currency options to minimize this exposure, and
even if these measures are implemented, we are unsure whether these arrangements
will be available, be cost effective or be able to fully offset future currency
risks.
OUR COMMON STOCK CURRENTLY IS, AND MAY CONTINUE TO BE, SUBJECT TO
ADDITIONAL REGULATIONS APPLICABLE TO LOWER PRICED SECURITIES THAT MAY REDUCE THE
TRADING VOLUME OF OUR SHARES AND MAY ALSO REDUCE YOUR ABILITY TO RESELL THE
SHARES LATER.
Our Common Stock is, and may continue to be, subject to a number of
regulations that can affect its price and your ability to sell it. For example,
Rule 15g-9 under the Exchange Act applies to our Common Stock. This rule imposes
sales practice requirements on broker-dealers that sell low priced securities to
persons other than established customers and institutional accredited investors.
For transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction.
In addition, under United States securities regulations, penny
stocks generally are equity securities with a price of less than US$5.00 per
share other than securities registered on certain national securities exchanges
or quoted on the Nasdaq Stock Market. For any transaction involving a penny
stock, unless exempt, the penny stock rules require the delivery, prior to the
transaction, of a disclosure schedule prescribed by the Securities and Exchange
Commission relating to the penny stock market. The broker-dealer must also
disclose the commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities. Finally, monthly
statements must be sent disclosing recent price information on the limited
market in penny stocks. Consequently, the penny stock rules may restrict the
ability of broker-dealers to sell our Common Stock. These requirements may
reduce the level of trading activity in any secondary market for our Common
Stock and may adversely affect the ability of broker-dealers to sell our
securities.
ITEM 3. CONTROLS AND PROCEDURES
As of November 3, 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 the
end of the period covered by this report, the disclosure controls and procedures
were effective as of September 30, 2003. 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.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 26, 2003, one of our former employees, Alain C.
Geahchan commenced an action against the Company in the Superior
Court, Province of Quebec, District of Laval. The complaint alleges
that Mr. Geahchan was wrongfully terminated and is seeking $130,000
in lost compensation. In the opinion of management, based on advice
and information provided by its legal counsel, the final
determination of this litigation is not determinable. As such no
provision has been recorded.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On August 29, 2003, we issued 813 Units at a price of US$1,000 per
unit pursuant to a private placement and raised $1,126,574. Each
unit is comprised of 3,000 shares of our common stock and warrants
to purchase 3,000 shares of our common stock at an exercise price of
US$1.00 per share of common stock until March 1, 2005. We issued an
aggregate of 2,439,000 shares of our Common Stock and warrants to
purchase 2,439,000 shares of our Common Stock. The proceeds were
used for working capital and other general corporate expenses.
The securities sold were exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant
to Section 4(2) of the Securities Act. Listed in the table below are
the investors in the private placement.
BIOSYNTECH, INC. - PRIVATE PLACEMENT
LIST OF SUBSCRIBERS - SCHEDULE A
- ---------------------------------------------------------------------------------------------------------
NAME ADDRESS Units Shares Warrants Cdn
(1) (2)
- ---------------------------------------------------------------------------------------------------------
9011-2822 Canada inc. 5934 Cote de Liesse 122 366,000 366,000 170,000
Mont-Royal, Quebec
H4T 2A5
c/o: Pierre Benoit
- ---------------------------------------------------------------------------------------------------------
Les Entreprises Serge 1010 de la Gauchetiere 108 324,000 324,000 150,000
Savard Suite 600
Montreal, Quebec
H3B 2N2
- ---------------------------------------------------------------------------------------------------------
Credit Suisse The Bahamas Financial 100 300,000 300,000 US$100,000
(Bahamas) Limited Centre
Shirley and Charlotte
Street
P.O. Box N-4928
Nassau, Bahamas
Attn : Ghislane Wilkinson
- ---------------------------------------------------------------------------------------------------------
Donald E. Meehan 201 City Centre Drive 108 324,000 324,000 150,000
Suite 400
Mississauga, Ontario
L5B 2T4
- ---------------------------------------------------------------------------------------------------------
National Bank of Goodman's Bay 100 300,000 300,000 US$100,000
Canada International Corporate Centre
P.O. Box N-3015
Nassau, Bahamas
Attn : Jacques Latendrese
- ---------------------------------------------------------------------------------------------------------
Olshan Grundman 505 Park Avenue 95 285,000 285,000 US$95,000
Frome Rosenzweig & New York, N.Y. 10022
Wolosky LLP USA
c/o : David Adler
- ---------------------------------------------------------------------------------------------------------
Business 5 Place Ville-Marie 180 540,000 540,000 US$180,000
Development Bank of Suite 400
Canada Montreal, Quebec
H3B 5E7
Attn: Nick Photiades
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Ex. 31 - Controls and Procedures Certificate of Chief Executive
Officer dated November 14, 2003.(1)(2)
Ex. 32 - Statement under oath of Chief Executive Officer dated
November 14, 2003. (1) (2)
----------------------------
(1) Filed herewith
(2) 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
None.
27
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 14, 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
28
