UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
| ¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934. |
OR
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005.
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO .
| ¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT
Commission File number 000-50994
BIOPROGRESS PLC
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
15-17 Cambridge Science Park
Milton Road, Cambridge CB4 0FQ
United Kingdom
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act
None
Securities registered or to be registered pursuant to Section 12(g) of the Act
Ordinary Shares, par value £0.01 per share
American Depositary Shares represented by American Depositary Receipts each representing 10 Ordinary Shares
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act
Ordinary Shares, par value £0.01 per share
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
123,076,259 Ordinary Shares, par value £0.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ YES x NO
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ¨ YES x NO
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x YES ¨ NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by the check mark which financial statement item registrant has elected to follow. ¨ ITEM 17 x ITEM 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ YES x NO
TABLE OF CONTENTS
i
Introduction and Use of Certain Terms
BioProgress PLC is a public limited company incorporated under the laws of England and Wales. As used herein, except as the context otherwise requires, the terms “BioProgress”, the “Company”, “we”, “our” and “us” refers to BioProgress PLC and its subsidiaries.
BioProgress files reports and other information electronically with the Securities and Exchange Commission (the “SEC”) located at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain copies of our filings on EDGAR with the SEC by accessing the SEC website located at www.sec.gov.
BioProgress is also subject to the informational requirements of UK company legislation, in particular the Companies Acts 1985 and 1989 (as amended), the Criminal Justice Act 1993 (as amended), the Financial Services and Markets Act 2000 and regulations made thereunder, and is required to file annual accounts and certain other administrative information with the Registrar of Companies in England and Wales. BioProgress must file an annual return containing basic company information with the Registrar of Companies in England and Wales within 28 days after each anniversary of the company’s incorporation date. Under the Companies Act 1985, BioProgress, as a public company, must deliver audited accounts to the Registrar of Companies in England and Wales within seven months of the end of each financial year. As long as the Company’s shares are admitted to trading on the Alternative Investment Market of the London Stock Exchange, the Company must follow the requirements of the Alternative Investment Market rules (which include requirements to publish half-yearly reports and annual audited accounts). As a public limited company, the Company must also follow the requirements of the City Code on Takeovers and Mergers. Such reports and other information is available from the Registrar of Companies in England and Wales or through a regulatory information service approved by the London Stock Exchange or through the Alternative Investment Market section of the London Stock Exchange website (http://www.londonstockexchange.com) as applicable.
The Company’s executive offices and principal place of business are located at 15-17 Cambridge Science Park, Milton Road, Cambridge CB4 0FQ, United Kingdom. The registered and records offices of the Company are also located at the same address.
Explanatory Note
The Company appointed a new Chief Financial Officer effective July 3, 2006. Because the Company’s Chief Financial Officer has only recently joined the Company, he was not in a position to be able to provide the certifications required under Section 302 and 906 of the Sarbanes-Oxley Act of 2002 with respect to this Annual Report on Form 20-F.
Forward-Looking Statements
This annual report contains certain forward-looking statements that are based on the belief of our management as well as assumptions made by, and information currently available to, us. These statements are accompanied by, and should be read in conjunction with, an explanation of important factors that could cause actual results to differ materially from those in the forward-looking statements. When issued in this document, the words “anticipate,” “believe,” “estimate,” “expect,” “plan” and “intend” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. Among other statements, statements regarding our financial position, operational and financial goals and objectives, including those under “Risk Factors”, “Operating and Financial Review and Prospects” and “Business” are forward looking in nature.
Forward-looking statements reflect the current view of our management with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by the forward-looking statements, including, among others, the factors identified under “Risk Factors” and the following:
| | • | | failure to maintain adequate capital resources; |
| | • | | competition to our products and businesses; |
| | • | | lack of acceptance of any new products we may develop; |
| | • | | changes in demand for our products or services; |
| | • | | technological changes and new products developed by our competitors; |
| | • | | changes in currency exchange rates; |
| | • | | changes in general economic and business conditions in the countries in which we operate; |
| | • | | changes in business strategy; and |
| | • | | infringement of our intellectual property. |
Should one or more of these risks materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this annual report as anticipated, believed, estimated, expected, planned or intended.
ii
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data for the years ended December 31, 2001, 2002, 2003, 2004 and 2005. Financial data for the years ended December 31, 2001 and 2002 are derived from the financial statements of BioProgress Technology International, Inc., which, in the case of 2001, have been audited by Arthur Andersen LLP and in the case of 2002, have been audited by Grant Thornton, independent chartered accountants, and in each case have been prepared in accordance with US GAAP. Financial data for the years ended December 31, 2003, 2004 and 2005 are derived from the financial statements of the Company, which have been audited by Grant Thornton UK LLP, independent chartered accountants, and which have been prepared in accordance with US GAAP.
The financial data set out below should be read in conjunction with the consolidated financial statements and notes thereto, as well as “Item 5: Operating and Financial Review and Prospects”, included elsewhere in this annual report.
| | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | |
| | | | | | | | | | | | | | | (As Restated) | |
Statement of operations data: | | | | | | | | | | | | | | | | | | | | |
Net revenues | | $ | 8,004,642 | | | $ | 4,618,564 | | | $ | 1,684,911 | | | $ | 2,317,571 | | | $ | 966,738 | |
Loss from Operations | | | (16,968,191 | ) | | | (13,250,558 | ) | | | (4,071,275 | ) | | | (5,890,330 | ) | | | (6,696,604 | ) |
Other income and expenses | | | (5,784,285 | ) | | | (168,757 | ) | | | (827,262 | ) | | | (1,007,041 | ) | | | (1,132,488 | ) |
Loss from Continuing Operations | | | (22,752,476 | ) | | | (13,419,315 | ) | | | (4,868,053 | ) | | | (6,897,371 | ) | | | (7,829,092 | ) |
Net loss | | | (22,752,476 | ) | | | (13,419,315 | ) | | | (4,576,512 | ) | | | (6,897,371 | ) | | | (7,829,092 | ) |
Net loss from operations per share | | | (0.14 | ) | | | (0.12 | ) | | | (0.06 | ) | | | (0.12 | ) | | | (0.15 | ) |
Net loss from continuing operations per share | | | (0.19 | ) | | | (0.12 | ) | | | (0.07 | ) | | | (0.14 | ) | | | (0.17 | ) |
Net loss per common share outstanding/diluted | | | (0.19 | ) | | | (0.12 | ) | | | (0.07 | ) | | | (0.14 | ) | | | (0.17 | ) |
Weighted average number of common shares outstanding/diluted | | | 121,001,000 | | | | 113,325,006 | | | | 70,372,161 | | | | 48,662,980 | | | | 45,730,823 | |
| | | | | |
Balance sheet data: | | | | | | | | | | | | | | | | | | | | |
Current assets | | | 14,226,411 | | | | 32,429,351 | | | | 14,598,955 | | | | 588,311 | | | | 1,623,635 | |
Current Liabilities | | | 3,446,243 | | | | 2,883,004 | | | | 1,502,008 | | | | 4,554,682 | | | | 3,667,001 | |
Total assets | | | 24,986,796 | | | | 48,354,615 | | | | 19,335,426 | | | | 5,662,572 | | | | 9,802,703 | |
Stockholders’ equity | | | 18,215,723 | | | | 32,679,781 | | | | 17,832,048 | | | | 342,930 | | | | 5,528,832 | |
CURRENCIES AND EXCHANGE RATES
In this report, references to “pounds sterling”, “£”, “pence” or “p” are to the lawful currency of the United Kingdom and references to “UK” mean the United Kingdom. References to “dollars”, “$” or “¢” are to the lawful currency of the United States, and references to “United States” and “US” mean the United States of America, its states, territories, possessions and all areas subject to its jurisdiction.
The following table sets out, for the periods and dates indicated, certain information concerning the noon buying rate in New York City for cable transfers in pounds sterling as certified for customs purposes by the Federal Reserve Bank of New York expressed in US dollars per £1.00. The average rate is based on the average of noon buying rates on the last day of the month or period as the case may be during the relevant period. On July 3, 2006, the noon buying rate translated to £1.00 = $1.8410.
1
High and low exchange rates for the previous six months:
| | | | | | |
| | | High | | Low |
January 2006 | | $ | 1.79 | | $ | 1.74 |
February 2006 | | $ | 1.78 | | $ | 1.73 |
March 2006 | | $ | 1.76 | | $ | 1.73 |
April 2006 | | $ | 1.82 | | $ | 1.74 |
May 2006 | | $ | 1.89 | | $ | 1.83 |
June 2006 | | $ | 1.88 | | $ | 1.81 |
Average exchange rates of US dollars per pound sterling for the past five years:
| | | |
Calendar Year | | Average |
2001 | | $ | 1.44 |
2002 | | $ | 1.51 |
2003 | | $ | 1.67 |
2004 | | $ | 1.84 |
2005 | | $ | 1.81 |
We make no representation that the amounts referred to above could have been or could be converted into the foregoing currencies at any particular rate or at all.
RISK FACTORS
This annual report contains forward-looking statements that involve risks and uncertainties. The following factors, among others, could cause our actual results to differ materially from those anticipated in the forward-looking statements in this report or presented elsewhere by management from time to time.
Risks Related to Our Business
Recent changes to our senior management may cause disruptions in our business, relationships with third parties and the verification of statements and operations conducted by prior management.
There have been further changes to our senior management since 15 July 2005, the date on which we filed our Annual Report on Form 20-F for the fiscal year ended December 31, 2004. On November 29, 2005, Tony Fabrizi resigned as a non-executive director. Larry Shattles, an executive officer, resigned on 28 November 2005. On 28 April 2006 Dan Farrow, our chief financial officer, also resigned. It is possible that these changes will cause disruptions in the conduct of our business. However, the appointment on 29 July 2005 of our new chairman, Peter Ibbetson, and the appointment of a new independent non-executive officer, Anthony Knight, on 29 November 2005, has strengthened our senior management. On 15 June 2006, we also announced the appointment of Peter Keen as Finance Director and Chief Financial Officer.
We cannot assure you that the Company will be able to comply with all applicable securities laws.
We cannot assure you that the Company will be able to comply with certain provisions of the Sarbanes-Oxley Act of 2002 or continuing listing requirements of The Nasdaq National Market Inc.
We have identified certain deficiencies in our internal disclosure controls.
We have concluded that we had a material weakness in our internal control over financial reporting as a result of (i) the previous Chief Financial Officer being unable to regularly attend the offices of the Company during quarter 4 2005, through to his resignation on April 28, 2006, (ii) the complete absence of a Chief Financial Officer for the period from April 28, 2006 until the appointment of Peter Keen as Chief Financial Officer on July 3, 2006 and (iii) the transition associated with a new Chief Financial Officer. In addition, because of the foregoing and the absence of the certifications required under Section 302 and 906 of the Sarbanes-Oxley Act of 2002 by our new Chief Financial Officer, we concluded that disclosure controls were not effective.
Our new Chief Financial Officer joined us effective July 3, 2006. As he has recently joined us, he was not in a position to provide the Section 302 and 906 certifications at the time of the filing of this Annual Report on Form 20-F and is currently reviewing our disclosure and internal controls. As part of this review, he may find deficiencies in our disclosure and internal controls and may propose and implement additional remedial actions.
Material weakness means that as of such date there was more than a remote likelihood that we would not prevent or detect a material misstatement of our financial statements that was more than inconsequential. Although we believe that we have implemented measures to remediate this material weakness, including having appointed a new Chief Financial Officer effective as of July 3, 2006,
there can be no assurances that deficiencies in internal and disclosure controls may continue to exist. See Item 15, “Controls and Procedures.”
We may face some difficulties or experience delays in developing changes and improvements to our internal accounting systems and controls. The failure or delay in implementing all required changes and improvements to our internal controls and any failure to maintain such control could adversely affect our ability to fulfill our financial reporting obligations. Any misstatements or adjustments due to errors or the failure to satisfy our reporting obligations on a timely basis could have an adverse effect on our business and results of operations.
Our limited operating history makes evaluating our business difficult.
We began demonstrations of our XGEL™ product during the early part of 2000 and executed the first sale of a license of XGEL™ film systems during August 2000. Further, in late 2005, we changed our business model from one which relies solely upon receiving revenue from licensees to one which combines a licensing model with a direct manufacturing and sales model. We have created a new pharmaceutical division called Dexo, which set up a joint venture with Crescent Pharma Limited in December 2005 and acquired Laboratoires Pharmaceutiques Dexo SA in January 2006. The establishment of Dexo means that we are now a specialty pharma business, able to ourselves develop and sell products which utilize the XGEL™ film system (e.g. through encapsulation using TABWRAP™, or placing a dose of medicine on a SOLULEAVES™ film strip) Accordingly, we have only a limited operating history in order to evaluate our business. The risks, expenses and difficulties that an early-stage company like ours faces must be considered. These risks include our ability to successfully complete the production engineering, manufacture and commissioning of each of the seven XGEL™ products, and to successfully integrate our XGEL™ products with our newly-acquired pharmaceutical products. We must:
| | • | | successfully respond to competitive developments; |
| | • | | continue to upgrade our products and service offerings; |
2
| | • | | continue to attract, retain and motivate qualified personnel; and |
| | • | | continue to attract financing to support the planned growth of our business. |
We believe that period-to-period comparisons of our operating results are not meaningful.
Growth of our business may suffer if new customers do not accept our product offerings.
We have historically derived our revenues (other than immaterial amounts) from XGEL™ products and associated services in the form of fees pursuant to development contracts. We anticipate that these sources together with XGEL™ related license fees, sales of XGEL™ film and film systems will continue to account for a proportion of our revenues for the foreseeable future.
In late 2005, we changed our business model from one which relies solely upon receiving revenue from licensees to one which combines a licensing model with a direct manufacturing and sales model. We have created a new pharmaceutical division called Dexo, which set up a joint venture with Crescent Pharma Limited in December 2005 and acquired Laboratoires Pharmaceutiques Dexo SA in January 2006. The establishment of Dexo means that we are now a specialty pharma business, able to ourselves develop and sell products which utilize the XGEL™ film system (e.g. through encapsulation using TABWRAP™, or placing a dose of medicine on a SOLULEAVES™ film strip).
The market for gelatin replacement materials and means of processing is still emerging and it may not continue to grow. Even if the market does grow, businesses may not adopt our product offerings as gelatin substitutes. We have expended, and intend to continue to expend, considerable resources educating potential customers about the XGEL™ products and our services in general and about the features of the XGEL™ film system and new product development opportunities afforded by it in particular. However, our product offerings may not achieve any additional degree of market acceptance.
The loss of one of our largest customers could cause our revenues to drop quickly and unexpectedly.
Revenues in 2005 were largely derived from BioTec Films LLC, which accounted for 97% of the total revenue of the Company, amounting to $7,728,222 out of total revenue of $8,004,642. In 2005, Tapemark Inc., a customer of BioTec Films LLC, accounted for 81% of the revenues of BioProgress PLC.
Although we have written agreements with our customers, the revenue generated from these contracts depends upon the successful commercialization of consumer products using our technology. We cannot be certain that our customers will continue to do business with us after the contracts expire, that business from existing customers will continue at the levels of previous periods, or that we will be able to do a significant amount of business with new customers. If we lose one of our customers, our revenues could drop more quickly than we could reduce expenses. This could substantially harm our financial results.
We depend to some extent upon licenses with manufacturers for revenue which makes part of our revenues dependent upon the success of our customers to commercialize and sell products incorporating our technology.
Revenues from our technologies will, to some extent, be dependent upon the production and sale of products utilizing our technologies. Though it should be noted that as explained above, we do now intend to independently market products incorporating our technologies in the foreseeable future. However, we have historically entered into agreements with customers whereby our customers conduct the marketing and commercialization of our products and our revenues from these agreements is still dependent on our customers’ ability to commercialize products using our XGEL™ technology.
In February 2004, we executed agreements with FMC BioPolymer, a business unit of FMC Corporation, whereby FMC acquired an exclusive worldwide license for our NROBE™ dosage form, process, equipment and enabling technology. FMC assumes full responsibility for the commercialization of NROBE™ and our success in generating revenues from our NROBE™ dosage form will be dependent entirely upon FMC’s success in commercializing NROBE™. Although FMC must purchase specified numbers of NROBE™ machines or pay a cash penalty to maintain its exclusive license rights, these agreements do not contain any minimum royalty payments and thus royalty payments are completely dependent upon FMC’s success in commercializing the NROBE™ dosage form. We are therefore completely dependent upon FMC to commercialize our NROBE™ dosage form.
We may be unable to enter into additional collaborative arrangements with respect to product development utilizing our technologies. Existing or future collaborative arrangements may not lead to successful consumer product sales. Milestones to receive revenue in such agreements may not be met. If we are unable to obtain development assistance and funds from manufacturers to fund a portion of our product development costs and to commercialize products, we may have to delay, scale back or curtail one or more of our activities.
3
We have no control over the resources and the attention devoted by our collaborative partners to the development of a product candidate and, to the extent resources devoted are limited, products using our technology may not be commercially successful. If any of our collaborators breaches or terminates its agreement with us or otherwise fails to conduct its collaborative activities in a timely manner, the development or commercialization of the product candidate or research program under such collaborative agreement may be delayed, and we may be required to devote unforeseen additional resources to continue such development or commercialization, or terminate such programs. Disputes may arise in the future with respect to the ownership of rights to any technology developed with third parties. These and other possible disagreements with collaborators could lead to delays in the collaborative research, development or commercialization of certain product candidates, or could require or result in litigation or arbitration, which would be time consuming and expensive
Our stock price or our business could be adversely affected if we are not able to efficiently integrate acquisitions or if we make future acquisitions.
We have consummated and we may continue to pursue acquisitions that provide new technologies, products or service offerings. In March 2004, we acquired certain of the assets of Aquafilm LLC in the United States. On 5 January 2006, we completed the acquisition of the entire share capital of Laboratoires Pharmaceutiques Dexo SA. On July 14, 2006 we completed the acquisition of the entire share capital of Segix Farma SRL. Due to our limited cash resources, future acquisitions by us may involve potentially dilutive issuances of equity securities. We also may incur substantial additional liabilities and expenses, such as debt. Acquisitions involve numerous risks, including:
| | • | | difficulties in the assimilation of the operations and technologies; |
| | • | | integration of products and personnel of the acquired company; |
| | • | | the diversion of our small management team’s attention from other business concerns; |
| | • | | risks of entering markets in which we have no or limited prior experience; and |
| | • | | the potential loss of key employees of the acquired company. |
Any or all of the above could reduce our revenue or delay or restrict the growth of our business
We have a limited ability to protect our intellectual property rights and others could infringe on or misappropriate our proprietary rights.
Our success and ability to compete are substantially dependent on our internally developed technologies and trademarks, which we protect through a combination of patent, trademark and trade secret laws, confidentiality procedures and contractual provisions.
As a small company with limited resources to devote to protecting our intellectual property we may not have protected all of our intellectual property rights. In addition, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our technology or to obtain and use information that we regard as proprietary. Policing unauthorized use of our technology is difficult. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States and certain European countries. Furthermore, our competitors may independently develop technology similar to ours.
The number of intellectual property claims may increase as the number of competing products grows and the functionality of products in different industry segments overlaps. Although we are not aware that any of our products infringe upon the proprietary rights of third parties, third parties may still claim infringement by us with respect to current or future products. Any of these claims, with or without merit, could be time-consuming to address, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, might not be available on terms acceptable to us or at all. See “Item 8: Legal Proceedings” for information on certain legal proceedings involving our intellectual property.
4
We depend on key personnel for our success, the loss of any of whom could affect the growth and development of our business.
Our success depends upon the continued contributions of our executive officers and scientific and technical personnel especially Richard Trevillion, Peter Keen, Stephen Martin, Stephen Lee, Ian Thompson, and Jason Teckoe. During our operating history, many key responsibilities have been assigned to a relatively small number of individuals. The competition for qualified personnel is intense, and the loss of services of certain key personnel could adversely affect the growth and development of our business. We have employment agreements with all of our key personnel.
We may be subject to future product liability claims which could be time consuming and costly.
Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing and marketing of products used for human ingestion. Product liability may result from, among other things, harm to end users using our products that were either not communicated as a potential side-effect or were more extreme than communicated. Although we believe that the ingredients used in our products are not harmful, the risk of accidental contamination or of injury from our products cannot be completely eliminated.
While our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims, it is possible that these provisions may not be effective under the laws of certain jurisdictions. Although we believe our products contain suitable substances for human ingestion, products using our technology have not been distributed widely yet and therefore adverse reactions may occur once our products are available on a wide-scale basis.
We are dependent on a small number of suppliers with some of whom we do not have formal agreements guaranteeing a source of supply.
We have agreed with Harro Hoefliger that they will be our preferred supplier with some exclusive supply rights for certain XGEL™ film systems. If Harro Hoefliger fails to fulfill its obligations to us, we may have difficulty finding another equipment manufacturer to build and service XGEL™ film systems in sufficient time to meet our customer orders.
We may not be able to obtain the necessary regulatory approvals for the sale of our products
As we move into developing and selling our own products through our Dexo division, we will need to obtain certain regulatory approvals and licenses for the products from bodies such as the US Food and Drug Administration and the UK Medicines & Healthcare Products Regulatory Agency. It is possible that we may not be able to obtain these approvals and licenses or that such approvals may be granted at a time outside of our control.
BioProgress PLC and its stockholders may suffer unfavorable tax treatment
You May be Subject to Additional Tax if We Decide to Pay Dividends.
We have no immediate plans to pay dividends. However, if we do so, you will be taxed on the dividend. If you are a United States holder that is a corporation incorporated in the United States, you may not be able to claim a dividends received deduction because we are not a corporation incorporated in the United States. Because the distributions would come from a foreign corporation, some or all of them may be deemed to have come from foreign sources for purposes of calculating any foreign tax credit that may be available to you. The foreign tax credit rules are complex, subject to interpretation, and limited by many specific requirements that are unique to individual taxpayers. As a result, we urge you to consult with your own tax advisor regarding the possible foreign tax credit consequences of any future distributions.
WE URGE YOU TO CONSULT YOUR TAX ADVISORS REGARDING THE TAX CONSEQUENCES TO YOU OF ANY FUTURE DISTRIBUTIONS FROM US.
We Could be Taxed in the United States as a Result of Legislation Enacted in 2004.
BioProgress Technology International, Inc. is subject to US corporate income tax, including US tax on certain operations of the UK subsidiaries of BioProgress Technology International, Inc. If we establish new subsidiaries outside the US, those subsidiaries ordinarily would not be subject to tax in the United States. However, legislation enacted in 2004 could have significant tax consequences to us.
Under the American Jobs Creation Act of 2004 and the temporary Treasury Regulations promulgated thereunder, a non-US corporation, like us, that was formed as a result of a corporate expatriation transaction with respect to a US corporation, such as the reorganization completed in May 2003, may be treated as a domestic corporation. The legislation applies retroactively, but it and the temporary regulations include a “safe harbor” for corporate groups that, like us, have substantial business operations (relative to the group’s operations as a whole) in the country of the group parent’s incorporation. While we believe the “safe harbor” applies to us, its application is uncertain. If the “safe harbor” is found not to apply, we will be taxed in the United States on our worldwide income, including certain income earned by our subsidiaries that are not United States corporations. In addition, we may lose the ability to claim certain tax losses in the United States.
5
Risks Relating to our Industry
Our business will not be successful if we do not keep up-to-date with the rapid changes in our industry.
Vitamin, mineral, supplement and drug delivery, biotechnology, pharmaceutical science and manufacturing are evolving fields in which developments are expected to continue at a rapid pace. Our success depends, in part, upon maintaining a competitive position in the development of products and technologies in our areas of focus. Our competitors may succeed in developing competing technologies or obtaining regulatory approval for products more rapidly than we or our customers are able. Future developments by others may render our products or the compounds used in combination with our products uncompetitive or obsolete.
We face strong competition.
Our competitors may be able to develop products and services that are more attractive to businesses than our products and services. Most of our competitors for encapsulation technologies similar to XGEL™, such as Banner Pharmacaps, Swiss Caps and Eurocaps Glaxo SmithKline, have longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition and larger customer bases. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They also may be able to devote greater resources to the promotion and sale of their products and services than us. If these companies introduce products and services that effectively competed with our products and services, they could be in a position to charge lower prices. This could give them a competitive advantage over us.
In order to be successful in the future, we must continue to respond promptly and effectively to the challenges of technological change and competitors’ innovations. If we cannot compete successfully with existing or new competitors, we may have to reduce prices on our products, which could lead to reduced profits.
Risks Related to our Shares
Exchange rate fluctuations may reduce the value of BioProgress PLC shares for US holders.
Individuals and entities located in the United States who hold our ordinary shares will bear exchange rate risk. Our ordinary shares are traded on the Alternative Investment Market of the London Stock Exchange and are priced in pounds sterling. As a result, United States holders of our ordinary shares who would like to sell their shares on a market must sell them on the Alternative Investment Market and have the proceeds of the sale converted into dollars. Holders may receive a reduced dollar value upon the sale of their shares as the result of the dollar/pound sterling exchange rate in effect at that time.
Item 4. Updated Information on the Company
Our History and Recent Developments
History
In June 1991, US Flywheel, Inc., a Californian company and a subsidiary of Sunbird Technologies, Inc., a Utah corporation (“Sunbird Technologies”) acquired three patents and a license relating to flywheel technology from Sunbird Technologies and its affiliates in exchange for common shares, par value $.001 per share, of US Flywheel, Inc. “Common Stock”. These shares of Common Stock were subsequently distributed to the shareholders of Sunbird Technologies after registration with the US Securities and Exchange Commission. US Flywheel, Inc. subsequently transferred its Flywheel Technology to a partnership in exchange for a minority interest in the partnership. The partnership interest of US Flywheel, Inc. was subsequently sold, after which US Flywheel, Inc. began its search for a business in which to engage. In May 1996 US Flywheel, Inc. sold all of its assets and liabilities to Famous Sam’s Group, Inc., a Nevada corporation incorporated in 1996, in exchange for shares in Famous Sam’s Group, Inc. which were distributed to the stockholders in US Flywheel Inc. Famous Sam’s Group Inc. briefly was a restaurateur.
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On November 17, 1997, Famous Sam’s Group Inc. entered into an agreement (the “Reorganization Agreement”) with BioProgress Technology, Inc., a Colorado corporation (“BioProgress Technology Colorado”). Pursuant to the Reorganization Agreement, Famous Sam’s Group, Inc. acquired all of the outstanding capital stock of BioProgress Technology Colorado in exchange for 4,000,000 post-split shares of Common Stock, after giving effect to a reverse one for five stock split approved by the then majority shareholder of Famous Sam’s Group Inc. on October 21, 1997.
In conjunction with the execution and delivery of the Reorganization Agreement, Famous Sam’s Group, Inc. entered into an agreement (the “BioProgress Technology Limited Option Agreement”) with certain of the shareholders of BioProgress Technology Limited, an entity incorporated in England and Wales. BioProgress Technology International, Inc. acquired approximately 62% of BioProgress Technology Limited on November 11, 1998, and the remaining approximately 38% of BioProgress Technology Limited on December 31, 1998, issuing an aggregate of 22,818,446 shares of Common Stock as the sole consideration for the acquisition. BioProgress Technology Limited is the company originally responsible for development of our product lines. In addition, in November 1997, BioProgress Technology International, Inc. and BioProgress Technology Limited entered into an exclusive distribution agreement pursuant to which BioProgress Technology International, Inc. became the exclusive distributor in the United States and Canada of any products created by BioProgress Technology Limited. Currently, these products are XGEL™ film system and XGEL™ film. The exclusive distribution agreement terminates upon the later of 20 years from the first commercial sale of BioProgress Technology Limited’s products or the expiration of the last valid utilized patent.
In December 1997, Famous Sam’s Group, Inc. changed its name to BioProgress Technology International, Inc.
On December 13, 2002, BioProgress PLC was incorporated as a public limited company under the laws of England and Wales and remained dormant until May 21, 2003, when we completed a corporate reorganization pursuant to which all shareholders of BioProgress Technology International, Inc. exchanged each share of common and preferred stock held for one ordinary or preference share of BioProgress PLC (except for 1.2% of preferred stock which was not exchanged and is held by a former director of BioProgress PLC). The ordinary shares of BioProgress PLC were subsequently admitted to trading on the Alternative Investment Market of the London Stock Exchange and the shares of BioProgress Technology International, Inc. ceased to be traded on the Nasdaq OTC Bulletin Board. The ordinary shares of BioProgress PLC received in exchange for common stock of BioProgress Technology International, Inc. in the reorganization were issued pursuant to a registration statement on Form F-4 filed with and declared effective by the SEC. Contemporaneously with the reorganization, BioProgress PLC issued 31,250,000 ordinary shares to investors in the UK for $0.26 per share for gross proceeds of $8.2 million.
In December 2003, BioProgress PLC raised an additional $13 million in gross proceeds through a placing to investors in the UK and open offer to certain of its non US shareholders of 14,559,444 ordinary shares for $0.90 per share. As the offer of the ordinary shares pursuant to the placing and open offer was not registered under the US Securities Act of 1933, the open offer was not made to any shareholders that were US Persons (as defined in Regulation S under the Securities Act of 1933).
Recent Developments
In March 2004, in order to acquire certain assets of Aquafilm LLC, as detailed further below in “—Principal Developments—Strategic Acquisitions and Dispositions,” as well as to provide the Company with additional working capital, BioProgress PLC raised $20.3 million in gross proceeds by way of a placing with institutional and other investors in the UK of 10,000,000 shares at a placing price of $2.03 per share.
On September 16, 2004, the Company redeemed all of the outstanding convertible and non-convertible shares at a price of £2.90 per share (US$5.19). The total payment amounted to £484,207.
In October 2004 the Company established an ADR program and American Depositary Shares represented by American Depositary Receipts each representing 10 ordinary shares were admitted to trading on the NASDAQ national market to raise its profile in the United States, the world’s largest market for its technology and where the majority of our current licensees and customers are based.
On October 6, 2004 the Company raised $8.9 million (£5 million) via the issue of 4.0% unsecured convertible bonds due 2009. The bonds had been privately placed, subject to customary closing conditions, with a leading institutional investor in a fund raising that had been structured and arranged by the broker, who in addition subscribed for warrants over 3.5 million ordinary BioProgress shares.
The bond could be converted into ordinary shares at any time during its term at the option of the bondholder at the conversion price of $2.88 (£1.52) per share. The institutional investor had an option to subscribe for up to a further $8.9 (£5) million of the convertible bonds within the following two years. The bonds were convertible into 3,289,474 fully paid ordinary shares in the Company at any time during the five year life of the bonds.
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On June 1, 2005 the Company concluded an agreement to repurchase in full the $9.4 (£5) million, five year 4.0% unsecured convertible bonds that were issued on October 6, 2004. The option to subscribe for further bonds up until October 6, 2006 was also cancelled.
The directors’ believe that the early redemption of the bond was beneficial to the results and cashflows of the Company, as the market value of the consideration paid was $3.4 (£1.7) million less than the carrying value of the bond, and future cash outflows in the form of interest on the bond were prevented.
Under this agreement, the $9.4 (£5) million bonds were repurchased for a total consideration of $6.0 (£3.3) million, being $3.4 (£1.7) million less than the carrying value of the bond. This consideration was satisfied by $3.0 (£1.65) million in cash and the issuance of 4,285,714 new shares with a market value of $3.0 (£1.65) million to the Bondholder, representing 3.5 per cent of the enlarged issued share capital of the Company. The number of new shares issued was calculated on the basis of a share price of $0.69 (£0.385), being a 1.3% premium to the closing share price on May 31, 2005.
As there were 996,240 more shares issued on early redemption than would have been issued had the bond been converted under the terms of the original agreement, the provisions of FAS 84 – Induced conversions of convertible debt apply. As such, a debt expense of $3,675,036, being the market value of the 996,240 shares issued amounting to $693,156 plus the cash consideration of $2,981,880, is included in the statement of operations, and paid in capital has increased by $10,023,085 in total as a result of the redemption. Finance costs incurred on the original fund raising had been capitalized in 2004 and were being amortized over the life of the bond. On redemption the carrying value of these costs of $3,867,583 was written off to the statement of operations. The total loss on redemption of the convertible bond, being the debt expense and finance costs written off is $7,542,619 in the statement of operations.
The accounting treatment of the redemption of the bond under UK GAAP differs to that under US GAAP. The provisions of FRS 25 apply which has resulted in an exceptional gain of $0.9 (£0.5) million being credited to the profit and loss account and a credit to equity of $1.9 (£1.1) million in the UK GAAP financial statements for the year ended December 31, 2005.
On February 15, 2005 we announced the appointment of Richard Trevillion and Tony Fabrizi as Non-Executive Directors and, on March 7, 2005, we announced the appointment of Dan Farrow as Finance Director.
Graham Hind resigned as Chief Executive Officer on April 29, 2005, Mr. Trevillion became interim Chief Executive officer from that date and was appointed permanent Chief Executive Officer on May 23, 2005.
On June 13, 2005 the Board of BioProgress regretfully announced the sudden death of Peter Glynn–Jones, Non-Executive Chairman of the Company aged 58.
On June 22, 2005, BioProgress announced the following resolutions were passed at the Company’s annual general meeting:
1. The financial statements of the Company for the period ended December 31, 2004 were received and adopted and the directors reports thereon were received;
2. Each of Larry Shattles, Dan Farrow, Tony Fabrizi, Richard Trevillion and Alan Clarke were re-elected directors of the Company;
3. Grant Thornton UK LLP were re-appointed as auditors of the Company until the conclusion of the next annual general meeting and the directors were authorized to fix their remuneration;
4. The authorized share capital of the Company was increased from £1,800,850 to £2,400,850 by the creation of an additional 60,000,000 ordinary shares of 1p each, ranking pari passu in all respects with the existing ordinary shares in the Company;
5. The directors of the Company were authorized to allot shares in the Company up to a maximum aggregate nominal amount of £392,326. This authority expires on the earlier of (i) 21 September 2006 and (ii) the conclusion of the next annual general meeting of the Company. The Company is entitled to make, prior to the expiry of this authority, any offer or agreement which would or might require shares to be allotted after the expiry of this authority and the directors may allot any shares pursuant to such offer or agreement as if this authority had not expired.
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6. Subject to (and having the same duration as) resolution 5 above, the directors of the Company were authorized to allot shares wholly for cash without regard to the statutory rights of pre-emption of the existing shareholders. This authority was limited to:
(a) the allotment of shares in connection with a rights issue (being an offer of equity securities to holders of ordinary shares in proportion to their respective holdings (as nearly as may be)); and
(b) the allotment (otherwise than pursuant to paragraph (a) above) of shares up to an aggregate nominal value of £117,698.
On July 29, 2005, we announced the appointment of Peter Ibbetson as our non-executive chairman.
On November 28, 2005, we announced the resignation of Larry Shattles as an executive director.
On November 29, 2005, Tony Fabrizi resigned as a non-executive director. On the same day we announced the appointment of Anthony Knight as a non-executive director.
On December 21, 2005 we announced that our wholly-owned subsidiary, Dexo BioPharm Limited, had entered into a joint venture (JV) named Dexo BioGenerics Limited which is 75.1% owned by Dexo BioPharm Limited. The JV partner is a private generics supplier, Crescent Pharma Limited, part of the General Mediterranean Group based in Basingstoke, which supplies a wide range of generic and OTC medicines in the UK. This JV brings significant new skill sets to the Group including manufacturing and regulatory know-how and a wide range of product licenses for generic medicines including NSAIDs, simvastatin and diazepam. These will be combined with our XGEL™ film systems for rapid commercialization. Although there was no consideration payable on the formation of the JV, the development and marketing of enhanced generics will be borne by Dexo BioPharm Limited and the JV marketing and administrative resources will be provided to the JV by the Company and Crescent Pharma Limited.
On January 5, 2006, we completed the acquisition of the entire share capital of Laboratoires Pharmaceutiques Dexo SA (“Dexo SA”) through our wholly-owned subsidiary Dexo BioPharm Limited. Dexo SA is a long standing profitable private company with specific expertise in registering and marketing innovative branded products into the French healthcare system. It operates in the area of registered pharmaceuticals, and specializes in medicines to treat gastrointestinal illness, and products for ear, nose and throat ailments, along with a treatment for Wilson’s Disease (a fatal disorder caused by excessive copper accumulation in the liver and brain, affecting one in 30,000 people world wide). Dexo SA is currently run by Mr. Jean-Francois Sfarti, the former CEO of Sanofi Pharma France who will remain as president of Dexo SA, along with the current team, running the operations in France. The consideration for the acquisition of Dexo SA was €12.5 million, €8 million of which was paid in cash and €4.5 million in sterling denominated ordinary shares, representing 5,866,791 new ordinary shares.
As part of the financing of the acquisition of Dexo SA, on January 3, 2006 the Company issued 12,285,328 new ordinary shares of £0.01 each (the “New Ordinary Shares”) and had placed these New Ordinary Shares with institutional and other investors, representing approximately 9.99% of the then issued share capital of the company, at 47p per New Ordinary Share (representing a 12% discount to the volume-weighted average share price on 19 December 2005), under the provisions of s.95 of the UK Companies Act 1985 as amended.
On July 14, 2006 we completed the acquisition of the entire share capital of Segix Farma SRL, an Italian specialty pharma and healthcare company based near Rome. The acquisition was made through a newly-formed subsidiary of Dexo BioPharm Limited, the Company’s pharmaceutical division.
The consideration for the acquisition, of up to €1,950,000, will be satisfied in cash and equity in BioProgress PLC. The cash element comprises a payment of €700,000 on completion, and a further payment to reflect the stock and net cash of Segix held on completion. The equity element comprises up to €1,250,000 in sterling denominated ordinary shares, contingent upon certain events occurring, including the extension or renewal of various product distribution agreements. The shares to be issued will be subject to lock-in periods of up to eighteen months.
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Segix is a private company and specializes in the distribution and marketing of established products in the anti-infective, gastrointestinal and oncology therapeutic areas. Segix works with strategic partners and agents, achieving sales coverage for the majority of Italy. Its portfolio currently includes the brands Ceporex™, Tamoxifen™, Gabbroral™, Acyvir™, Curoxim™, Eusaprim™ and Lefcar™. Luigi Baldassarri, Segix’s current general manager, will remain as interim general manager pending the appointment of a replacement.
For the year ended December 31, 2005 Segix generated revenues of €2.6 million and profit of €0.2 million. As at December 31, 2005 Segix had net assets of €1.7 million.
On April 28, 2006, Dan Farrow resigned as Finance Director.
On June 20, 2006, BioProgress announced the following resolutions were passed at the Company’s annual general meeting:
| | 1. | The financial statements of the Company for the period ended 31 December 2005 were received and adopted and the Directors’ and Auditors’ reports thereon were received. |
| | 2. | Peter Ibbetson, Tony Knight and Alan Clarke were re-elected as directors of the Company. |
| | 3. | Grant Thornton UK LLP were re-appointed as auditors of the Company until the conclusion of the next annual general meeting and the directors were authorised to fix their remuneration. |
| | 4. | The directors of the Company were authorized to allot shares in the Company up to a maximum aggregate nominal amount of £117,698. This authority expires on the earlier of (i) 19 September 2007 and (ii) the conclusion of the next annual general meeting of the Company. The Company is entitled to make, prior to the expiry of this authority, any offer or agreement which would or might require shares to be allotted after the expiry of this authority and the directors may allot any shares pursuant to such offer or agreement as if this authority had not expired. |
5. Subject to (and having the same duration as) resolution 4 above, the directors of the Company were authorized to allot shares wholly for cash without regard to the statutory rights of pre-emption of the existing shareholders. This authority was limited to:
(a) the allotment of shares in connection with a rights issue (being an offer of equity securities to holders of ordinary shares in proportion to their respective holdings (as nearly as may be)); and
(b) the allotment (otherwise than pursuant to paragraph (a) above) of shares up to an aggregate nominal value of £122,976.
6. The regulations of the Company contained in the amended articles of association produced at the meeting and signed, for the purpose of identification, by the chairman of the meeting were adopted as the articles of association of the Company in substitution for the regulations contained or incorporated in the prior articles of the Company.
BioProgress PLC is governed by the Companies Act 1985. Our principal executive offices are located at 15-17 Cambridge Science Park, Milton Road, Cambridge CB4 0FQ, United Kingdom and our telephone number is +44 (0) 122 339 4250. The offices of BioTec Films LLC are located at 9455 Adamo Drive, Tampa, Florida, USA and our telephone number is +1 813 628 0424. Dexo BioPharm Limited, the principal company of the Dexo division, is located at the same address as BioProgress PLC.
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Capital Expenditures
We have incurred capital expenditures related to office fixtures and fittings, office equipment, leasehold improvements and laboratory equipment.
In 2005, we had approximately $486,000 in capital expenditures, compared to $1,562,000 in 2004 and $123,000 in 2003.
We estimate that we will incur a reduction in capital expenditure in 2006.
Principal Developments
A summary of the principal developments within the business were as follows:
Strategic Licenses, Options, Acquisitions and Dispositions
On February 4, 2004, we announced that we had executed agreements with FMC BioPolymer a business unit of FMC Corporation whereby FMC has acquired an exclusive worldwide license for the BioProgress PLC NROBE™ dosage form, process, equipment and enabling technology. The licensing agreement runs to 2023 and under its terms FMC has provided contractual assurances that in order to retain its exclusive license a minimum number of NROBE™ machines will be purchased from BioProgress PLC within the first six years following commercialization. See “Item 10: Material Contracts” for further information regarding the agreements executed with FMC.
In March 2004, BioProgress PLC entered into a license agreement with Perrigo Company relating to BioProgress PLC’s TABWRAP™ technology which grants Perrigo an exclusive license of specified patents and patent applications (and related technical information) relating to TABWRAP™ in North America and Europe. Perrigo agreed to pay a royalty to BioProgress PLC expressed as a percentage of net sales of products incorporating TABWRAP™ technology. The term of the License Agreement lasts until the expiration of all patents licensed thereunder, although BioProgress PLC may terminate it early under certain specified conditions, which are detailed further in “Item 10: Material Contracts.”
In March 2004, BioProgress PLC acquired certain assets of Aquafilm LLC for up to $11 million, made up of $3.5 million cash and $7.5 million as an earn-out against the net earnings of the business acquired from 2004 until the $7.5 million is reached, with payments from BioProgress PLC matching the net annual earnings of the business acquired on a dollar for dollar basis. Currently no amounts have become due and payable under the terms of the earn-out agreement.In order to acquire and invest in the facility in Tampa, as well as to provide the Company with additional working capital, we raised $20.3 million in gross proceeds by way of a placing with institutional and other investors in the United Kingdom of 10,000,000 shares at a placing price of $2.03 per share.
In October 2004, BioProgress announced that it had granted exclusive distribution rights in China and Taiwan to AXM Pharma, Inc. (AMEX: AXJ) for certain formulations of BioProgress’ revolutionary Soluleaves™ oral drug and flavors delivery technology that uses dissolve-in-the-mouth films. This agreement is for an initial period of two years, which could then be extended by mutual agreement.
The products, which include children’s multi vitamins, Vitamin C and Echinacea dissolve-in-the-mouth films, will be manufactured by BioTec Films LLC in Tampa, Florida and will be distributed by AXM Pharma under both the Sunkist® brand and AXM Pharma’s house brands.
In February 2005 BioProgress announced that it had executed an agreement with Custom Pharmaceuticals Limited (“Custom”) to install a film manufacturing line in Custom’s new pharmaceutical contract manufacturing facility currently being built near Brighton, in the south of England. This followed the initial Letter of Intent announcement on November 9, 2004.
In June 2005, we announced that a 1/10 scale pilot NROBE™ machine for powder encapsulation had been delivered to our strategic partner FMC BioPolymer (“FMC”), a business unit of the FMC Corporation (NYSE:FMC). This is a significant step in the development of the technology, leading towards full scale production. We will continue our close collaboration with FMC to maximize the commercial potential of NROBE™.
We also advised that the exclusive option agreement with Wyeth will not be extended. We will continue to explore opportunities with Wyeth. However, in relation to the Company’s SWOLLO (TM) liquid-fill encapsulation technology, we will hope to extend this exciting technology to other partners so as to fully exploit and commercialize its potential.
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On December 21, 2005, we announced that we had entered into a joint venture with Crescent Pharma Limited, the joint venture to trade through a limited company called Dexo Biogenerics Limited which is 75.1% owned by Dexo BioPharm Limited, a wholly-owned subsidiary of BioProgress PLC. The joint venture will combine Crescent’s generic pharmaceutical products with BioProgress’ XGEL™ technology.
On January 5, 2006, we announced that we had completed the acquisition of the entire share capital of Laboratoires Pharmaceutiques Dexo SA, again through Dexo BioPharm Limited.
On May 4, 2006, we announced that we had entered into a joint development agreement with Uluru Inc to develop anti-emetic products utilizing BioProgress’ XGEL™ technology and Uluru’s OraDisc™ technology.
On July 14, 2006, we completed our acquisition of the entire share capital of Segix Farma SRL.
Overview of the Business and Products
We are engaged in the sales, marketing and distribution of pharmaceutical and medical device products and in the development, marketing, sales and distribution of products that use water soluble and biodegradable films for the dietary supplement, pharmaceutical and other applications. The Company also develops flushable and biodegradable products for the medical device industry. Our principal development operations are in the USA and Europe.
Our primary development focus is on the commercialization of our unique and proprietary process, the XGEL™ film system (“XGEL™”).
The XGEL™ film system aims to provide a cost effective and animal-free encapsulation process for liquids, tablets and powders, addressing the needs of the entire existing market for oral dosage forms while providing novel delivery mechanisms which we believe are not possible with traditional processes.
We believe there will be an increasing demand for our non-gelatin capsules. Gelatin is a protein which is predominantly derived from animal renderings. A number of industry and consumer trends are driving the need to replace gelatin as an encapsulation material. Among them are:
| | • | | Health and safety concerns, |
| | • | | Religious, ethnic and moral beliefs, |
| | • | | Efficacy of the material and process, and |
| | • | | New product development. |
Our current business model envisions the following elements:
| | • | | Sell licenses to use our intellectual property vested in the XGEL™ film systems, |
| | • | | Sell XGEL™ film systems, |
| | • | | Sell XGEL™ film for use with XGEL™ film systems, |
| | • | | Sell on our own behalf pharmaceutical, nutraceutical and other products which utilize the XGEL™ film systems, |
| | • | | Offer development services to assist licensees to gain maximum benefit from the license, and |
| | • | | Offer development services to customers seeking new product innovations involving XGEL™ film or film systems. |
We anticipate that the resultant business model, with its two aspects of licensing and sales on our own behalf, will benefit our business in the following ways:
| | • | | Licensing could facilitate the rapid introduction of the XGEL™ film system on a global basis by a large group of companies who already have in place the infrastructure and resources to produce and deliver products to consumers, |
| | • | | The ability for a rapid rollout could reduce the risk of a competitive response by industry peers, |
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| | • | | Licensing the manufacture of our technologies and focusing on development will potentially allow us to employ our innovative technological and engineering skills to maximum advantage, |
| | • | | Developing and selling our own products reduces our reliance on commercial partners and enables us to have control over how and when our technology is commercialized, and |
| | • | | Acquiring the rights to market pharmaceutical products, whether or not utilizing our XGEL™ film systems, gives us a revenue stream which was not available to us in the past. |
Description of Products
Our primary focus is to build a range of specialty pharmaceutical and medical device products and to commercialize our XGEL™ film systems and associated technologies. This will include the application of our XGEL™ technology to our own range of products.
Dexo SA markets the following products:
| | • | | Artisial™ – artificial saliva |
| | • | | Collunovar™ – chlorhexidine mouthwash for the treatment of gingivitis and sore throats |
| | • | | Cortisal™ – salicylic acid and prednisolone cream – for the treatment of contact dermatitis and allergic reactions such as to insect bites |
| | • | | Dexef™– an antibiotic; cefadrine capsules |
| | • | | Diacor™ – a sustained release capsule containing diltiazem |
| | • | | Dimegan™ – mild, sedating histamine injection and capsules |
| | • | | Endium™ – vein circulation tonic |
| | • | | Inflaced™ – NSAID analgesic based on piroxicam |
| | • | | Magnespasmyl™ – magnesium supplement |
| | • | | Mucipulgite™ – antacid granules |
| | • | | Mulkine™ – antacid granules |
| | • | | Ronflux™ - for the reduction of snoring |
| | • | | Spironone™ – diuretic tablet for the treatment of hypertension |
| | • | | Trolovol™ – orphan drug for the treatment for Wilson’s disease |
XGEL™ Film System
Over the past several years, we have increased our knowledge base of natural and water-soluble materials and the means of processing them to form soft capsules, to enrobe, or coat, tablets and to produce and encapsulate powder forms. Initially, one base material and one means of processing were developed to serve the needs of the market. From our own research and from discussions with actual and potential customers, we have developed an extensive library of XGEL™ films and seven specific constructions of the XGEL™ film system designed to maximize the efficiency of the production process. The current versions of the XGEL™ film system which we are currently working to commercialize, are:
| | • | | TABWRAP™, aims to replace coating processes employed in the production of tablets. |
| | • | | SWOLLO™, is used to produce soft capsules which are free from gelatin and other animal by-products. Soft capsules are commonly recognized as products that contain a wide variety of liquid fillings in ingestible form, such as vitamin, herbal and mineral supplements and as oral delivery systems for drugs. |
| | • | | NROBE™, aims to encapsulate powders in a continuous process thereby eliminating the need for two piece hard shell capsules. The NROBE® product incorporates a lightly compacted powder that is able to disintegrate and thus can reduce the need to incorporate material in the powder formula to cause disintegration |
| | • | | SEPTUM™, enables the encapsulation of two non-compatible active ingredients in the same capsule separated by a membrane of XGEL™ film. In this dosage form it is also possible to use XGEL™ films with different disintegration properties, such that the active ingredients are released at different times and sites within the body. |
| | • | | SOLULEAVES™is a thin film strip technology which can incorporate active ingredients, colours and flavours. The strip dissolves quickly upon contact with saliva, enabling rapid release of the active substances and flavours into the mouth. |
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| | • | | WAFERTAB™ is a mechanised and high throughput version of SOLULEAVES™ whereby film strips containing different active ingredients or flavours and colours can be layered and bonded together. |
| | • | | FOAMBURST™ is a fast release film technology suitable for encapsulating or containing a pharmaceutical or nutritional substance. The dissolution rate of the film and hence the active ingredient is controlled by the density of the films internal honeycomb structure that is developed during the film’s manufacture. |
| | • | | Non-ingestible XGEL™ is used for medical devices such as ostomy bags. |
The WAFERTAB™ product is a new technology we have been developing for over two years, which enables a more effective delivery of active ingredients including pharmaceutical drugs into ‘in the mouth’ dissolving films. We believe this new WAFERTAB™ technology will significantly enhance the current product offering of BioTec Films LLC, a company based in Tampa, Florida, USA, whose edible film production assets we acquired in March 2004 from Aquafilm. See “Suppliers: XGEL™ Film System” for further information regarding Aquafilm and our acquisition of certain of Aquafilm LLC’s assets. It is anticipated that this has potential as a new drug delivery platform and that it will create further exclusive licensing opportunities for us.
We believe that our XGEL™ film system has significant advantages over traditional gelatin-based soft capsule production machinery. The pharmaceutical industry, for example, currently uses three types of gelatin-based dosage forms: soft gelatin capsules for liquids, gelatin enrobed tablets and two-piece hard gelatin capsules for powders. As the gelatin films used to encapsulate products typically contain high levels of moisture, they are not generally suitable for use directly with powders or products that have moisture sensitivity. With the development of our NROBE™ powder fill version of the XGEL™ film system and the SWOLLO™ liquid fill system, pharmaceutical companies now have an alternative capable of delivering both liquid and powder products, without the problems of moisture sensitivity.
Further, our Septum™ technology enables both liquids and powders to be combined in a single capsule and to be released at different times and/or sites in the digestive system, by controlling the disintegration properties of our XGEL™ films.
XGEL™ Film System—Non-Ingestible Products: XGEL™ film, the raw material used in the process, is made from a water-soluble and biodegradable polymer, which is naturally resistant to oils. This version of XGEL™ film exhibits good elasticity and forms a very strong bond when sealed during the encapsulation process.
XGEL™ Film System—Ingestible Products: XGEL™ film also can be made from drug regulatory body-approved natural and sustainable ingredients, and are, therefore, ingestible. These materials are processed to form XGEL™ films. Using proprietary techniques, XGEL™ films are essentially dry after manufacture and may be formulated and/or coated to produce an encapsulation medium with broad ranging characteristics that facilitate the oral delivery of oils, pastes and powders by time or at site within the human body. XGEL™ films are processed using the XGEL™ film system. We have developed a comprehensive range of films suitable for vitamin, herbal and mineral supplements as well as pharmaceutical products.
Gelatin is a protein which is predominantly derived from animal renderings. For many years, gelatin has proven to be an acceptable and cost-effective encapsulation medium for soft capsules. However, a number of industry and consumer trends are driving the need to replace gelatin as an encapsulation material. Among them are:
| | • | | Health and safety concerns—The outbreak of “mad cow” disease has caused worldwide concern over animal products, particularly in Europe. |
| | • | | Religious, ethnic and moral beliefs—Many groups, because of belief or culture, refuse to consume gelatin derived from cows or pigs, or in some cases, from any animal source. |
| | • | | Efficacy of the material and process—Use of the XGEL™ film system and XGEL™ film has lower raw material costs, requires reduced capital investment and manpower, includes a multi-task encapsulating head, enables improved speed of processing and reduced drying time as compared to current gelatin encapsulation technology. |
Following the outbreak in Europe of Bovine Spongiform Encephalopathy (“BSE”), commonly known as “mad cow” disease, all animal-derived food and by-products have come under the scrutiny of the scientific community and legislators for fear that BSE may have entered the human food chain. The reason for concern is that BSE may be linked to Creutzfeldt Jakob Disease (“CJD”), which is fatal to humans. Since the first recorded deaths in 1995, about 104 people have succumbed to CJD, the vast majority in the United Kingdom, where 20 died in 2001, 17 died in 2002, 18 died in 2003 and 1 died as of April 5, 2004, according to the U.K. Department of Health. A further six cases in living persons were subsequently identified. During 2000, cases of BSE were recorded in France, Germany, Poland and Spain, and during 2001 the first case of BSE was recorded in Japan. Australia and New Zealand have refused imports of bovine-derived materials and by-products. CJD occurs in about one in a million people annually worldwide, according to the United States Centers for Disease Control and Prevention.
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The XGEL™ film system not only provides consumers with the choice of an animal-free soft capsule, but we believe its unique and novel design may deliver significant advantages in the manufacturing process when compared to traditional encapsulation processes, many of which may lead to a cheaper cost for the encapsulation process overall. These advantages are:
| | • | | Reduced Capital Investment and Manpower: The nature of XGEL™ film eliminates the need for mixing containers and vats currently used to prepare gelatin for the encapsulation machine. In addition, expensive machinery is needed to maintain the viscosity of gelatin during its transportation to the encapsulation machine. We believe these resultant savings more than offset the somewhat higher raw material cost for XGEL™ film over gelatin powder. We believe that the net resultant savings to our customers by switching from gelatin based systems are potentially significant. |
| | • | | Multi-Task Engine: A modular design of the filling, sealing, and cutting head, the “engine”, makes it possible to produce capsules having a range of shapes and sizes on the same XGEL™ film system without a lengthy changeover procedure. Traditional machinery using gelatin cannot deliver this flexibility. |
| | • | | Improved Speed of Processing: To achieve the correct viscosity for processing, gelatin requires wide changes in temperature prior to its being fed to the encapsulation machine. The time taken to achieve this change in temperature is one of the controlling factors that determine the speed at which the encapsulation machine can produce products. XGEL™ film requires no such temperature variation, and its use can potentially increase processing speeds significantly to a level dependent upon the rate of injection of the material to be encapsulated. |
| | • | | Reduced Drying Time: Gelatin soft capsules require up to 48 hours in which to dry after being made. This lengthy process requires a substantial resource in terms of material handling equipment and storage facilities. XGEL™ soft capsules require less than one hour to dry. |
We believe our XGEL™ film system to be a potentially revolutionary development within the encapsulation industry.
Flushable and Biodegradable Products
Although ingestible XGEL™ films are our primary focus, we also hold two patent families for ostomy products, of which 11 patents have been granted and 13 patents are pending. We believe that our flushable and biodegradable ostomy pouch offers ostomists a safe, hygienic and convenient product, which equals or exceeds the in-use performance of existing products. We commenced user trials of our ostomy pouch during the third quarter of 2001. We believe that initial feedback from users is extremely encouraging. As a result of the feedback received during quarter three of 2001, we produced a large batch of ostomy pouches in order to expand the number of trials with a view toward collecting sufficient data to determine the efficacy of the current design. In 2002, we executed an exclusive worldwide license which includes minimum royalty payments for each of the first two years for one version of our ostomy pouch to Convatec, a division of Bristol Myers Squibb Company, Inc., a global industry leader in this market. Commercialization of this product will be handled solely by this licensee and we are not obligated to contribute to the cost of commercializing the product. During 2003, Bristol Myers Squibb Convatec (“Convatec”) conducted market research with users and modified and improved the flushable pouch design in line with the research findings. The license provides that under certain circumstances the licensee could be required to pay to us aggregate milestone payments of up to $525,000.
Clients
Ingestible XGEL™ Film System
2005 revenues were largely derived from BioTec Films LLC, which accounted for 97% of the total revenue of the Company amounting to $7,728,222 out of total revenue of $8,004,642. BioTec Films derived 88% its revenue in 2005 from Tapemark Inc. In 2004, revenues derived from BioTec Films LLC accounted for 87% of the total revenue of the Company amounting to $4,618,564, of which a significant amount was derived from Tapemark Inc.
We are capable of working with potential customers around the world, although historically our customers have been in North America and the United Kingdom.
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Non-Ingestible XGEL™Film System
We have licensed our Ostomy technology to Convatec, who is our sole customer for this particular product. However we continue to pursue other applications for our non-ingestible film systems, including using our technology in the prevention of the spread of Methicillin-Resistant Staphylococcus Aureus (MRSA) in hospitals and care homes.
Sales and Marketing
Products
We have established our own sales and marketing infrastructure covering our pharmaceutical products and new XGEL™-enhanced products. In some cases, direct selling is contracted out if this is felt to be appropriate.
Ingestible XGEL™ Film System
Our marketing and sales strategy for our XGEL™ platform is focused on providing engineering processes and proprietary materials to enable cost efficient, flexible and high capacity novel dosage forms to manufacturers of pharmaceuticals, vitamins herbs and minerals, and fast moving consumer goods. In addition, we anticipate that new markets for our products will be developed as future versions of our XGEL™ film system are proven. We use our website and a corporate brochure to market and develop our products. We have also appointed sales representatives and agents in the United Kingdom and the United States.
Non-ingestible XGEL™ Film System
The marketing and sales strategy for our ostomy pouch is to market through our sole licensee, Convatec, and receive royalties on sales made by such licensees.
Industry Background
Pharmaceuticals
We have targeted our pharmaceutical products and medical devices and product development at the supportive care market: that is, therapies which improve patient quality of life. This also applies to the application of our XGEL™ technology to pharmaceutical products and medical devices.
XGEL™ Film System
We have targeted our XGEL™ film system technology primarily at the global encapsulation and delivery markets for pharmaceutical, vitamins, herbs, minerals and over the counter medicine products.
Certain formulations of XGEL™ film are likely to enable its use as a drug delivery system. We have executed agreements with several global corporations engaged in the marketing of oral dose forms. In addition, we continue discussions with several leading pharmaceutical companies regarding the sale of XGEL™ film system licenses. Through our newly-established pharmaceutical division, Dexo, we are also working on the development and sale of our own products utilizing XGEL™ film. It is too early in our development to comment in more detail on the possibilities within this market sector and no assurances can be made that any such discussions will result in additional formal agreements with any of such pharmaceutical companies, or that sales of a satisfactory volume will be achieved.
Competition
Competition is fierce in the global economy and small technology companies need not only a well-protected innovative technology which adds value, but the right resources and infrastructure to be able to establish it quickly in the competitive global marketplace. Identifying the right strategic partner and negotiating fair terms within each alliance is always a significant challenge for smaller companies like us. In each of our markets, we face significant competition from other companies that are better capitalized, have greater name recognition, have more background and experience in the industry, have greater financial, technical, marketing and other resources, and have better facilities.
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Distribution Methods
Ingestible XGEL™ Film System
Soft capsules reach consumers via a multitude of distribution channels. In the United States, dietary supplements and pharmaceuticals are sold through traditional over-the-counter outlets, as well as “in-store” locations at large food retailers. In general terms, the sales and distribution channels that we plan to use will be through licensed manufacturers, which are mature and can be easily identified.
Non-Ingestible XGEL™ Film System
Our ostomy pouch will be manufactured and distributed through our exclusive licensee, Convatec. We will receive a royalty based on total sales of the product per annum.
Other non-ingestible products such as our MRSA prevention system may be distributed through medical device and hospital equipment distributors.
Suppliers
XGEL™ Film System
In 2004, we purchased a film line from Aquafilm LLC which is now cGMP compliant.
In October 2003, we agreed with Harro Hoefliger that they would be our preferred supplier of certain XGEL™ film equipment with some exclusive rights. If Harro Hoefliger fails to fulfill its obligations to us, we may have difficulty finding another equipment manufacturer to build and service XGEL™ film equipment in sufficient time to meet our customer orders.
In March 2004, we acquired the edible film production assets of Aquafilm LLC, which acquisition excluded Aquafilm’s assets in Connecticut, US and Hartlebury in the UK. Based in Tampa, Florida, USA, Aquafilm was founded in 2000 and has a film production facility with FDA certification to produce soluble films for use in nutritional products (vitamins, minerals and supplements) and food products.
Intellectual Property Rights
We value highly our intellectual property and precautions have been, and will be taken to ensure its security. No discussions have been held with third parties without the protection of a confidential disclosure agreement and we expect to enter into similar confidential disclosure agreements to the extent we have discussions with third parties in the future. We are also very careful, when entering into development agreements with other parties, to ensure that the agreements do not give such other parties any ownership of intellectual property which may arise out of the development and which is relevant to our own technology.
Our future sales revenues are heavily dependent upon our procuring and maintaining broad protection of our intellectual property. There can be no guarantee that complete protection will be afforded to any or all of our processes and materials.
We have 40 granted patents and approximately 50 patents in application in 31 different patent families.
Development
We spent $3,439,772 in 2005 compared to $513,457 in 2004, $171,959 in 2003 and $87,994 in 2002 on development of our liquid and powder encapsulation. The reason for the continued increase is due to more time being spent on development of our liquid and powdered encapsulation.
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Ingestible XGEL™ Film System
We are committed to a development program intended to produce new products for licensees and new variations of, and improvements to, the XGEL™ film system. We seek to explore the use of alternative materials and formulations and to test their suitability to form capsules suitable for ingestion and drug delivery by time and at site. In parallel with the formulation work, we aim to expand the processing abilities of the XGEL™ film system. There can be no guarantee that our development work will produce products that are saleable to our targeted customers.
Non-Ingestible XGEL™ Film System
We continue to develop our ostomy product.
Government Regulation
Development activities and the manufacturing and marketing of products using our ingestible XGEL™ film system technology are subject to the laws, regulations, guidelines and, in some cases, regulatory approvals of governmental authorities in the United States and other countries in which the products will be marketed. Specifically, in the United States, the Food and Drug Administration (“FDA”), among other areas, regulates new drug product approvals to establish the safety and efficacy of these products. FDA also regulates the formulation, manufacture and labeling of foods, dietary supplements and over the counter drugs. FDA regulations require companies to meet relevant Good Manufacturing Practice regulations for the preparation, packing and storage of foods and over the counter drugs. Good Manufacturing Practices for dietary supplements have yet to be promulgated but are expected to be proposed. Governments in other countries have similar requirements for testing and marketing of drug products, foods and dietary supplements. Although we are not directly regulated, we make efforts to cause our products to comply with regulations in the various jurisdictions in which our customers are located so that our customers can apply for regulatory approval to use XGEL™ film systems in their products.
In the United States, the processing, formulation, packaging, labeling and advertising of the ingestible products used in conjunction with our technologies are subject to regulation by one or more federal agencies, including the FDA, by the Federal Trade Commission (“FTC”), the Consumer Product Safety Commission, the US Department of Agriculture and the US Environmental Protection Agency. These activities are also regulated by various agencies of the states, localities, and countries in which ingestible products are sold. We are not currently, nor do we expect to be, required to obtain regulatory approval from the FDA nor the FTC for our core XGEL™ film. However, a development program has commenced where active pharmaceutical ingredients are being incorporated into XGEL™ film and will be subject to the licensing requirements of different regulatory bodies including the FDA before these products can be made available for sale. These developments could be licensed to third party customers who may either assume all regulatory responsibility or will remunerate us to carry out the process on their behalf.
US Regulatory Process
The duration of the governmental approval process for marketing new pharmaceutical substances, from the commencement of pre-clinical testing to the receipt of a governmental final letter of approval for marketing a new substance, varies with the nature of the product and with the country in which such approval is sought. For entirely new drugs, the approval process could take eight to ten years or more; however, for reformulations of existing drugs (such as to integrate XGEL™film), the process is typically shorter. In either case, the procedures required to obtain governmental approval to market new drug products are costly and time-consuming, requiring rigorous testing of the new drug product. There can be no assurance that even after such time and expenditures, regulatory approval will be obtained for any products that are develop using our ingestible XGEL™ film system technology. Our current development program utilizes existing known molecules that have already been marketed. These can be registered as a New Drug Application (NDA) 505(B2), or under the FDA monographed drug route. All developments conform to international standards of cGMP.
The steps required before a new human pharmaceutical product can be marketed or shipped commercially in the United States are cumbersome and time-consuming.
The facilities of each company involved in the manufacturing, processing, testing, control and labeling must be registered with and approved by the FDA. Continued registration requires compliance with Good Manufacturing Practice regulations. The FDA conducts periodic establishment inspections to confirm continued compliance with its regulations.
We and/or our subcontractors are also subject to various federal, state and local laws, regulations and recommendations relating to such matters as laboratory and manufacturing practices and the use, handling and disposal of hazardous or potentially hazardous substances used in connection with development work. Although we believe we are in compliance with these laws and regulations in all material respects, there can be no assurance that we or our subcontractors will not be required to incur significant costs to comply with environmental and other laws or regulations in the future.
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The 1994 Dietary Supplement Health and Education Act revised the provisions of the Federal Food, Drug and Cosmetic Act concerning the composition and labeling of dietary supplements. The legislation creates a new statutory class of “dietary supplements.” This new class includes vitamins, minerals, herbs, amino acids and other dietary substances for human use to supplement the diet, and the legislation grandfathers, with some limitations, dietary ingredients that were on the market before October 15, 1994. A dietary supplement that contains a dietary ingredient that was not on the market before October 15, 1994 will require evidence of a history of use or other evidence of safety establishing that it is reasonably expected to be safe. Manufacturers of dietary supplements that make specified types of statements on dietary supplements, including some product performance claims, must have substantiation that the statements are truthful and not misleading. Our ingestible XGEL™ film system technology is being used (or is in development for use) in formulating dietary supplements.
The adoption of new regulations in the United States or in any of our international markets, or changes in the interpretation of existing regulations, could have a material adverse effect on the business of our customers. In some markets, including the United States, claims made with respect to dietary supplements may change the regulatory status of the products. In the United States, for example, it is possible that the FDA could take the position that claims made for some of the dietary supplements incorporating our ingestible XGEL™ film system technology places those products within the scope of an FDA over the counter drug monograph. Over the counter monographs prescribe permissible ingredients and appropriate labeling language, and require the marketer or supplier of the products to register and file annual drug listing information with the FDA. In the event that the FDA asserted that product claims for other products caused them to fall within the scope of over the counter monographs, we would be required either to comply with the applicable monographs or to change the claims made in connection with the products. We cannot be sure that we could do so effectively, or that any changes would not adversely affect sales and marketing of an affected product.
There can be no assurance that the FDA will accept the evidence of safety for any new dietary ingredient that we or our customers may decide to use, and the FDA’s refusal to accept such evidence could result in FDA requiring costly safety testing. Also, while the 1994 Dietary Supplement Health and Education Act authorizes the use of statements of nutritional support in the labeling of dietary supplements, the FDA is required to be notified of such statements, and there can be no assurance that the FDA will not consider particular labeling statements used by our customers to be drug claims rather than acceptable statements of nutritional support, necessitating approval of a costly new drug application, or re-labeling to delete such statements.
Regardless of how products incorporating our ingestible XGEL™ film system technology are regulated, the Federal Food, Drug, and Cosmetic Act and other federal statutes and regulations govern or influence the research, testing, manufacture, safety, labeling, storage, record keeping, approval, distribution, use, reporting, advertising and promotion of such products. We are currently required to submit a type 4 DMF form to the FDA for XGEL™ film to be used in any drug product. Noncompliance with applicable requirements by any company involved in the manufacturing, processing, testing, control, labeling, promotion or advertising, etc., can result in civil penalties, recall, injunction or seizure of products, refusal of the government to approve or clear product approval applications or to allow such company to enter into government supply contracts, withdrawal of previously approved applications and criminal prosecution.
Our customers must also comply with product labeling and packaging regulations that vary from country to country. Failure to comply with these regulations can result in a product being removed from sale in a particular market, either temporarily or permanently, which would indirectly have a materially adverse effect on our business. The FTC, which in the United States exercises jurisdiction over the advertising of the products used in conjunction with our technology, has in the past several years instituted enforcement actions against several dietary supplement companies for false and misleading advertising of some of their products. These enforcement actions have resulted in consent decrees and monetary payments by the companies involved. In addition, the FTC has increased its scrutiny of the use of testimonials. Although we have not been the target of FTC enforcement action for the advertising of our products, we cannot be sure that the FTC will not question our advertising or that of our customers in the future. In November 1998, the FTC issued a guide for the dietary supplement industry, describing how the FTC applies the law that it administers to advertisements for dietary supplements. It is unclear whether the FTC will subject advertisements of this kind to increased surveillance to ensure compliance with the principles set forth in the guide.
In addition, we cannot predict whether new legislation or regulations governing our activities will be enacted by legislative bodies or promulgated by agencies regulating our activities, or what the effect of any such legislation or regulations on our business would be.
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European Union, including the U.K., Regulatory Process
Pharmaceutical companies operating in the European Union are subject to regulatory controls governing the development, manufacture, labeling, supply and marketing of their products. Traditionally, regulation in this sector took the form of national legislation and self regulation through codes of practice. However, national legislation in the area increasingly reflects initiatives at the European Community level, normally in the form of Directives and regulations. There is a broad range of European Community legislation governing all aspects of activities related to medicinal products. This legislation is supplemented by numerous guidelines (which provide guidance on existing European directives relating to safety, quality and efficacy), that are not legally binding in most cases. However, failure to comply with, or a departure from, the guidelines requires justification and may, for example, raise issues as to the adequacy of data submitted in support of an application to market a product. In November 2001, many of the stand-alone Directives regulating medicinal products were brought together and codified in a single Directive (Directive 2001/83/EC, as amended by Directives 2002/98/EC, 2003/63/EC, 2004/24/EC and 2004/27/ECon the Community Code relating to medicinal products for human use).
Pre-clinical Research - European legislation (Directive 2001/83/EC, as amended by Directives 2002/98/EC and 2003/63/EC) imposes certain specific requirements for pre-clinical testing of a product where the data generated will be used for an application for a product marketing authorization in the European Union. Basic provisions in legislation are expanded upon by a broad range of guidance documents issued by the European Committee for Proprietary Medicinal Products, which, while not usually incorporated into the legislation, are extremely important for companies to follow when products are under development. Deviation by companies from such guidance, particularly where they are specific to product groups, would generally require a strong justification upon application for a marketing authorization. Directive 86/609/EEC establishes pre-clinical research standards to be met by research institutions engaged in animal research. Certain provisions of Directive 86/609/EEC containing guidelines for the accommodation and care of animals were amended by Directive 2003/65/EC to bring it up to date. with the latest scientific and technical developments as well as current research. These provisions are enforced through registration and inspection. Additionally, Directive 2004/10/EC on the harmonization of laws, regulations and administrative provisions relating to the application of the principles of good laboratory practice and the verification of their applications for tests on chemical substances establishes the methods to be used for the non-clinical tests on pharmaceutical products that are required to be carried out under Directive 2001/83/EC, as amended by Directives 2002/98/EC and 2003/63/EC, with compliance again monitored through a system of inspection.
Clinical Research - European legislation also stipulates requirements for conducting research in human beings where the data is intended to be utilized in a marketing authorization application (Directive 2001/83/EC, as amended by Directives 2002/98/EC and 2003/63/EC). The European Committee for Proprietary Medicinal Products has issued a number of guidance documents. In particular, these include guidelines on good clinical practice, which adopt the texts developed by the International Conference for Harmonization. These guidelines became effective in January 1997 and take account of European Committee for Proprietary Medicinal Products guidelines on good clinical practice previously adopted in 1990. In addition, some general legislation, such as the Data Protection Directive (95/46/EC), is also relevant to the conduct of clinical research. Aside from these provisions, however, the conduct of research in the European Union was not until recently subject to specific European Union legislation. As a result, the national laws and practices of member states still govern research conducted within the local jurisdiction. The variation in these laws and practices limits the extent to which the conduct of research projects can be streamlined across multiple sites throughout the European Union.
Manufacturing - Manufacturing conducted within the European Union must meet good manufacturing practice requirements in respect of medicinal products for human use and investigational medicinal products for human use. (Directive 2003/94/EC). Legislation (Directive 2001/83/EC, as amended by Directives 2002/98/EC and 2003/63/EC) imposes precise obligations upon manufacturers, in particular with regard to control, batch testing and release of products in the European market and the qualifications for the personnel authorized to undertake such activities (the Qualified Person). Inspections of manufacturing site facilities and procedures are regularly undertaken, both by local inspectors and by inspectors from other countries in which the product is to be sold. Failing an inspection may result in:
| | • | | product supplies being interrupted; |
| | • | | plant closure pending elimination of defects. |
The legislation requires clear, contractual documentation regarding how manufacturing services are provided by one company to another when aspects of the manufacturing process are subcontracted to others by the marketing authorization holder and/or manufacturer.
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Marketing Authorization - Regulation 1084/2003, published in June 2003, concerns the examination of variations to the terms of a marketing authorization for medicinal products for human use and veterinary medicinal products granted by a competent authority of a member state. It establishes the procedure for the examinations of, notifications of and applications for variations to the terms of a marketing authorization of medicinal products.
Pricing - In a number of member states, it is not possible to market a product until pricing negotiations with the responsible government authorities have been concluded. Authorization by the regulatory authorities does not guarantee the negotiation of a satisfactory price or of reimbursement terms under national public health systems for the products concerned. In the United Kingdom, new or existing products which already have a marketing authorization may be referred by the Department of Health to the National Institute for Clinical Excellence for a clinical and cost-effectiveness appraisal. Adverse findings (if any) in consequent NICE Guidance can mean that the target products will not be routinely prescribed on the National Health Service, that is, at public expense.
Regulatory Process in Other Countries
In general, regulation is similar in countries outside the United States and Europe, with the approval system regulated by specific agencies in each geographic area. However, approval by one agency does not ensure approval in other countries.
Organizational Structure
Subsidiaries
The following table sets forth the Company’s trading subsidiaries as of December 31, 2005. Each of the private companies are directly or indirectly controlled by the Company:
| | | | | | | | |
Company name | | Registered office | | Location of business | | Activities | | Proportion of voting rights held (%) |
| BioProgress Technology International, Inc. | | 9055 Huntcliff Trace, Atlanta, Georgia 30350-1935 | | Atlanta, USA | | Administrative Services | | 100 |
| | | | |
| BioProgress Technology Limited | | 15-17 Cambridge Science Park, Milton Road, Cambridge CB4 0FQ, UK | | Cambridge, UK | | Research & Development | | 100 |
| | | | |
| DHA Nutrition Limited | | 15-17 Cambridge Science Park, Milton Road, Cambridge CB4 0FQ, UK | | Cambridge, UK | | Dormant | | 100 |
| | | | |
| BioProgress Technology Inc. | | 9055 Huntcliff Trace, Atlanta, Georgia 30350-1935 | | Nevada, USA | | Dormant | | 100 |
| | | | |
| BioTec Films LLC | | 7455 Adamo Drive, Tampa, Florida 33619 | | Florida, USA | | Manufacturing | | 100 |
| | | | |
| BioCustom Limited1 | | 15-17 Cambridge Science Park, Milton Road, Cambridge CB4 0FQ, UK | | Cambridge, UK | | Dormant | | 100 |
| | | | |
Dexo BioPharm Limited2 | | 15-17 Cambridge Science Park, Milton Road, Cambridge CB4 0FQ, UK | | Cambridge, UK and London, UK | | Product Development, Administrative Services including Sales and Marketing | | 100 |
| | | | |
| Dexo BioPharm France SAS2 | | 179 Bureaux de la Colline, 92213 St Cloud, France | | Paris, France | | Administrative Services | | 100 |
| | | | |
| Dexo BioGenerics Limited2 | | 15-17 Cambridge Science Park, Milton Road, Cambridge CB4 0FQ, UK | | Cambridge, UK and London, UK | | Research and Development, Sales and Marketing | | 75.1 |
| 1 | An application has been made for BioCustom Limited to be struck off the register of companies. |
| 2 | There were no significant transactions within these companies during 2005 |
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Since December 31, 2005, we have established the following additional subsidiaries:
| | | | | | | | |
Company name | | Registered office | | Location of business | | Activities | | Proportion of voting rights held (%) |
| Laboratoires Pharmaceutiques Dexo SA | | 179 Bureaux de la Colline, 92213 St Cloud, France | | Paris, France | | Research and Development, Sales and Marketing | | 100 |
| | | | |
| Dexo LLC | | Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware, USA | | USA | | Sales and Marketing | | 100 |
| | | | |
| Dexo BioPharm Italia SRL | | Piazza Castello 9, 20121, Milan, Italy | | Italy | | Administrative Services | | 100 |
Properties
BioProgress PLC’s main offices are located at 15-17 Cambridge Science Park, Milton Road, Cambridge CB4 0FQ, United Kingdom and the telephone number at this address is +44 (0)1223 394250.
In March 2004, BioProgress PLC acquired certain assets of Aquafilm LLC. Such assets include a film manufacturing facility and an office facility each located in Tampa, Florida, USA. The first facility is a manufacturing facility that consists of 15,000 square feet . The lease for this facility was renewed and now expires on December 31, 2006. The second facility consists of 11,000 square feet of office and warehouse space and was leased pursuant to two year lease agreement that expired on August 31, 2005 and that contains an option to purchase. On June 1, 2005 we exercised this option and are waiting for the landlord to contact us regarding the exact manner in which this purchase will be achieved.
Sources and Availability of Supplies, Consumables and Raw Materials
Most principal raw materials are sourced from the United States, although some pharmaceutical grade materials are sourced from Japan. Certain ingredients are sourced from Europe.
Raw materials are held based upon lead times from suppliers and risk of disruption to production. The majority of the raw materials are standard food or pharmaceutical raw ingredients mostly of a commodity nature with some alternative supply capacity. Due to the commodity nature of the majority of the ingredients the pricing of most of our raw materials is non-volatile.
Seasonality
We do not consider ourselves to be materially affected by seasonal variations, as our business is non seasonal in nature. The products in production and proposed are predicted to be regularly produced throughout the year.
Revenue Trends
The following table summarizes BioProgress PLC’s net sales by category of activity for its fiscal years ended December 31, 2005, 2004 and 2003:
| | | | | | | | | |
| | | Net Sales |
| | | 2005 | | 2004 | | 2003 |
XGEL™ Film and Film Systems | | | — | | $ | 585,975 | | $ | 1,530,329 |
Development Contracts | | $ | 276,420 | | | — | | $ | 154,582 |
Ostomy Products | | | — | | | — | | | — |
Dissolve in the mouth films | | $ | 7,728,222 | | $ | 4,032,589 | | | — |
| | | | | | | | | |
| | $ | 8,004,642 | | $ | 4,618,564 | | $ | 1,684,911 |
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The following table summarizes BioProgress PLC’s net sales by geographical area for its fiscal years ended December 31, 2005, 2004 and 2003:
| | | | | | | | | |
| | | Net Sales |
| | | 2005 | | 2004 | | 2003 |
United States | | $ | 7,728,222 | | $ | 4,032,589 | | $ | 1,530,329 |
United Kingdom | | $ | 276,420 | | $ | 585,975 | | $ | 154,582 |
| | | | | | | | | |
| | $ | 8,004,642 | | $ | 4,618,564 | | $ | 1,684,911 |
Item 4A. Unresolved Staff Comments
The Company has received and responded to correspondence from the Division of Corporation Finance of the United States Securities and Exchange Commission in respect of a limited review of the Company’s Annual Report Form 20-F for fiscal year ended December 31, 2004 (the “2004 Form 20-F”). In respect of the review, the accounting reviewer from the SEC has requested further clarification in respect of the disclosure about the Company’s disclosure controls and procedures (See Item 15: Controls and Procedures) for the period covered by the 2004 Form 20-F. The unresolved staff comments are related to whether management had ultimately concluded that the disclosure controls and procedures were effective or ineffective as of the end of the period covered by the 2004 Form 20-F. Discussions regarding the 2004 Form 20-F are ongoing and could result in modifications to that document or this Form 20-F with respect to those or other issues. The Company will continue to work with the SEC to reach resolution of any outstanding issues and will provide updates if any material developments occur.
Item 5. Operating and Financial Review and Prospects
You should read the following discussion and analysis of the results of operations of BioProgress PLC and its subsidiaries in conjunction with our consolidated financial statements and related notes contained elsewhere in this report. Some of the statements contained below, including those concerning future revenue, costs and capital expenditures and possible changes in our industry and competitive and financial conditions include forward-looking statements. Because such statements involve risks and uncertainties, actual results may differ materially from the results which the forward-looking statements express or imply.
Overview
We are a specialty pharmaceutical and healthcare company which generates revenues from product sales (predominantly in Europe); contract manufacturing, predominantly in the USA; and licensing and royalty income. Our development operations are located in the United Kingdom. Our primary development focus remains on the development and commercialization of our unique and proprietary process, the XGEL™ film system. Under the XGEL™ technology family of products the Company is developing several new pharmaceutical dosage forms designed to replace existing gelatin based oral dose delivery products. XGEL™ SWOLLO™ liquid filled capsules, XGEL™ TABWRAP™ tablet coating XGEL™ NROBE® powder filling technology XGEL™ Septum™ and XGEL™ WAFERTAB™ in the mouth dissolving films.
We also generate revenues from fees pursuant to development contracts, licensing the rights to use our intellectual property in the XGEL™ film system, the sale of the XGEL™ film system, the sale of XGEL™ film to use in the film system and development services to assist customers in gaining maximum benefit from the license. Revenues from license arrangements and the sale of XGEL™ film system are recognized when there is persuasive evidence of an agreement with a customer, collectibility is probable and the fee is fixed or determinable, and we have no continuing obligations. These factors vary by contract, but generally revenue is recognized over the term of the contract either time base or on some milestone basis. Revenues from development contracts are recognized ratably over the period to which the contract relates, unless significant acceptance criteria exist. If acceptance criteria exist, revenues are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. With certain contracts, revenues are recognized on a milestone basis, when there is persuasive evidence of customer acceptance.
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We have entered into an exclusive agreement with Convatec to commercialize our flushable and biodegradable ostomy pouch. We are not obligated to fund the commercialization of this product further, although as part of the amendments to our agreements with EcoProgress (from whom we obtained the rights to the flushable ostomy technology) we agreed to pay EcoProgress a royalty of 5% of all proceeds we receive on any account from our ostomy products up to a maximum cumulative amount of $1,000,000. See “Business—History” and “—Clients”
We also expect to generate revenues from sales made on our own behalf through our Dexo division of pharmaceutical and other products, either as newly-developed products utilizing XGEL™ or in their current non-XGEL™ format.
Our ability to achieve profitability is dependent upon our ability to successfully execute our marketing and sales plan for the XGEL™ film system and various versions of XGEL™ film, to successfully maximize the revenues which can be generated as a result of the establishment of our Dexo division, and to complete in an efficient and timely manner development work on other versions of the XGEL™ film system.
We generate revenues in US dollars, pounds sterling, and Euros. Fluctuations in the exchange rate between these currencies and, to a lesser extent, other currencies in which we collect revenue and pay expenses, could affect our operating results.
As a result, even when foreign currency expenses substantially offset revenues in the same currency, our net income may be diminished, or our net loss increased, when reported in US dollars. To help mitigate this exposure we are considering taking steps to hedge our currency positions as appropriate, however, the continued weakness of the US dollar will make it more difficult for us to achieve margin improvements in the short term.
On May 31, 2004, Malcolm Brown resigned from the Board of Directors. On February 15, 2005, we announced the appointment of Richard Trevillion and Tony Fabrizi as Non-Executive Directors and the resignation of Graham Cole as a Non-Executive Director. On March 7, 2005, we announced the appointment of Dan Farrow as Finance Director. On May 4, 2005, we announced the re-appointment of Alan Clarke as a Non-Executive Director.
On April 29, 2005, R. Graham Hind, Chief Executive Officer, resigned from the Board of Directors. Richard Trevillion was appointed Chief Executive Officer on May 23, 2005.
On June 13, 2005 the Board of BioProgress regretfully announced the sudden death of Peter Glynn–Jones, Non-Executive Chairman of the Company aged 58.
On July 29, 2005, we announced the appointment of Peter Ibbetson as our non-executive chairman.
On November 29, 2005, Tony Fabrizi resigned as a non-executive director. On the same date we announced the appointment of Anthony Knight as a non-executive officer.
On November 28, 2005, we announced the resignation of Larry Shattles as an executive officer.
On April 28, 2006, Dan Farrow resigned as Finance Director. On June 15, 2006, we announced that Peter Keen had been appointed as Finance Director and Chief Financial Officer.
All directors have entered into service agreements or letters of appointment as befits their position as executive or non-executive. Their remuneration is set out in their contracts of employment, which are further detailed in “-Directors, Senior Management and Employees.”
In February 2006, we moved premises from March, UK to Cambridge, UK. An Agreement for Lease was entered into with Trinity College, the owners of the land, under which three units on the Cambridge Science Park would be refitted and renovated to provide office and laboratory space. The Lease between BioProgress and Trinity College is in the process of being formally completed, but the term of the Lease for the Cambridge premises is 5 years with a break after 3 years, at an annual rent of £63,409.50 plus value added tax. The lease of the March premises has been assigned in whole to Barry Muncaster, and there are no ongoing obligations under it.
Application of Critical Accounting Policies
We have adopted a number of accounting policies and methods that we use in connection with preparing our financial statements under US GAAP. The application of those policies and methods in some cases depends on estimates and judgments made by our management about matters that are uncertain. The following is a brief discussion of those policies and methods used by us that involve our most complex judgments and estimates. Note 2 of the notes to the financial statements included elsewhere in this annual report includes a more technical summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements.
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Goodwill
Goodwill represents the excess purchase price of net assets acquired in business combinations over their estimated fair value
In accordance with adoption of Statement of Financial Accounting Standards 142, “Goodwill and Other Intangible Assets” (SFAS 142), management annually assesses the composition of the Company’s assets and liabilities, as well as the events that have occurred and the circumstances that have changed since the most recent fair value determination. If events occur or circumstances change that would more likely than not reduce the fair value of goodwill below its carrying amount, goodwill will be tested for impairment. The Company did not recognize an impairment loss in the current year, as the fair value of the asset exceeds the carrying value.
Revenue Recognition
A majority of revenue represents sales of inventory, and the related fees charged to the customer for shipping. The Company’s policy is to recognize revenue when title to the product, ownership and risk of loss transfer to the customer, which generally is at the time of shipment. Service revenues, from the creation of new products for customers, are recognized upon the completion of the service.
We also generate revenues from licensing the rights to use our intellectual property in the XGEL™FS, the sale of the XGEL™ FS, and development services to assist customers in gaining maximum benefit from the license.
Revenues from license arrangements and the sale of XGEL(TM) are recognized when there is persuasive evidence of an agreement with a customer, collectibility is probable, the fee is fixed or determinable, and we have no continuing obligations relating to the arrangements. These factors vary by contract, but generally revenue is recognized over the term of the contract either time based or on some milestone basis.
Revenues from development contracts are recognized ratably over the period to which the contract relates, unless significant acceptance criteria exist. If acceptance criteria exist, revenues are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. With certain contracts, revenues are recognised on a milestone basis, when there is persuasive evidence of customer acceptance.
The Company reduces revenue for estimated customer returns and other allowances which totaled $192,864 during the year ended December 31, 2005, $101,400 during the year ended December 31, 2004 and $nil in 2003.
Foreign Currency Translation
The functional currency of foreign operations is the local currency, which is the British pound. The financial statements of non US companies are translated into US Dollars using the exchange rate in effect at year end for balance sheet accounts and the average exchange rate in effect during the year for revenue and expense accounts with currency translation adjustments reflected in other comprehensive loss in stockholders’ equity. Gains and losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables, are included in the consolidated statement of operations.
Stock-based Compensation
The Company has adopted the disclosure provisions of SFAS No. 148 “Accounting for Stock Based Compensation, Transition and Disclosure”. As permitted by the provisions of SFAS No 123, the Company applies Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees” (“APB No 25”) and related interpretations in accounting for share based awards to employees, for options granted. As a result, compensation expense related to options granted is measured based on the intrinsic value of the underlying common stock.
The Company has not yet completed its analysis of the impact of adopting SFAS No. 123(R) and is therefore currently unable to quantify the effect on its financial statements.
Inventory
Inventory and work in progress is stated at the lower of cost and net realizable value and are maintained on a first-in, first-out basis. Costs include direct costs plus attributable overheads for work in progress.
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Intangibles
Trademarks, licenses and patents are included at cost and amortized in equal annual installments over a period of 10 years, which is their estimated useful economic life. Provisions are made for any known impairments, which generally occur through technological obsolescence.
The Company accounts for intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. In accordance with SFAS 142, goodwill and intangible assets with indefinite lives are not amortized, but tested for impairment, at least annually. Intangible assets with estimable useful lives, consisting primarily of non-compete agreements, technology and know-how, and customer relationships, are amortized on a straight-line basis over the estimated useful lives of 5 to 15 years.
Long-Lived Assets and Impairment testing
Long-lived assets and certain amortizable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of such asset and eventual disposition. Measurement of an impairment loss for long-lived assets and certain amortizable intangible assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets and certain amortizable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
The Company evaluates long-lived assets, including goodwill and amortizable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future expected undiscounted cash flows attributable to that asset. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Fair value is determined generally based on discounted cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Financial instruments
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash investments and trade receivables. The Company has cash investment policies that limit investments to investment grade securities and marketable securities. The Company performs ongoing credit evaluations of its customers’ financial positions.
The fair values of financial instruments are deemed to be equivalent to the carrying amounts as cash and cash equivalents, bank overdraft, marketable securities, accounts payable and accounts receivable are short term items and readily convertible into cash.
The carrying amount of the convertible bond is a reasonable estimate of fair value, as the bond has terms based on market rates.
Results of Operations for Fiscal Years Ended December 31, 2005, 2004 and 2003
The financial statements for BioProgress PLC are consolidated under US GAAP and denominated in US dollars resulting in a net loss for 2005 of $22,752,476 compared with $13,419,315 in 2004. The increased loss was due in large part to the accounting treatment under FAS 84 of the cash and share consideration on the redemption of the 4% convertible bond, and the write down of the associated finance costs which had previously been capitalized, excess costs and expenses, development programmes, maintenance of fixed costs at BioTec and non-business expenditures on consultants and legal advisors. The increased net loss between 2003 and 2004 was due to a termination agreement with Peter Black costing approximately $736,000 and substantial consulting, legal and professional fees relating to our ongoing legal proceedings and acquisitions. During the period March 30 to December 31, 2004 the Company incurred losses of $1,573,414 relating to the initial trading period of BioTec Films, LLC.
Results in fiscal years prior to 2003 were for BioProgress Technology International, Inc., incorporated in Nevada, USA and listed on the Over-the-Counter Bulletin Board operated by the National Association of Security Dealers Inc. The financial statements for BioProgress Technology International, Inc. were under US GAAP and denominated in US dollars. The historic financial statements of BioProgress Technology International, Inc. were included in our Proxy Statement/Prospectus dated May 16, 2003.
The net loss for 2003 was $4,576,512. We had previously expected to reach break-even point in 2003 but, during the final quarter of 2003, we were in final stage negotiations to license two of the XGEL™ technologies to major international companies, including FMC BioPolymer. As part of the due diligence process, and with our permission, these companies had verification discussions with several potential customers from whom we were previously expecting revenue in the final quarter of 2003. For sound commercial reasons, it was therefore decided to defer our negotiations with these potential customers until the XGEL™ licensing agreements were executed.
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Revenues
Our total revenues for the year-ended December 31, 2005 were $8,004,642 compared to $4,618,564 for the year-ended December 31, 2004. The increase in total revenues from 2004 to 2005 is due to BioTec Films, LLC revenues growing from $4,032,589 in the period since acquisition in 2004 to $7,728,222 for the full year of 2005.
Our total revenues for the year-ended December 31, 2004 were $4,618,564 compared to $1,684,911 for the year-ended December 31, 2003. This increase in revenue was also largely attributable to the increases at BioTec Films, LLC.
The following is a summary of major contracts signed during 2005 and the first half of 2006 which have had or we believe will have a major impact on or revenues and which are expected to lead to the generation of material revenues in the future:
On December 21, 2005 we announced that our wholly-owned subsidiary, Dexo BioPharm Limited, had entered into a joint venture (JV) named Dexo BioGenerics Limited which is 75.1% owned by Dexo BioPharm Limited. The JV partner is a private generics supplier, Crescent Pharma Limited, part of the General Mediterranean Group based in Basingstoke, which supplies a wide range of generic and OTC medicines in the UK. This JV brings significant new skill sets to the Group including manufacturing and regulatory know-how and a wide range of product licenses for generic medicines including NSAIDs, simvastatin and diazepam. These will be combined with our XGEL™ film systems for rapid commercialization. Although there was no consideration payable on the formation of the JV, the development and marketing of enhanced generics will be borne by Dexo BioPharm Limited and the JV marketing and administrative resources will be provided to the JV by the Company and Crescent Pharma Limited.
In January 5, 2006, we completed the acquisition of the entire share capital of Laboratoires Pharmaceutiques Dexo SA (“Dexo SA”) through our wholly-owned subsidiary Dexo BioPharm Limited. Dexo SA is a long standing profitable private company with specific expertise in registering and marketing innovative branded products into the French healthcare system. It operates in the area of registered pharmaceuticals, and specialises in medicines to treat gastrointestinal illness, and products for ear, nose and throat ailments, along with a treatment for Wilson’s Disease (a fatal disorder caused by excessive copper accumulation in the liver and brain, affecting one in 30,000 people world wide). Dexo SA is currently run by Mr Jean-Francois Sfarti, the former CEO of Sanofi Pharma France who will remain as president of Dexo SA, along with the current team, running the operations in France. The consideration for the acquisition of Dexo SA was €12.5 million, €8 million of which was paid in cash and €4.5 million in sterling denominated ordinary shares, representing 5,866,791 new ordinary shares.
On May 4, 2006 we announced that we had entered into a joint development agreement with Uluru Inc to develop anti-emetic products utilizing BioProgress’ XGEL™ technology and Uluru’s OraDisc™ technology.
On July 14, 2006 we completed the acquisition of the entire share capital of Segix Farma SRL, an Italian specialty pharma and healthcare company based near Rome.
For the year ended December 31, 2005 Segix generated revenues of €2.6 million and profit of €0.2 million. As at December 31, 2005 Segix had net assets of €1.7 million.
The following is a summary of major contracts signed during 2003 and 2004.
In June 2004 we announced that we executed an exclusive option agreement with Wyeth to complete due diligence and enter into negotiations to license our XGEL® SWALLOW liquid fill capsule technology for certain specified product fields. On May 27, 2005 Wyeth informed us that they no longer wished to exercise their option.
In March 2004, we entered into a license agreement with Perrigo Company relating to BioProgress PLC’s TABWRAP™ technology which provides for the commercialization of TABWRAP™ in North America and Europe by Perrigo. Pursuant to the License Agreement, BioProgress PLC granted Perrigo an exclusive license of specified patents and patent applications (and related technical information) relating to TABWRAP™ in North America and Europe. The term of the License Agreement lasts until the expiration of all patents licensed thereunder.
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On February 4, 2004 we announced the execution of an exclusive global licensing agreement for the XGEL™ NROBE® dosage form technology with FMC BioPolymer, a division of the FMC Corporation, whereby we share in any exclusive licensing fees, machine sales and film sales, and we also receive a royalty on film regardless of whether it is FMC BioPolymer-developed film or BioProgress PLC-developed film. This is in recognition of the patents we hold on the NROBE® dosage form itself. The licensing agreement runs to 2023 and we expect that it will generate significant revenues and profits for the Company.
In October 2003, we announced a strategic alliance with Harro Hoefliger in Germany whom we appointed as the preferred global builder and supplier (with some exclusive rights of supply) of certain machines. Harro Hoefliger is a pharmaceutical machine supplier that is already dealing with the majority of the world’s top ten pharmaceutical companies. Their appointment reduces uncertainty about the quality and reliability of the XGEL™ machines, in that it helps to ensure the machines will be properly manufactured, installed and commissioned and that they will receive appropriate after-sales service through Harro Hoefliger’s global service network.
Cost of Revenues
In 2005 our cost of revenues was $4,804,063 compared to $3,142,247 in 2004. Despite the increased revenues generated from BioTec Films, LLC, the associated cost of revenues fell to $2,859,191 from $3,136,504 in 2004. There has however been an increase in other cost of revenues across the business.
Our cost of revenues increased from $275,549 in 2003 to $3,142,247 in 2004. The increase in the cost from 2003 to 2004 was primarily due to the increased volume of business at BioTec Films, LLC.
Development Expenditure
In 2005 our development costs were $3,439,772 compared to $513,457 in 2004. The significant increase was due to more time being spent on developing and expanding our technologies and the write-off of $1,949,723 of development expenditure previously capitalized in work in progress.
The development expenditure in 2003 increased from $171,959 in 2003 to $513,457 in 2004. The reason for the increase in 2004 is due to more time spent on developing the technologies. A significant portion of our development expenses is dependent on the requirements of our customers. During 2004 and 2003 we have expensed as operating costs most continuing development expenditures, and intend to capture as cost of revenues only those expenses directly related to inventory of film and film systems and the sale thereof and identifiable costs of development contracts.
General and Administrative Expenses
General and administration expenses increased in 2005 to $10,203,773 from $7,813,347 in 2004. The increase in 2005 was largely due to a full year’s activities at BioTec Films, LLC, which had been acquired during 2004.
Similarly, general and administrative expenses increased in 2004 to $7,813,347 from $4,384,395 in 2003, largely due to the acquisition of BioTec Films, LLC during the year.
Material balances within general and administrative expenses are described below.
Directors and senior management costs
The cost of the directors and senior managers in 2005 was $1,959,171 ($1,995,822 in 2004) indicating that the senior management team and the costs thereof are showing a greater degree of stability than in prior years.
Costs in relation to directors and senior management services increased to $1,995,822 during 2004 from $1,710,381 in 2003. The increase in 2004 was primarily due to the employment of additional senior managers and the acquisition of BioTec Films, LLC.
Staff related costs
Staff costs increased to $4,038,926 in 2005 from $3,582,872 in 2004. This was due to additional staff being employed within BioTec Films LLC and also due to additional consultants being engaged in the year.
Staff related costs, which consist primarily of salary costs (other than directors and senior management), recruitment, and traveling increased to $3,582,872 in 2004 from $2,710,138 in 2003. This increase was due in large part to employing temporary CAD Designers to move projects forward more quickly.
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Other general and administrative costs
Other costs within the general and administrative area have increased in 2005 to $4,205,676 from $2,234,653 in 2004.
The following are the major reasons for the changes:
| | • | | Expenses within this category that include such items as office overheads (rent, stationery, maintenance and similar categories) were approximately the same as 2004, although individual items may have fluctuated in line with our expectations due to our review of operations in 2005. |
| | • | | Patent portfolio costs during the year were $739,927. |
Other costs within the general and administrative area increased in 2004, the following are the major reasons for the changes:
| | • | | Expenses within this category that include such items as office overheads (rent, stationery, maintenance and similar categories) were approximately the same as 2003, although individual items may have fluctuated in line with our expectations due to our review of operations in 2004. |
| | • | | Patent portfolio costs during the year were $434,020. |
| | • | | Termination of the Peter Black agreement gave rise to costs of $736,000. |
Amortization and depreciation
Depreciation expense for 2005 of $927,094 represents an increase from $626,573 in 2004 due to further additional tangible fixed assets being acquired during the current and prior years.
Depreciation expense is $626,573 in 2004 compared to $288,785 in 2003. During 2004, we purchased more tangible assets that require depreciating as well as the acquisition of certain assets of BioTec Films LLC.
Amortization for the year increased to $550,761 from $414,094 in 2004. This increase was due to the full year charge following the purchase of intangible assets in 2004.
Amortization on intangibles increased from $4,094 in 2003 to $414,094 in 2004. This increase was due to the purchase of intangible assets in the year.
Amortization of goodwill remained at zero in 2005 as we adopted the provisions of SFAS 142 on January 1, 2002 and accordingly no longer amortize goodwill. No impairment provision was required for goodwill based on the annual impairment review.
The amortization of capitalized issue costs associated with the convertible bond, incurred until the point of redemption, have been included within interest expense in the statement of operations. These amounted to $371,885 in 2005 and $223,131 in 2004.
Consulting Fees
Consulting fees have decreased during the year to $871,040 from $2,154,619 in 2004. In 2003 there were consulting fees of $357,499. The use of external consultants was reduced in 2005 in comparison to the prior year.
Professional Fees
Professional fees have increased during the year ended December 31, 2005 to $4,176,330 from $3,204,785 in 2004. This relates to substantially increased legal fees, relating to ongoing litigation. Professional fees were $273,905 in 2003.
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Other income and expenses
Other expenditure was $5,784,285 for the year ended December 31, 2005, compared to $168,757 for 2004 and $827,262 in 2003.
The major reasons for the changes between 2005 and 2004 are:
| | • | | the redemption of the convertible bond in June 2005 gave rise to a net expense of $7,542,619 in relation to debt issue costs under FAS 84 and the write down of the associated finance costs that had previously been capitalized. |
| | • | | foreign exchange gains of $1,644,552 in 2005 compared to a foreign exchange loss of $788,290 in 2004. |
The major reasons for the changes between 2004 and 2003 are:
| | • | | net interest received on cash balances of $619,533 compared to $18,373 in 2003. |
Provision for Income Taxes
For 2005 and 2004 there was no provision for Income Taxes. The income tax benefit of $30,484 in 2003 is in respect of the reversal of the 2002 deferred tax liability of ProDesign Technology Limited and arose as a result of that company going into liquidation. During 2003, the taxable profits generated by BioProgress Technology Limited were offset against the taxable loss made by its ultimate parent undertaking, BioProgress PLC. As a result, we have not recorded any provision for UK taxation in 2003.
Net Loss
The result of the above is that a net loss of $22,752,476 was generated in 2005 compared to a loss of $13,419,315 in 2004, an increase of $9,333,161. The increased loss was due in large part to the accounting treatment under FAS 84 of the cash and share consideration on the redemption of the 4% convertible bond, and the write down of the associated finance costs which had previously been capitalized, excess costs and expenses, development programmes, maintenance of fixed costs at BioTec and non-business expenditures on consultants and legal advisors.
A net loss of $13,419,315 was generated in 2004 compared to a net loss of $4,576,512 in the year 2003. The increased net loss between 2003 and 2004 was due to a termination agreement with Peter Black costing approximately $736,000 and substantial consulting, legal and professional fees relating to our ongoing legal proceedings and acquisitions. During the period March 30 to December 31, 2004 the Company incurred losses of $1,573,414 relating to the initial trading period of BioTec Films, LLC.
During 2003, the Company’s subsidiaries Aronrate Limited and Prodesign Technology Limited were liquidated, which resulted in a net gain from discontinued operations of $291,541. The gain represents the net liabilities of these subsidiaries at the time of liquidation and is stated after liquidation costs of $18,365. These subsidiaries had no trading activities in the period from January 1, 2003 to the date of liquidation.
Liquidity and Capital Resources
As of December 31, 2005 we had cash and cash equivalents of $11,216,448 a decrease of $16,137,150 from the 2004 balance of $27,353,598. This decrease mainly arose from the early settlement of the convertible bond during the year, capital expenditure, professional fees and continued investment in our research and development programs, with a much reduced level of stock issues in the year compared to 2004.
We have financed our operations primarily through the issue of preference and ordinary shares to US accredited investors and UK investors. A further $9,814,164 was receivable from third parties in respect of share issues during 2003, this was received between January 2 and 5, 2004. These proceeds were used for general working capital purposes, including research & development and the building, design and upgrade of further plant and machinery for our Hostmoor location.
In March 2004, BioProgress PLC acquired certain assets of Aquafilm LLC for up to $11 million, made up of $3.5 million of cash and $7.5 million as an earn-out against the net earnings of the business acquired from 2004 until the $7.5 million is reached, with payments from BioProgress PLC matching the net annual earnings of the business acquired on a dollar for dollar basis. In order to acquire and invest in the facility in Tampa, as well as to provide the Company with additional working capital, we raised $20.3 million in gross proceeds by way of a placing with institutional and other investors in the UK of 10,000,000 shares at a placing price of $2.03 per share.
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On April 1, 2004 options were exercised in respect of 625,000 ordinary shares of £0.01 each at an issue price of US $0.35 (£0.18) per ordinary share, total proceeds were $220,574 (£121,528). Warrants were also exercised on that date in respect of 2,327,086 ordinary shares of £0.01 each at prices ranging from US $1.00 (£0.55) to US $2.50 (£1.38) per ordinary share, total proceeds were $2,504,319 (£1,379,790).
On April 30, 2004 options and warrants were exercised over 320,000 ordinary shares of £0.01 each, at issue prices between US $0.33 (£0.18) and US $1.00 (£0.55) per share, total proceeds were $164,046 (£91,644).
On October 5, 2004 options were exercised over 420,158 ordinary shares of £0.01 at issue prices ranging from US $ 1.00 (£0.55) to US $ 2.50 (£1.38) per share, total proceeds were $476,211 (£262,375).
On October 18, 2004 warrants were exercised over 225,949 ordinary shares of £0.01 at prices ranging from US $1.00 (£0.55) to US $ 1.50 (£0.84) per share, total proceeds were $316,132 (£200,184).
On October 31, 2004 options were exercised over 100,000 ordinary shares of £0.01 at an issue price of $1.54 (£0.84), total proceeds were $154,381 (£84,269).
On November 16, 2004 the Company issued 341,373 ordinary shares of £0.01 at an issue price of US $ 1.59 (£0.84) in consideration for the transfer to the Company of an equivalent number of shares of series C preferred stock in Bioprogress Technology International Inc.
On December 31, 2004 options were exercised over 1,000,000 ordinary shares of £0.01 at an issue price of US $0.50 (£0.26). $500,000 (£261,575) was received during 2005.
On October 1, 2004 Bioprogress announced that it had raised $8.9 (£5) million via the issue of 4.0 per cent unsecured convertible bonds due 2009. The bonds were privately placed, subject to customary closing conditions, with a leading institutional investor, Citadel, in a fund raising that was structured and arranged by a broker, who in addition subscribed for warrants over 3.5 million ordinary BioProgress shares. Citadel were also granted an option to subscribe for up to a further $9.4 (£5) million of the convertible bonds within two years. The bonds were convertible into fully paid ordinary shares in the Company at any time during the five year life of the bonds. On June 1, 2005 BioProgress advised that it had concluded an agreement to repurchase in full the $8.9 (£5) million, five year 4.0 per cent unsecured convertible bonds that were issued to Citadel (“the Bondholder”) on October 6, 2004. The option to subscribe for further bonds up until October 6, 2006 were also cancelled. Under this agreement, the bonds were repurchased for a total consideration of $6.0 (£3.3) million satisfied by $ 3.0 (£1.65) million in cash and by the issue of 4,285,714 new shares to the Bondholder, representing 3.5 per cent of the enlarged issued share capital of the Company.
On June 15, 2005 the Company announced that it had issued 992,908 ordinary shares of £0.01 in consideration for the settlement of litigation brought against it by Charles Tatnall.
On January 3, 2006 the Company issued 5,866,791 ordinary shares of £0.01 in partial consideration for the acquisition of Laboratoires Pharmaceutiques Dexo SA. This number of shares was calculated to be equivalent to 4.5 million Euros in the following manner: the value of each share was a sum equal to the average of the middle market price for an ordinary share of BioProgress plc for each of the last 5 business days preceding the date of signature on December 20, 2005. The sum of 4.5 million Euros was then divided by this individual share value to arrive at the total number of shares to be issued.
On January 3, 2006 the Company also issued 12,285,328 new ordinary shares of £0.01 each (the “New Ordinary Shares”) and had placed these New Ordinary Shares with institutional and other investors, representing approximately 9.99% of the then issued share capital of the Company, at 47p per New Ordinary Share (representing a 12% discount to the volume-weighted average share price on 19 December 2005), under the provisions of s.95 of the UK Companies Act 1985 as amended.
We also continue to investigate a number of other long-term funding scenarios and opportunities. There can, however, be no assurance that any additional financing, either debt or equity financing, will be available, if and when needed, or that, if available, such financing could be completed on commercially favorable terms. Failure to obtain additional financing if and when needed, could have a material adverse effect on our business, results of operations and financial condition.
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Following the various fundraisings and transactions described elsewhere herein, we had a cash balance of $11,216,448 as of December 31, 2005 (2004: $27,353,598, 2003: $3,349,930) and therefore we believe our cash resources will be adequate to meet our commitments, capital expenditure requirements and working capital requirements as well as fund losses for at least the next twelve months.
Development
Total R&D expenditure during 2005 was $3,439,772 compared to $513,457 in 2004 and $171,959 in 2003. Significant R&D projects were liquid fill encapsulation, powder & solid encapsulation and ostomy. The Company cannot currently accurately determine when these projects will be completed or when such projects will begin generating revenues.
The above information is based on our current expectations and the results of the projects thus far and is also contingent on our ability to continue to devote the cash and other resources to such projects. We cannot assure you that any of these projects will be completed successfully or even if completed successfully that customers will decide to commercialize products that are developed. Thus, even if successful, such projects may not necessarily lead to our recognizing license, film or film system revenue.
Contractual Obligations
Our contractual obligations at December 31, 2005, by nature of the obligation and amount due over certain periods of time, are set out in the table below. There have been no material changes in the obligation set forth in the table since December 31, 2005.
| | | | | | | | | | |
| | | Payments Due by Period |
Contractual Obligations | | Total | | 2006 | | 2007 to
2008 | | 2009 to
2010 | | 2011 and beyond |
| | | (dollars in thousands) |
Operating leases | | 249 | | 198 | | 51 | | — | | — |
Total contractual obligations | | 249 | | 198 | | 51 | | — | | — |
Off-Balance Sheet Arrangements
At December 31, 2005, 2004 and 2003, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Item 6. Directors, Senior Management and Employees
Executive Officers and Directors
The following table sets forth certain information with respect to each of the directors and executive officers of BioProgress PLC.
| | | | |
Name | | Age | | Positions |
Peter Ibbetson (1) | | 50 | | Non-Executive Chairman |
Richard Trevillion | | 39 | | Director, Chief Executive Officer |
Anthony Knight (1) | | 54 | | Non-Executive Director |
Alan Clarke(1) | | 55 | | Non-Executive Director |
Peter Keen | | 48 | | Director, Chief Financial Officer |
| (1) | Member of the Audit Committee and the Remuneration Committee |
Peter Ibbetson was appointed non-executive chairman in July 2005. He is an experienced banker and non-executive director with an extensive background in Corporate, Investment, and Retail banking. From 1974 to 2003 he was employed in the NatWest and RBS Group where he was most recently Director of Investment Banking / Head of Aerospace, and Head of Business Banking. He is a member of the Government’s Small Business Investment Taskforce which looks at venture capital and Equity Gap funding. He is currently a director of Utilyx Limited, the Local Investment Fund and Lenlyn Holdings plc. He is also Regional Chairman for East Anglia of Coutts and Co, and Chairman of The Prince’s Trust for Cambridgeshire.
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Richard Trevillion joined the Board in February 2005. He is the founder, former CEO and a Non-Executive Director of Amity Partners Limited, a principal healthcare and technology finance business which has been responsible for numerous transactions since it was formed in late 2002. A qualified solicitor, Mr Trevillion began his career with law firms Lovell White Durrant and Simmons & Simmons, before moving to corporate finance where his senior experience includes being co-Director at Arthur Andersen responsible for their healthcare corporate finance team. Mr Trevillion then became Head of healthcare within the technology corporate finance group at Close Brothers Corporate Finance in 2000.
Tony Knight was appointed to the Board as a Non-Executive Director and Chairman of the Remuneration Committee in November 2005. He provides strategic advice in sales and marketing to the pharmaceutical industry and related businesses. He was formerly the Customer Marketing Director for Parke-Davis prior to its acquisition by Pfizer Inc, and had Board responsibility for various marketing and sales initiatives in the UK and Europe. He brings over 30 years of experience in the pharmaceutical industry where he has held senior positions in marketing, sales, commercial, training, business development, business information and general management. He holds directorships in both the commercial and voluntary sectors and is the founding partner of the Portland Partnership.
Alan Clarke was appointed to the Board in May 2003 as a Non-Executive Director. He is a Chartered Accountant and a former partner of Ernst & Young from 1986 to 1996. Since 1996, he has specialised in corporate finance and strategic consultancy, advising a variety of privately owned and medium sized quoted companies. He formerly served as Chief Financial Officer and Director of TopJobs.net plc and as Chairman of Heyco Group of Companies providing strategic and restructuring advice. He currently holds several Directorships of AIM listed and private companies including Conister Trust, The University of Manchester Intellectual Property Limited and Castle Green Hotel Group.
Peter Keen was appointed to the Board in July 2006 as Finance Director and Chief Financial Officer. He is a Chartered Accountant and has been involved in the management and financing of life science companies for over 21 years. He was a co-founder, Finance Director and Company Secretary of Chiroscience Group plc, taking the company public in 1994. He joined BioProgress from Arakis Limited, where he was Chief Financial Officer until its sale to the Japanese company Sosei; prior to that he was UK Managing Director of Merlin Biosciences Limited. Peter is currently a Non-executive Director of Abcam plc, Ark Therapeutics Group plc and the Finsbury Emerging Biotechnology Trust plc (“FEBT”); he is also Chairman of the audit committee at Abcam and FEBT.
Compensation
Compensation of Executive Officers and Directors
During 2005 $1,368,297 was paid to executive and non-executive officers, which includes salary, fees, bonuses and cash benefits. The aggregate amount paid in the year to provide benefits in kind, including medical insurance and pension contributions, was $109,314.
During 2004 $1,286,444 was paid to the executive and non-executive officers which includes salary, fees, bonuses and cash benefits. The aggregate amount paid in the year ended December 31, 2004, to provide benefits in kind, including medical insurance, and pension contributions for our executive officers and directors as a group, was $108,524. During the year 1,000,000 share options were granted to Graham Hind, an Executive Director at that time.
During 2005 the Company granted 5,000,000 options to Dan Farrow and 6,000,000 options to Richard Trevillion.
Our executive officers who also serve as directors do not receive any additional compensation for their services as members of our Board of Directors but are reimbursed for their reasonable out-of-pocket expenses incurred in attending meetings of our Board of Directors.
The following table sets out the compensation, excluding share options, paid to or accrued on behalf of certain of our directors and executive officers for the year ended December 31, 2005.
| | | | | | | | | | | | | | | | | | | | |
Name | | Salary, Bonus
Fees, Cash
Benefits | | Benefits
In Kind | | Pension
Contributions | | Total 2005 | | Total 2004 | | Total 2003 |
R. Graham M. Hind | | $ | 85,658 | | $ | 6,417 | | $ | 15,954 | | $ | 108,029 | | $ | 886,076 | | $401,821 |
Richard Trevillion | | $ | 513,951 | | $ | 8,879 | | $ | 22,265 | | $ | 545,095 | | | — | | — |
Daniel Farrow | | $ | 346,717 | | $ | 12,968 | | $ | 27,831 | | $ | 387,516 | | | — | | — |
Anthony Fabrizi | | $ | 171,308 | | | — | | | — | | $ | 171,308 | | | — | | — |
Peter Ibbetson | | $ | 21,659 | | | — | | | — | | $ | 21,659 | | | — | | — |
Anthony Knight | | $ | 4,113 | | | — | | | — | | $ | 4,113 | | | — | | — |
Malcolm Brown | | | — | | | — | | | — | | | — | | $ | 162,805 | | $299,707 |
Larry Shattles | | $ | 115,585 | | | — | | $ | 15,000 | | $ | 130,585 | | $ | 144,477 | | $175,266 |
Peter Glynn-Jones | | $ | 31,626 | | | — | | | — | | $ | 31,626 | | $ | 87,769 | | $38,955 |
Alan Clarke | | $ | 74,216 | | | — | | | — | | $ | 74,216 | | $ | 66,367 | | | | $ | 40,401 |
Graham Cole | | $ | 3,464 | | | — | | | — | | $ | 3,464 | | $ | 47,470 | | | | $ | 25,932 |
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For the period January to March 2005 Richard Trevillion was retained on a consultancy basis by the Company. This arrangement continued through the period March to May 2005 after the appointment of Richard Trevillion as a Non-Executive director. Richard Trevillion was appointed Chief Executive Officer on 23 May, 2005. The remuneration disclosed in the table above reflects that paid to him for services rendered under these different contractual arrangements.
Share Ownership and Option Information
The following table sets forth the number of ordinary shares held by each of our executive officers and directors, as of December 31, 2005. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the securities. Except as indicated by footnote, and subject to applicable community property laws, to our knowledge the individuals named in the table have sole voting and investment power with respect to all ordinary shares shown as beneficially owned by them. The number of shares outstanding includes the ordinary shares underlying options held by such shareholder. Percentage of beneficial ownership is based on 123,076,259 ordinary shares outstanding at December 31, 2005.
| | | | | | |
| | | Ordinary £0.01 shares
December 31, 2005 | | Percent of
Shares | | Options
(As below) |
Peter Ibbetson | | — | | — | | — |
Anthony Knight | | — | | — | | — |
Alan Clarke | | 122,500 | | * | | — |
Richard Trevillion | | — | | — | | 6,000,000 |
Dan Farrow | | — | | — | | 5,000,000 |
The following table sets forth the grant date, the number, the exercise price and the exercise period for the share options held by each of our executive officers and directors, as of December 31, 2005.
1.Stock Options
| | | | | | | | | | | | | | | |
Name | | Date of
grant | | Number at
1 January
2005 | | Number of
options
granted | | Number of
options
exercised | | Exercise
price | | Number at 31 December
2005 | | Exercise period |
Richard Trevillion | | 11/1/2005 | | 0 | | 6,000,000 | | 0 | | $ | 0.50 | | 6,000,000 | | For first 2,000,000 options, exercisable only when share price reaches middle market quotation of £0.873 in 3 out of 5 consecutive dealing days For second 4,000,000 options, 50% from 1 March 2006 and 50% from 30 September 2006. |
Dan Farrow | | 9/23/2005 | | 0 | | 5,000,000 | | 0 | | $ | 0.50 | | 5,000,000 | | For first 1,500,000 options, exercisable only when share price reaches middle market quotation of £0.873 in 3 out of 5 consecutive dealing days For second 3,500,000 options, 50% from 1 March 2006 and 50% from 30 September 2006. |
Peter Ibbetson | | — | | — | | — | | — | | | — | | — | | — |
Anthony Knight | | — | | — | | — | | — | | | — | | — | | — |
Alan Clarke | | — | | — | | — | | — | | | — | | — | | — |
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Larry Shattles resigned on November 28, 2005, but the question of whether he retains his options has not yet been resolved.
Share options denominated in sterling have been translated into US dollars at the exchange rate as of December 31, 2005.
2.Warrants
The directors held the following warrants at December 31, 2005:
| | | | | | | | | |
Warrant | | Exercise price | | Number of ordinary shares of £0.01 each |
| | | Estate of Peter Glynn-Jones | | Graham Cole | | Alan Clarke |
“B” | | $ | 1.50 | | 50,000 | | 15,000 | | 15,000 |
“C” | | $ | 2.00 | | 50,000 | | 15,000 | | 15,000 |
“D” | | $ | 2.50 | | 50,000 | | 15,000 | | 15,000 |
“E” | | $ | 5.00 | | 50,000 | | 15,000 | | 15,000 |
“F” | | $ | 10.00 | | 50,000 | | 15,000 | | 15,000 |
The warrants are denominated in US dollars.
All of the unit warrants were issued on May 21, 2003 and can be exercised at any time before December 31, 2006. Graham Cole resigned as a director on February 15, 2005 and Peter Glynn-Jones died on June 9, 2005. Both Graham Cole and the Estate of Peter Glynn-Jones retain their interest in the warrants.
The following ‘A’ warrants were exercised on the May 7, 2004 at US $ 1.00 when the market price per ordinary share was $1.84:
| | | | | |
| | | Number | | Gain on exercise |
Peter Glynn-Jones | | 50,000 | | $ | 42,000 |
Graham Cole | | 15,000 | | $ | 12,600 |
Alan Clarke | | 15,000 | | $ | 12,600 |
Employment Agreements and Termination of Employment and Change-in-Control Arrangements
The following summary of certain provisions of the employment agreements does not purport to be complete and is subject to and is qualified in its entirety by reference to the actual text of the employment agreements, copies of which are exhibits to the annual report.
35
On May 23, 2005 the Company entered into a service agreement with Richard Trevillion under which he agreed to serve as chief executive at a current annual salary of £240,000 to be reviewed annually. The agreement is terminable by either party giving not less than 12 months’ written notice. In addition to the basic remuneration, Mr. Trevillion is entitled to private health provision, life and critical illness assurance, a company car allowance and contributions into a personal pension plan.
On November 29, 2005 the Company entered into a letter of appointment with Anthony Knight which was replaced by a further letter of appointment on March 23, 2006. This provides for the relationship to be terminated by either party giving to the other at least three months’ written notice. He shall receive an annual fee of £30,000. He is a member of the audit, remuneration and nominations committee.
On May 21, 2003 the Company entered into a letter of appointment with Alan Clarke which was replaced by a further letter of appointment on March 23, 2006. This provides for the relationship to be terminated by either party giving to the other at least three months’ written notice. He shall receive an annual fee of £30,000. He is a member of the audit committee.
On July 29, 2005 the Company entered into a letter of appointment with Peter Ibbetson which was replaced by a further letter of appointment on March 23, 2006. This provides for the relationship to be terminated by either party giving to the other at least three months’ written notice. He shall receive an annual fee of £35,000. He is a member of the audit committee and serves as non-executive Chairman of the Company.
Description Of BioProgress PLC Share Option Schemes
In 2003, BioProgress PLC implemented a share option scheme under the terms set forth below. In the United Kingdom, a share option scheme can be either an Approved Scheme (approved by H.M. Revenue & Customs of the United Kingdom) or an Unapproved Scheme or a combination of both. The BioProgress PLC scheme is a combination of both. The 2003 Scheme continues to apply to share options granted under its terms.
On November 21, 2005, BioProgress PLC implemented a new share option scheme under the terms set forth below. The terms of this scheme apply to the awards of options made to Richard Trevillion and Dan Farrow, and will apply to all awards of options made after the scheme’s adoption date. The 2005 scheme is an Unapproved Scheme.
Summary of the BioProgress PLC Share Option Scheme 2003 (the “2003 Scheme”)
General
The 2003 Scheme is divided into two parts, of which one is approved by H.M. Revenue & Customs under the Income and Corporation Taxes Act 1988 (and which confers certain tax reliefs on participants) and the other is not. The two parts are identical in all material respects unless indicated to the contrary in this summary.
Eligibility
Employees (regardless of their hours of work) and directors (who are obliged to devote at least 25 hours a week to their duties) of BioProgress PLC and its subsidiaries and who are not within two years of their contractual retirement age and who are not otherwise excluded by the relevant legislation are eligible to participate in the Scheme. Decisions relating to the 2003 Scheme are made by the Board or a duly authorized committee. Options are a matter entirely separate from participants’ contracts of employment.
Grant of Options
Options may be granted at any time within 42 days after the approval of the 2003 Scheme by H.M. Revenue & Customs and thereafter within the 42 days following the announcement by BioProgress PLC of its results for any period. Options may also be granted at other times which the board of directors considers to be sufficiently exceptional.
No payment will be required for the grant of an option. Options are not transferable other than where, virtue of a participant’s death, they may be exercised by his personal representatives.
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Limit on the Issue of Shares under the Executive Scheme
The maximum number of Shares over which options may be granted under the 2003 Scheme shall be 10% of the BioProgress PLC’s issued ordinary share capital from time to time. Options granted under any other discretionary share option scheme operated by BioProgress PLC shall not count for the purposes of this limit and vice versa.
Limit on Individual Participation
No person may, unless the board of directors determines otherwise, in a calendar year be granted options over shares worth more than 100 per cent. of his annual remuneration. This limit is four times remuneration in respect of the first grant of options to an eligible executive after he joins.
The aggregate market value (as at the date of grant) of shares which may be held under option by an individual at any one time under H.M. Revenue & Customs approved part of the 2003 Scheme or any other approved executive share option scheme established by BioProgress PLC shall not exceed £30,000 or such other limit may apply from time to time.
Option Price
The price per ordinary share payable on the exercise of an option will not be less than the higher of:
(a) the average middle-market quotation for an ordinary share as derived from the Official List on the three dealing days before the option was granted—in respect of options granted under H.M. Revenue & Customs approved part of the 2003 Scheme, for so long as the Company’s shares shall be admitted to trading on Alternative Investment Market options will not be granted at less than the then market value as agreed with the Shares Valuation Division of H.M. Revenue & Customs; and
(b) the nominal value of an ordinary share.
Exercise of Options
An option will not normally be exercisable until three years from its grant. Options will lapse 10 years from the date granted. On termination of the employment of an option holder by reason of death an option will remain exercisable for 12 months from death. On termination of employment by reason of redundancy, ill health or disability an option will remain exercisable for 6 months from termination. Exercise of options following termination of employment in other circumstances will be at the discretion of the board of directors. Exercise is permitted on a reconstruction, takeover or winding-up of BioProgress PLC.
The board of directors intends to set performance conditions on the exercise of options.
Rights Attaching to Shares
All ordinary shares issued under the 2003 Scheme will rank equally with all other ordinary shares for the time being in issue (except for any rights arising by reference to a record date before the date of issuance).
Variation of Capital
In the event of any variation of share capital the Board may make such adjustments as it so determines.
Alterations to the 2003 Scheme
The board of directors may not alter the 2003 Scheme to the advantage of participants without the prior consent of shareholders in general meeting (save for minor changes to benefit the administration of the Scheme to take account of a change in legislation or to obtain or maintain favorable tax, exchange control or regulatory treatment for a participant or BioProgress PLC. Amendments may be made to options to reflect overseas taxation, securities or exchange control laws provided that the overall terms of such options are not more favorable as a result than those granted to other executives. Prior H.M. Revenue & Customs approval is required to any change to the approved part of the 2003 Scheme.
Summary of the BioProgress PLC Executive Share Option Scheme 2005 (“2005 Scheme)
General
The 2005 Scheme is unapproved by H.M. Revenue & Customs.
37
Eligibility
Employees and directors (regardless of their hours of work) of BioProgress PLC and its subsidiaries, and any other person whom the Board determines should be eligible, are eligible to participate in the 2005 Scheme. Decisions relating to the 2003 Scheme are made by the Board or a duly authorized committee. Options are a matter entirely separate from participants’ contracts of employment.
Grant of Options
Offers and grants of options shall be made by the Board in its absolute discretion any time after the date of adoption of the 2005 Scheme. Options are personal to the participant and are not capable of transfer or assignment save where the Board expressly agrees in advance of such transfer or assignment. Any purported transfer or assignment without Board consent will render the option in question void.
Limit on the Issue of Shares under the Executive Scheme
The maximum number of Shares over which options may be granted under the 2005 Scheme shall be 10% of BioProgress PLC’s paid up ordinary share capital from time to time. Shares subject to options granted to individuals which are renounced, surrendered of cancelled shall not be taken into account for the purposes of this limitation.
Limit on Individual Participation
The number of shares over which options may be granted to eligible participants shall be determined by the Board from time to time.
Subscription Price
The price per ordinary share payable on the exercise of an option will be such amount as the Board may determine, being not less than the nominal value of a share.
Exercise of Options
Options may be exercised in whole or in part, provided that exercises in part shall be in respect of a minimum of 100 shares.
Options may not be exercised later than 10 years after the date of grant, or such shorter period as may be specified in the option offer letter given to the participant. The Board may, in any offer letter, specify a period which must expire before the options granted can be exercised.
If the holder of an option dies within 10 years from date of grant, the option may be exercised by his or her personal representatives provided that such exercise is no later than 12 months after the date of death. After such 12 month period, the options will lapse. If the participant becomes bankrupt, any options granted to him will lapse.
The Board may grant an option subject to conditions for exercise, and may waive or vary such conditions of an event or events occur which cause the Board to consider that the original conditions are no longer appropriate or capable of being achieved.
Availability of authorized capital
BioProgress PLC must keep available sufficient authorized but unissued shares to satisfy all outstanding options.
Rights Attaching to Shares
All ordinary shares issued under the 2005 Scheme will rank equally with all other ordinary shares for the time being in issue (except for any rights arising by reference to a record date before the date of issuance).
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Variation of Capital
In the event of any variation of share capital the Board may make such adjustments as it so determines.
Alterations to the 2005 Scheme
The Board may resolve to alter the 2005 Scheme, provided that no alteration shall be made which would adversely affect any of the existing rights of participants. However, majority option-holders (i.e. participants who, if they exercised their options in full, would become entitled to not less than three-quarters of all the shares which would fall to be allotted upon exercise in full of all outstanding options) may consent to an alteration.
Insurance
The Company has obtained customary directors’ and officers’ insurance against certain liabilities such persons may incur on our behalf.
Corporate Governance
Our Board of Directors has established an Audit Committee, a Remuneration Committee and a Nomination Committee.
Audit Committee
The Audit Committee meets generally three times a year and will usually request the attendance of the chief financial officer and the external auditor. The Committee has clearly defined terms of reference which outline its objectives and responsibilities relating to financial reporting, internal controls, risk management and the application of appropriate accounting policies and procedures. Specific responsibilities include reviewing the effectiveness of internal controls and risk management and reviewing the scope and results of the external audit. This includes monitoring the independence and objectivity of the external auditor and agreeing the level of remuneration and the extent of non-audit services.
The Audit Committee oversees the financial reporting process on behalf of the board of directors and is composed of independent non-executive directors who are not officers or employees of the Company. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviews the audited financial statements with management, including a discussion of the quality and the acceptability of financial reporting and controls. In fulfilling its oversight responsibilities, the Audit Committee reviews with the independent auditors, who are responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles, their judgments as to the quality and the acceptability of financial reporting and such other matters as are required to be discussed with the Audit Committee under generally accepted auditing standards. The Audit Committee also discusses with the independent auditors their continued independence. The Audit Committee reviews and approves any non-auditing services to be provided by the auditors prior to the firm being retained to perform such services. The Audit Committee oversees the financial reporting process on behalf of the Board. Management is responsible for the Company’s financial reporting process including its system of internal control, and for the preparation of consolidated financial statements in accordance with generally accepted accounting principles. The independent auditors are responsible for auditing those financial statements. The Audit Committee’s responsibility is to monitor and review these processes. It is not their duty or responsibility to conduct auditing or accounting reviews or procedures.
Remuneration Committee
The Remuneration Committee reviews and sets the compensation of the executive officers of BioProgress PLC. The executive compensation program is designed to attract and retain highly qualified executives and to motivate them to contribute to BioProgress PLC’s goals and objectives and its overall financial success. Compensation for executives consists of both cash and equity-based compensation. In determining executive compensation, the Remuneration Committee reviews and evaluates information supplied by management and base decisions on management recommendations as well as on BioProgress PLC’s performance and on the individual’s contribution and performance. The Remuneration Committee reviews the salary of each executive officer in relation to previous salaries, personal performance, and salaries of executive officers in the industry and general economic conditions. The salaries are set at levels intended to motivate and retain highly qualified executives whom the Board believes are important to the continued success of BioProgress PLC. Any annual incentive payments to executive officers will be intended to encourage and reward excellent individual performances by managers who make significant contributions to the financial success of BioProgress PLC. BioProgress PLC will grant stock options to provide long-term incentives for the executive officers. The option grants are designed to better align the interests of the executive officers with those of the stockholders and to provide each individual with a significant incentive to manage from the perspective of an owner and to remain employed by BioProgress PLC. The number of shares subject to each option grant will be based on the officer’s level of responsibility, relative position within BioProgress PLC, and is approved by the Board of Directors. The remuneration of the non-executive directors is determined by the Board and reflects their anticipated time commitment to fulfill their duties. Non-executive directors do not receive long-term incentive awards (excluding share options) or pension provision. Non-executive directors’ service agreements can be terminated by either party provided that 3 months’ notice has been given.
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Nomination Committee
The Nomination Committee considers, at the request of the board or of the chairman of BioProgress PLC, the appointment or reappointment of directors to the board of BioProgress PLC, and provides recommendations and advice to the board or to the chairman as appropriate.
Employees
As of December 31, 2005, we had 52 full-time employees and 3 part-time employees. As of December 31, 2004, we had 77 full-time employees and 7 part-time employees. As of December 31, 2003, we had 22 full-time employees and 2 part-time employees.
Our future success depends significantly in part upon the continued service of our key technical and senior management personnel and its continuing ability to attract and retain highly qualified technical and managerial personnel. Competition for such personnel is intense and there can be no assurance that we can retain key managerial and technical employees or that can attract, assimilate or retain other highly qualified technical and managerial personnel in the future. Collective bargaining units represent none of our employees and, to date, we have not experienced a work stoppage. We believe that our employee relations are good.
Item 7. Major Shareholders and Related Party Transactions
Major Shareholders
The following table contains information with respect to each shareholder known to us to own, of record or beneficially, 3% or more of the nominal value of our ordinary shares as of April 10, 2006 based on 141,228,378 ordinary shares outstanding as of that date:
| | | | |
Name | | Shareholding | | % |
TD Waterhouse Nominees (Europe) Limited | | 13,003,592 | | 9.2 |
Mellon Nominees (UK) Limited | | 9,567,839 | | 6.8 |
Barclayshare Nominees Limited | | 9,136,442 | | 6.5 |
Credit Suisse Securities (Europe) Limited | | 9,010,550 | | 6.4 |
LR Nominees Limited | | 7,367,384 | | 5.2 |
Related Party Transactions
Employment Agreements
For information regarding employment agreements of the Company, see “Item 6—Employment Agreements and Termination of Employment and Change-in-Control Arrangements.”
The Jade Partnership International, Inc.
The Jade Partnership International, Inc. (“Jade”), of which Barry Muncaster was a controlling shareholder and director, is a shareholder of BioProgress PLC. When BioProgress Technology International, Inc. and its subsidiary undertakings were acquired by BioProgress PLC on May 21, 2003, it was owed $315,282 by Jade. As of December 31, 2004, BioProgress PLC was owed $237,913 (2003: $290,264) by Jade. This debt has been settled under the terms of an agreement dated November 23, 2005.
There were no other related party transactions in the three years ended December 31, 2005.
US Property
The Company’s US offices are provided by a former director, Larry Shattles, for a nominal rent.
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Larry Shattles
In February 2003, Larry Shattles, a former Director, exchanged his and his family’s shares of common stock in BioProgress Technology International, Inc. for preferred shares of BioProgress Technology International, Inc. carrying a right to approximately 1.2% of the voting, dividend and liquidation rights.
Item 8. Financial Information
See “Item 18: Financial Statements” and the information beginning on page F-1 of this annual report.
Legal Proceedings
On January 27, 2006 the Company settled the patent litigation with Stanelco plc. BioProgress Technology Limited and Stanelco RF Technologies Limited were disputing entitlement to three families of patents relating to the making of water-soluble capsules sealed using radio frequency. Under the main terms of settlement, both parties will be able to commercially exploit all three patent families. Stanelco plc has agreed to issue to BioProgress new ordinary 0.1p shares and/or cash up to a maximum market value of £1,000,000.
Momentus Solutions LLC, d/b/a Healthy Moments LLC v. BioTec Films LLC, Superior Court of New Jersey. This case, which was filed on 23 November 2004, arises out of an alleged contract pursuant to which the Company was to supply various vitamin-infused edible films to the plaintiff. The plaintiff alleges that the Company failed to produce edible films which were of merchantable quality and claims that it incurred damages in excess of US $ 1.00 million.
The plaintiff is asserting three claims including two counts of breach of contract and one count of promissory estoppel. The Company has filed a response to the complaint and filed a counterclaim alleging that the plaintiff failed to pay for product purchased from the Company. The case is progressing.
BioProgress Technology Ltd. has been named as a co-defendant in a proceeding against our former Chief Financial Officer, Mr. Longley, relating to shares of BioProgress Technology International, Inc. allegedly owned by Mr. Longley but claimed to be the property of the plaintiff. On June 22, 2005 the Company announced it had settled the proceedings on confidential terms.
BioProgress PLC, BioProgress Technology International Inc, BioProgress Technology Inc and BioProgress Technology Limited (“BioProgress Group”) were named in 2004 as defendants in a proceeding brought by a former employee. BioProgress Group has now settled this action.
In late 2005, Bioprogress PLC, Bioprogress Technology International Inc and BioTec Films LLC were named as defendants in legal proceedings brought by a former director. The companies named are defending the action and the matter is ongoing.
In addition, the Company has become aware of various allegations regarding a former officer. The Company has reviewed these allegations and has conducted a preliminary investigation into them. The allegations do not relate directly to the assets or business of the Company. In the Company’s view, it is unable to take any further action itself in relation to these allegations, and the Board of Directors has, therefore, decided to refer these matters to appropriate regulatory authorities. The Company is unable to determine whether these matters will be taken further by any of those authorities.
Dividend Policy
We have never paid dividends on our share capital. We currently intend to retain future earnings, if any, to fund the development and growth of our business and do not anticipate paying cash dividends. Any payment of future dividends will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.
Under English law, any payment of dividends would be subject to the Companies Act 1985, which requires that all dividends be approved by our Board of Directors and, in some cases, our shareholders. Moreover, under English law, we may pay dividends on our shares only out of profits available for distribution determined in accordance with the Companies Act and accounting principles generally accepted in the United Kingdom, which differ in some respects from United States generally accepted accounting principles.
For information regarding the taxation of dividends under United States tax law, see “Item 10: Additional Information—Taxation—United States Federal Income Tax Consequences.”
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Item 9. The Offer and Listing
Prior to May 2003, the shares of common stock of BioProgress Technology International, Inc. were admitted for trading on the Over-the-Counter Bulletin Board operated by the National Association of Security Dealers Inc. Since May 2003, the Company’s ordinary shares have been admitted to trading on the Alternative Investment Market of the London Stock Exchange. The following table sets forth information regarding the high and low market prices of the shares of common stock of BioProgress Technology International, Inc. for time periods prior to May 2003 and ordinary shares of BioProgress PLC for time periods since the date of the offering in May 2003:
| | | | |
| | | Per share of common stock |
| | | High | | Low |
| | | ($) | | ($) |
Year Ended | | | | |
2001 | | 2.88 | | 0.33 |
2002 | | 0.98 | | 0.31 |
Quarter Ended | | | | |
March 31, 2002 | | 0.95 | | 0.40 |
July 1, 2002 | | 0.98 | | 0.48 |
September 30, 2002 | | 0.67 | | 0.32 |
December 31, 2002 | | 0.55 | | 0.31 |
March 31, 2003 | | 0.51 | | 0.30 |
| |
| | | Per ordinary share |
| | | High | | Low |
| | | (£) | | (£) |
Year Ended | | | | |
2003 | | 0.77 | | 0.22 |
2004 | | 1.64 | | 0.06 |
2005 | | 0.88 | | 0.25 |
Quarter ended | | | | |
June 30, 2003 | | 0.28 | | 0.22 |
September 30, 2003 | | 0.59 | | 0.23 |
December 31, 2003 | | 0.77 | | 0.48 |
March 31, 2004 | | 1.64 | | 0.62 |
June 30, 2004 | | 1.25 | | 0.63 |
September 30, 2004 | | 1.27 | | 0.06 |
December 31, 2004 | | 1.37 | | 0.60 |
March 31, 2005 | | 0.88 | | 0.54 |
June 30, 2005 | | 0.59 | | 0.28 |
September 30, 2005 | | 0.36 | | 0.25 |
December 31, 2005 | | 0.60 | | 0.26 |
Month Ended | | | | |
January 31, 2006 | | 0.59 | | 0.47 |
February 28, 2006 | | 0.56 | | 0.49 |
March 31, 2006 | | 0.51 | | 0.42 |
April 30, 2006 | | 0.53 | | 0.42 |
May 31, 2006 | | 0.48 | | 0.38 |
June 30, 2006 | | 0.47 | | 0.40 |
In October 2004 the Company established an ADR program and American Depositary Shares represented by American Depositary Receipts each representing 10 ordinary shares were admitted to trading on the NASDAQ national market.
| | | | |
| | | Per American Depositary Share |
| | | High | | Low |
| | | $ | | $ |
Quarter Ended | | | | |
December 31, 2004 | | 24.25 | | 12.35 |
March 31, 2005 | | 16.72 | | 11.00 |
June 30, 2005 | | 12.00 | | 5.50 |
September 30, 2005 | | 6.50 | | 4.51 |
December 31, 2005 | | 11.16 | | 4.41 |
March 31, 2006 | | 10.30 | | 7.00 |
June 30, 2006 | | 9.50 | | 6.91 |
Month Ended | | | | |
January 31, 2006 | | 10.30 | | 8.60 |
February 28, 2006 | | 9.80 | | 7.76 |
March 31, 2006 | | 8.35 | | 7.00 |
April 30, 2006 | | 9.50 | | 7.26 |
May 31, 2006 | | 9.14 | | 7.41 |
June 30, 2006 | | 8.50 | | 6.91 |
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Item 10. Additional Information.
Memorandum and Articles of Association
(a) Memorandum of Association
The Memorandum of Association of the Company provides that the Company’s principal objects are to carry on all or any of the business of a holding and investment company. The objects of the Company are set out in clause 4 of its Memorandum of Association.
(b) Articles of Association
The Articles below, which were adopted on incorporation, include provisions to the following effect:
| | (i) | Variation of class rights and changes of capital |
| | (1) | The special rights attached to any class of shares may, subject to any applicable law, be varied or abrogated in such manner (if any) as may be provided by such rights or, in the absence of any such provision, either with the consent in writing of the holders of three fourths in nominal value of the issued shares of the class or with the sanction of an extraordinary resolution passed at a separate general meeting of the holders of shares of the class and may be so varied or abrogated either whilst the company is a going concern or during or in contemplation of winding up. |
| | (2) | the Company may by ordinary resolution increase its share capital, consolidate and divide all or any of its shares into shares of a larger amount, cancel any shares not taken or agreed to be taken by any person and sub-divide its shares into shares of a smaller amount. |
| | (3) | the Company may by special resolution reduce its share capital or any capital redemption fund, share premium account or other undistributable reserve subject to authority required by law. Subject to applicable law, and to sanction by an extraordinary resolution, the Company may purchase its own shares. |
The provisions of the Articles relating to general meetings apply mutatis mutandis to every such meeting but the necessary quorum is two persons holding or representing by proxy or as the duly authorized representative of a corporation one third in nominal amount of the issued shares of the class except where there is only one holder of the relevant class of shares in which case the quorum shall be that holder.
Subject to statute and any special rights or restrictions as to voting attached to any class of shares, at any general meeting, on a show of hands, every member who is present in person has one vote and, in the case of a poll, every member present in person or by proxy has one vote for every share of which he is the holder. No member is entitled to attend or vote at a general meeting either personally or by proxy if he or any person appearing to be interested in shares held by him has been duly served with a notice under Section 212 of the Companies Act 1985 (as amended) (“Companies Act”) and is in default for the prescribed period in supplying to the Company the information required thereby or, unless the Directors determine otherwise, if any calls from him have not been paid.
The Directors may exercise all the powers of the Company to borrow money and to mortgage or charge all or any part of its undertaking, property, assets (present and future) and uncalled capital and, subject to applicable law, to issue debenture and other loan stock and debentures and other securities.
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| | (1) | A Director is not required to hold any qualification shares. |
| | (2) | The amount of any fees payable to Directors shall be determined by the Directors provided that they shall not in any year exceed an aggregate amount of £200,000 or such other sum as may from time to time be approved by ordinary resolution. Any such fees shall be divisible among the Directors as they may agree, or failing agreement, equally. The Directors are also entitled to be repaid all reasonable expenses incurred by them respectively in the performance of their duties. Any Director holding an executive office or otherwise performing services which in the opinion of the Directors are outside the scope of his ordinary duties as a Director may be paid such remuneration as the Directors may determine. |
| | (3) | The Directors may establish and maintain the establishment of any non-contributory or contributory pension or superannuation funds for the benefit of, and give donations, gratuities, pensions, allowances or emoluments to, any persons who are or were at any time in the employment or service of, or Directors or officers of and holding any salaried employment or office in, the Company or any other company which is its holding company or in which the Company or such holding company has any interest or which is allied to or associated with the Company or of any company which is a subsidiary undertaking of the Company or of any such other company (“associated companies”) and the families and dependents of any such persons; and the Directors shall have power to purchase and maintain insurance against liability for any persons who are or were at any time Directors, officers, employees or auditors of, the Company or, its associated companies and for trustees of any pension fund in which employees of the Company or its associated companies are interested. |
| | (4) | The Directors may from time to time appoint one or more of their body to be the holder of any executive office (including the office of chairman, deputy chairman, managing director or chief executive) on such terms and for such period as they may determine. |
| | (5) | Subject to the provisions of applicable law and provided that he has disclosed to the Directors the nature and extent of any material interest of his, a Director notwithstanding his office:- |
| | (a) | may be a party to, or otherwise interested in, any contract, transaction or arrangement with the Company or in which the Company is otherwise interested; |
| | (b) | may be a director or other officer of, or employed by, or a party to, any transaction or arrangement with, or otherwise interested in any body corporate promoted by the Company or in which the Company is otherwise interested; |
| | (c) | may hold any other office or place of profit under the Company (except that of auditor or auditor of a subsidiary of the Company) in conjunction with the office of Director and may act by himself or through his firm in a professional capacity to the Company and in any such case on such terms as to remuneration and otherwise as the Directors may arrange; and |
| | (d) | shall not, by reason of his office, be accountable to the Company for any benefit which he derives from any such office or employment or from any such contract, transaction or arrangement or from any interest in any such body corporate, and no such contract, transaction or arrangement shall be liable to be avoided on the grounds of any such interest or benefit. |
| | (6) | Save as specifically provided in the Articles, a Director may not vote in respect of any contract, transaction or arrangement or any other proposal whatsoever in which he has any material interest otherwise than by virtue of his interests in shares or debentures or other securities of, or otherwise in or through, the Company. A Director will not be counted in the quorum of a meeting in relation to any resolution on which he is debarred from voting. |
| | (7) | Subject to applicable law, a Director is (in the absence of some other material interest than is indicated below) entitled to vote (and will be counted in the quorum) in respect of any resolution concerning any of the following matters, namely:- |
| | (a) | the giving of any guarantee, security or indemnity to him in respect of money lent or obligations incurred by him at the request or for the benefit of the Company or of its subsidiary undertakings; |
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| | (b) | the giving of any guarantee, security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiary undertakings for which he himself has assumed responsibility in whole or in part under a guarantee or indemnity or by the giving of security; |
| | (c) | any contract, transaction, arrangement or proposal concerning an offer of shares or debentures or other securities of or by the Company or any of its subsidiary undertakings for subscription or purchase in which offer he is or is to be interested as a participant in the underwriting or sub-underwriting thereof; |
| | (d) | any contract, transaction, arrangement or proposal to which the company is or is to be a party concerning any other body corporate in which he (together with any persons connected with him) do not to his knowledge hold an interest in shares (as that term is used in Part VI of the Companies Act) representing one per cent. or more of either any class of the equity share capital or the voting rights in such body corporate; |
| | (e) | any contract, transaction, arrangement or proposal for the benefit of the employees of the company or any of its subsidiary undertakings and which does not award any Director any privilege or benefit not generally awarded to the employees to whom such arrangement relates; and |
| | (f) | any contract, transaction, arrangement or proposal concerning any insurance against liability which the Company is empowered to purchase and/or maintain for, or for the benefit of, any Directors or group of persons who include Directors. |
| | (8) | A resolution for the appointment of two or more persons as Directors by a single resolution shall not be moved at any general meeting unless a resolution that it shall be so moved has first been agreed by the meeting without any vote being given against it, and any resolution moved in contravention of this provision of the Articles shall be void. |
| | (9) | The Articles provide that statutory provisions which would have the effect of rendering any person ineligible for appointment as a Director or liable to vacate office as a Director on account of his having reached any specified age, or of requiring special notice or any other special formality in connection with the appointment of any Director over a specified age, shall not apply to the company. |
All transfers of shares may be effected by transfer in writing in any usual form or in any other form acceptable to the Directors and shall be executed by or on behalf of the transferor and, if the share is partly paid, the transferee. The Articles do not contain any restriction on the transferability of fully paid shares, provided that the Company has no lien over the shares, the instrument of transfer is in favour of not more than four transferees and in respect of only one class of shares and is duly stamped (if so required), the provisions in the Articles relating to the deposit of instruments of transfer accompanied by the relevant share certificate have been complied with and the member is not in default of any notice duly served under section 212 of the Companies Act as referred to in the Articles.
| | (vii) | Dividends and distribution of assets on liquidation |
The holders of shares are entitled pari passu amongst themselves, but in proportion to the numbers of shares held by them and to the amounts paid up or credited as paid up, to share in the whole of the profits of the Company paid out as dividends. In the event of liquidation of the Company, the liquidator may, with the authority of a special resolution and any other sanction required by law, divide among the members in specie or in kind the whole or any part of the assets of the company and determine how such division shall be carried out as between the members or different classes of members.
| | (viii) | Unclaimed dividends |
Any dividend unclaimed after a period of 12 years from the date of its declaration shall be forfeited and shall revert to the Company.
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| | (1) | If a member fails to pay in full any call or instalment of a call on the due date for payment, the Board may at any time serve a notice on him/her requiring payment and stating that in the event of non-payment in accordance with such notice the shares on which the call was made will be liable to be forfeited. Any share so forfeited may be disposed of by the company within three years, otherwise it shall be cancelled. |
| | (2) | The Company shall have a first and paramount lien on every share (not being a fully paid share) for all monies (whether presently or not) called or payable at a fixed time in respect of such share. |
| | (3) | The Company may sell in such manner as the Board thinks fit any share on which the Company has a lien fourteen days after a notice in writing stating and demanding payment of the sum presently payable and giving notice of intention to sell. |
Material Contracts
On December 21, 2005, we announced that our wholly-owned subsidiary, Dexo BioPharm Limited, had entered into a joint venture (JV) named Dexo BioGenerics Limited which is 75.1% owned by Dexo BioPharm Limited. The JV partner is a private generics supplier, Crescent Pharma Limited, part of the General Mediterranean Group based in Basingstoke, which supplies a wide range of generic and OTC medicines in the UK. This JV brings significant new skill sets to the Group including manufacturing and regulatory know-how and a wide range of product licenses for generic medicines including NSAIDs, simvastatin and diazepam. These will be combined with our XGEL™ film systems for rapid commercialization. Although there was no consideration payable on the formation of the JV, the development and marketing of enhanced generics will be borne by Dexo BioPharm Limited and the JV marketing and administrative resources will be provided to the JV by the Company and Crescent Pharma Limited.
In January 5, 2006, we completed the acquisition of the entire share capital of Laboratoires Pharmaceutiques Dexo SA (“Dexo SA”) through our wholly-owned subsidiary Dexo BioPharm Limited. Dexo SA is a long standing profitable private company with specific expertise in registering and marketing innovative branded products into the French healthcare system. It operates in the area of registered pharmaceuticals, and specialises in medicines to treat gastrointestinal illness, and products for ear, nose and throat ailments, along with a treatment for Wilson’s Disease (a fatal disorder caused by excessive copper accumulation in the liver and brain, affecting one in 30,000 people world wide). Dexo SA is currently run by Mr Jean-Francois Sfarti, the former CEO of Sanofi Pharma France who will remain as president of Dexo SA, along with the current team, running the operations in France. The consideration for the acquisition of Dexo SA was €12.5 million, €8 million of which was paid in cash and €4.5 million in sterling denominated ordinary shares, representing 5,866,791 new ordinary shares.
In 2006 we announced that we had entered into a joint development agreement with Uluru Inc to develop anti-emetic products utilizing BioProgress’ XGEL™ technology and Uluru’s OraDisc™ technology.
On July 14, 2006 we completed the acquisition of the entire share capital of Segix Farma SRL, an Italian specialty pharma and healthcare company based near Rome. The acquisition was made through a newly-formed subsidiary of Dexo BioPharm Limited, the Company’s pharmaceutical division.
The consideration for the acquisition, of up to €1,950,000, will be satisfied in cash and equity in BioProgress PLC. The cash element comprises a payment of €700,000 on completion, and a further payment to reflect the stock and net cash of Segix held on completion. The equity element comprises up to €1,250,000 in sterling denominated ordinary shares, contingent upon certain events occurring, including the extension or renewal of various product distribution agreements. The shares to be issued will be subject to lock-in periods of up to eighteen months.
Segix is a private company and specializes in the distribution and marketing of established products in the anti-infective, gastrointestinal and oncology therapeutic areas. Segix works with strategic partners and agents, achieving sales coverage for the majority of Italy. Its portfolio currently includes the brands CeporexTM , TamoxifenTM, GabbroralTM, AcyvirTM, CuroximTM, EusaprimTM and LefcarTM. Luigi Baldassarri, Segix’s current general manager, will remain as interim general manager pending the appointment of a replacement.
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For the year ended December 31, 2005 Segix generated revenues of €2.6 million and profit of €0.2 million. As at 31 December 2005 Segix had net assets of €1.7 million.
In February 2005 Bioprogress announced that it has now executed an agreement with Custom Pharmaceuticals Limited (“Custom”) to install a film manufacturing line in Custom’s new pharmaceutical contract manufacturing facility currently being built near Brighton, in the south of England. This follows the initial Letter of Intent announcement on 9 November 2004.
In October 2004, Bioprogress announced that it had granted exclusive distribution rights in China and Taiwan to AXM Pharma, Inc. (AMEX: AXJ) for certain formulations of BioProgress’ revolutionary Soluleaves™ oral drug and flavours delivery technology that uses dissolve-in-the-mouth films. This agreement is for an initial period of two years, which could then be extended by mutual agreement.
In March 2004, BioProgress PLC entered into a license agreement with Perrigo Company relating to BioProgress PLC’s TABWRAP™ technology which provides for the commercialization of TABWRAP™ in North America and Europe by Perrigo. Pursuant to the License Agreement, BioProgress PLC granted Perrigo an exclusive license of specified patents and patent applications (and related technical information) relating to TABWRAP™ in North America and Europe.
The term of the License Agreement lasts until the expiration of all patents licensed thereunder. The License Agreement may be terminated early by BioProgress PLC for a material breach by Perrigo, failure of Perrigo to pay royalties thereunder or if products using TABWRAP™ are not put into commercial use within three years of the execution of the agreement.
In March 2004, BioProgress PLC acquired the edible film production assets of Aquafilm LLC, which acquisition excluded Aquafilm’s assets in Connecticut, US and Hartlebury in the UK, for up to $11 million, made up of $3.5 million of cash and $7.5 million as an earn-out against the net earnings of the business acquired from 2004 until the $7.5 million is reached, with payments from BioProgress PLC matching the net annual earnings of the business acquired on a dollar for dollar basis. In order to acquire and invest in the facility in Tampa, as well as to provide the Company with additional working capital, we raised $20.3 million in gross proceeds by way of a placing with institutional and other investors in the United Kingdom of 10,000,000 shares at a placing price of $2.03 per share.
BioProgress PLC has recently filed patents on a new technology the Company has been developing for nearly two years, which enables a more effective delivery of active ingredients including pharmaceutical drugs into ‘in the mouth’ dissolving films. BioProgress PLC believes this new WAFERTAB™ technology will significantly enhance the Aquafilm current product offering, and intends to upgrade Aquafilm’s Tampa facility to full pharmaceutical production standard and accelerate the development of the WAFERTAB™ technology into the pharmaceutical sector. It is anticipated that this has tremendous potential as a new drug delivery platform and that it will create further exclusive licensing opportunities for BioProgress PLC.
In February 2004, BioProgress PLC entered into a series of agreements with FMC BioPolymer, a division of FMC Corporation, relating to a strategic alliance for the commercialization of BioProgress PLC’s NROBE® system. The agreements provide that FMC will be solely responsible for the commercialization of the NROBE® system and provide for the license of IP to enable FMC to do so.
Pursuant to a Master License Agreement, BioProgress PLC granted FMC a worldwide exclusive license of specified patents and patent applications (and related technical information) relating to NROBE®. FMC granted back to BioProgress PLC a non-exclusive worldwide royalty free license to use these patents with respect to TabWrap, Septum and SWOLLO (TM) and to produce NROBE® film for sale to FMC. FMC also granted BioProgress PLC, subject to specified conditions, a right of first refusal if FMC wants to sublicense the specified patents for use outside the pharmaceutical, personal care, household care, food and medical materials fields. FMC agreed to pay a specified royalty to BioProgress PLC expressed as a percentage of net sales, as defined in the agreement, of NROBE® film sold by FMC. BioProgress PLC remains responsible for prosecuting patents but if its costs in any year exceed 20% of license fees received from FMC, FMC is required to contribute 50% of such excess. FMC agreed that if it does not order specified minimum numbers of NROBE® machines from BioProgress PLC within specified time periods and does not pay a specified payment then the exclusive license to FMC shall become a non-exclusive license. The Master License Agreement contains mutual representations, warranties and covenants regarding the specified patents and its term lasts until the expiration of all patents licensed thereunder. The Master License Agreement may be terminated early by BioProgress PLC for specified failures of FMC to pay royalties thereunder and by FMC for willful uncured breaches by BioProgress PLC which are material to the agreement over the course of its term.
Pursuant to an Equipment Purchase Agreement, FMC agrees during the term of the agreement to purchase all NROBE® equipment exclusively from BioProgress PLC. The Equipment Purchase Agreement shall remain in effect until the expiration of the term of the Master License Agreement unless FMC elects to terminate it earlier for failure of BioProgress PLC to comply with specified delivery and quality criteria. If FMC elects to terminate it must pay BioProgress PLC a specified fee per Nrobe® machine FMC purchases from another supplier following termination. The agreement specifies, payment, delivery and acceptance terms and
specifies that $500,000 which was paid by FMC to BioProgress PLC in 2002 when FMC commenced discussions with BioProgress PLC shall be treated as payment for one laboratory scale equipment and a down payment for a one tenth sized machine and BioProgress PLC’s obligation to negotiate repayment of this amount is superseded by this Agreement.
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Exchange Controls
There are currently no foreign exchange control restrictions imposed by English law on the import or export of capital, including the availability of cash and cash equivalents for our use; or on our ability to pay dividends, interest or other payments to non-resident holders of our ordinary shares; or on the conduct of our operations.
Taxation
The following discussion summarizes the material US federal income tax consequences and U.K. tax consequences of the acquisition, ownership and disposition of our ordinary shares. This summary applies to you only if you are a beneficial owner of ordinary shares and you are for US federal income tax purposes:
| | • | | an individual who is a citizen or resident of the United States; |
| | • | | a corporation, or other entity taxable as a corporation, created or organized under the laws of the United States or any state thereof or the District of Columbia; |
| | • | | a trust subject to the control of one or more US persons and the primary supervision of a US court; or |
| | • | | an estate the income of which is subject to US federal income tax regardless of its source. |
This summary applies only to holders who will hold our ordinary shares as capital assets for US federal income tax purposes. This summary is based:
| | • | | upon current U.K. tax law and US federal tax law, and H.M. Revenue and Customs and US Internal Revenue Service practice as of the date of this Form 20-F; and |
| | • | | upon the United Kingdom—United States Income Tax Convention that entered into force on April 25, 1980 (the 1980 Treaty), the new income tax treaty that entered into force on March 31, 2003 (the New Treaty), and the United Kingdom—United States Convention relating to estate and gift taxes (the Estate Tax Treaty) as in effect on the date of this Form 20-F. |
This summary assumes that the “anti-inversion” provisions of the American Jobs Creation Act of 2004 do not apply to our restructuring. Under that statute and the temporary Treasury Regulations thereunder, a non-US corporation, like us, that was formed as a result of a corporate expatriation transaction with respect to a US corporation, such as the reorganization completed in May 2003, may be treated as a domestic corporation. The legislation applies retroactively, but it and the temporary regulations include a “safe harbor” for corporate groups that, like us, have substantial business operations (relative to the group’s operations as a whole) in the country of the group parent’s incorporation. While we believe the “safe harbor” applies to us, its application is uncertain. If the “safe harbor” is found not to apply, we will be treated as a US corporation under US domestic law, which may result in different tax consequences to you.
The following summary is of a general nature and does not address all of the tax consequences that may be relevant to you in light of your particular situation. For example, this summary does not apply to US expatriates, insurance companies, regulated investment companies, tax-exempt organizations, financial institutions, persons subject to the alternative minimum tax, securities dealers, persons who are owners of an interest in a partnership or other pass-through entity that is a holder of ordinary shares, holders who hold ordinary shares as part of hedging, straddle or conversion transactions or holders who own directly, indirectly or by attribution, 10% or more of the voting power of our issued share capital and holders whose functional currency for US tax purposes is not the US dollar. The following summary also does not discuss the tax consequences of the exchange or other disposition of foreign currency in connection with the purchase or disposition of our ordinary shares. In addition, the following summary of U.K. tax considerations does not, except where indicated otherwise, apply to you if:
| | • | | you are resident or, in the case of an individual, resident or ordinarily resident in the United Kingdom for U.K. tax purposes; |
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| | • | your holding of shares is effectively connected with a permanent establishment in the United Kingdom through which you carry on business activities or, in the case of an individual who performs independent personal services, with a fixed base situated therein; or |
| | • | you are a corporation which, alone or together with one or more associated corporations, controls, directly or indirectly, 10% or more of our issued voting share capital. |
You should consult your own tax advisers as to the particular tax consequences to you under U.K., US federal, state and local and other foreign laws, of the acquisition, ownership and disposition of ordinary shares.
United Kingdom Tax Consequences
United Kingdom taxation of dividends and distributions.Under current U.K. taxation legislation, no tax will be withheld by us from cash dividend payments.
US holders of ordinary shares will not receive any payment from H.M. Revenue and Customs in respect of any tax credit on dividends paid by us. This is because the Treaty provides for a notional U.K. withholding tax, at a maximum rate of 15%, which exceeds the tax credit of 10% of the gross amount of the dividend (being the cash dividend we have paid plus the tax credit) to which an individual resident (for tax purposes) in the U.K. would have been entitled had he received the dividend.
United Kingdom taxation of capital gains.You will not ordinarily be liable for U.K. tax on capital gains realized on the disposal of ordinary shares, unless, at the time of the disposal, you carry on a trade, including a profession or vocation, in the U.K. through a branch or agency (if you are an individual) or permanent establishment (if you are a corporation) and those ordinary shares are, or have been, used, held or acquired for the purposes of that trade or branch or agency or permanent establishment (as the case may be).
A holder of ordinary shares who is an individual and who has, on or after March 17, 1998, ceased to be resident or ordinarily resident for tax purposes in the U.K. but who again becomes resident or ordinarily resident in the U.K. within a period of less than five complete tax years and who disposes of ordinary shares during that period may also be subject to U.K. tax on capital gains, notwithstanding that he/she is not resident or ordinarily resident in the U.K. at the time of the disposal.
United Kingdom inheritance tax.Subject to the discussion of the Estate Tax Treaty in the next paragraph, ordinary shares beneficially owned by an individual will be subject to U.K. inheritance tax on the death of the individual or, in some circumstances, if the ordinary shares are the subject of a gift, including a transfer at less than full market value, by that individual. Inheritance tax is not generally chargeable on gifts to individuals or on some types of settlement made more than seven years before the death of the donor. Special rules apply to ordinary shares held in a settlement.
An ordinary share held by an individual whose domicile is determined to be the United States for the purposes of the Estate Tax Treaty, and who is not a national of the U.K., will not be subject to U.K. inheritance tax on the individual’s death or on a lifetime gift, including a transfer at less than full market value, of the ordinary share except where:
| | • | the ordinary share is part of the business property of a U.K. permanent establishment of an enterprise; |
| | • | the ordinary share pertains to a U.K. fixed base of an individual used for the performance of independent personal services; or |
| | • | any applicable US federal gift or estate tax liability has not been paid. |
The Estate Tax Treaty generally provides a credit against US federal tax liability for the amount of any tax paid in the U.K. in a case where the ordinary share is subject both to U.K. inheritance tax and to US federal estate or gift tax.
United Kingdom stamp duty and stamp duty reserve tax (SDRT).U.K. stamp duty will (subject to specific exceptions) be payable at the rate of 1.5% (rounded up to the nearest £5) on any instrument pursuant to which ordinary shares are transferred:
| | • | to, or to a nominee or agent for, a person whose business is or includes the provision of clearance services; or |
| | • | to, or to a nominee or agent for, a person whose business is or includes issuing depositary receipts. |
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Where consideration is paid for the transfer of ordinary shares to the issuer of depositary receipts (or nominee or agent therefor) or to the person whose business is or includes the provision of clearance services (or nominee or agent therefor), this 1.5% charge is applied to the value of the consideration paid. In any other case, the charge is applied to the value of the ordinary shares transferred.
SDRT, at the rate of 1.5% of the value of the ordinary shares (or 1.5% of the consideration paid, if any), could (subject to specific exemptions) also be payable on the transfer or issue of shares to such a person, but no SDRT will be payable if stamp duty equal to that SDRT liability is paid. In circumstances where stamp duty is not payable on the transfer of ordinary shares to, or to a nominee or agent for, such person, such as where there is no chargeable instrument, SDRT will be payable at the rate of 1.5%.
Subject to some exceptions, a transfer on sale of ordinary shares in registered form will attract ad valorem U.K. stamp duty at the rate of 0.5% (rounded up to the nearest £5) of the dutiable consideration given, usually the cash consideration for the transfer. Generally, ad valorem stamp duty applies neither to gifts nor on a transfer from a nominee to the beneficial owner, although in cases of transfers where there is a transfer otherwise than on sale, a fixed U.K. stamp duty of £5 may be payable. The purchaser or transferee of shares usually pays stamp duty.
SDRT at a rate of 0.5% of the amount or value of the consideration for the transfer may be payable on an unconditional agreement to transfer ordinary shares. If, within six years of the date of an unconditional agreement to transfer shares, an instrument transferring the shares is executed and duly stamped, any SDRT paid may be repaid or, if it has not been paid the liability to pay such tax, but not necessarily interest and penalties, would be cancelled. SDRT is chargeable whether the agreement is made or effected in the U.K. or elsewhere and whether or not any party is resident or situated in any part of the U.K. The purchaser or transferee of shares usually pays SDRT.
United States Federal Income Tax Consequences
Taxation of dividends.Subject to the discussion below under “Passive foreign investment company considerations,” the gross amount of a cash distribution (including the amount of foreign taxes, if any, withheld therefrom) paid on an ordinary share will be a dividend for US federal income tax purposes to the extent paid out of our current or accumulated earnings and profits (as determined for US federal income tax purposes). To the extent that a distribution exceeds our earnings and profits, it will be treated as a non-taxable return of capital to the extent of your adjusted basis in such shares and thereafter as a capital gain. Dividends paid by us generally will be treated as foreign source income and will not be eligible for the dividends-received deduction generally allowed to corporate shareholders under the US federal income tax law.
The amount of any cash distribution that you must include in income will equal the fair market value in US dollars of the pounds sterling or other foreign currency received on the date received by you for the ordinary shares, based on the spot exchange rate on such date, whether or not the payment is converted into US dollars at that time. You will have a basis in any pounds sterling or other foreign currency distributed equal to such US dollar amount. Any gain or loss recognized upon a subsequent disposition of the pounds sterling or other foreign currency will generally be US source ordinary income or loss.
Dividend income is generally taxed as ordinary income. However, as a result of recent United States tax legislation, a maximum United States federal income tax rate of 15% will apply to “qualified dividend income” received by individuals (as well as certain trusts and estates) in taxable years beginning after December 31, 2002, and before January 1, 2009, provided that certain holding period requirements are met. “Qualified dividend income” includes dividends paid on shares of United States corporations as well as dividends paid on shares of “qualified foreign corporations,” including shares of a foreign corporation which are readily tradable on an established securities market in the United States.
The amount of foreign income taxes that may be claimed as a credit against United States federal income tax in any year is subject to certain complex limitations and restrictions, which must be determined on an individual basis by each US holder. The limitations include, among others, rules that may limit foreign tax credits allowable with respect to specific classes of income to the United States federal income taxes otherwise payable with respect to each such class of income. Dividends paid by us generally will be foreign source “passive income” or “financial services income” for United States foreign tax credit purposes.
We do not currently intend to pay dividends. If we do pay a dividend, you are urged to consult your tax advisers as to the application of the 1980 Treaty, the New Treaty and the Jobs and Growth Tax Relief Reconciliation Act of 2003.
Taxation of capital gains.Upon the sale, exchange or other disposition of an ordinary share, you generally will recognize a gain or a loss for US federal income tax purposes in an amount equal to the difference between the amount realized (determined in US dollars) and your adjusted tax basis in the ordinary share. Subject to the discussion below under “Passive foreign investment company considerations”, such gain or loss will generally be a capital gain or loss and will generally be treated as US source gain or loss. Such capital gain or loss will be long-term capital gain or loss if you have held the ordinary share for more than one year at the time of the disposition. If you are an individual, trust or estate, long-term capital gain realized upon a disposition of an ordinary share after May 5, 2003 and before the end of a taxable year which begins before January 1, 2009, generally will be subject to a maximum US federal income tax rate of 15%. If you have held the ordinary share for one year or less, any such gain will be treated as short-term capital gain, taxed as ordinary income at your marginal income tax rate. Capital losses may only be used to offset capital gains, except that US individuals may deduct up to $3,000 of net capital losses against ordinary income. You should consult your own tax advisers regarding the availability of this offset.
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Passive foreign investment company considerations.A company’s status as a passive foreign investment company (a PFIC) for US federal income tax purposes is a factual determination made on a year to year basis. We cannot determine our status as a PFIC for our current taxable year or for future taxable years until the close of the applicable tax year. We will be a PFIC if either:
| | • | | 75% or more of our gross income in a taxable year is “passive income”, which includes dividends, interest, royalties, rents, annuities, and some types of gains; or |
| | • | | the average percentage of the value of our assets that produce or are held for the production of passive income is at least 50%. The US Internal Revenue Service has indicated that cash balances, even if held as working capital, are considered to be assets that produce passive income. |
The application of the gross income test in our particular circumstances is uncertain and could result in our classification as a PFIC even in a year in which we have substantial gross revenues from product sales. In addition, the proportion of our cash balances compared to the value of our other assets may in the future lead to us being a PFIC. We intend to use reasonable efforts to avoid PFIC status, but can give no assurance that we will be successful. If we determine that we are a PFIC, we will take reasonable steps to notify you.
If we were classified as a PFIC, unless you timely made one of specific available elections, a special tax regime would apply to both:
| | • | | any “excess distribution”, which would be your share of distributions in any year that are greater than 125% of the average annual distributions received by you in the three preceding years or your holding period, if shorter; and |
| | • | | any gain realized on the sale or other disposition of the ordinary shares. |
Under this regime, any excess distribution and realized gain would be treated as ordinary income and would be subject to tax as if the excess distribution or gain had been realized ratably over your holding period for the ordinary shares. As a result of this treatment:
| | • | | the amount allocated to the taxable year in which you realize the excess distribution or gain would be taxed as ordinary income; |
| | • | | the amount allocated to each prior year, with certain exceptions, would be taxed as ordinary income at the highest applicable tax rate in effect for that year; and |
| | • | | the interest charge generally applicable to underpayments of tax would be imposed on the taxes deemed to have been payable in those previous years. |
If you own shares in a PFIC that are treated as marketable stock, you may make a mark-to-market election. If you make this election, you will not be subject to the PFIC rules described above. Instead, in general, you will include as ordinary income each year the excess, if any, of the fair market value of your shares at the end of the taxable year over your adjusted basis in your shares. You will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of your shares over their fair market value at the end of the taxable year, but only to the extent of the net amount of income previously included as a result of the mark-to-market election. Your basis in the shares will be adjusted to reflect any such income or loss amounts. Any gain realized upon disposition of your shares will also be taxed as ordinary income.
In addition, the special PFIC tax rules described above will not apply to you if you make a QEF election, that is, you elect to have us treated as a qualified electing fund for US federal income tax purposes. If we determine that we are a PFIC, we will provide you with such information as you may require from us in order to make an effective QEF election.
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If you make a QEF election, you will be required to include in your gross income for US federal income tax purposes your pro rata share of our ordinary earnings and net capital gain for each of our taxable years that we are a PFIC, regardless of whether or not you receive any distributions from us. Your basis in your ordinary shares will be increased to reflect undistributed amounts which are included in your gross income. Distributions of previously includible income will result in a corresponding reduction of basis in the ordinary shares and will not be taxed again as a distribution to you.
You are urged to consult your own tax adviser concerning the potential application of the PFIC rules to your ownership and disposition of ordinary shares.
United States information reporting and backup withholding.Dividend payments with respect to ordinary shares and proceeds from the sale, exchange or other disposition of ordinary shares may be subject to information reporting to the US Internal Revenue Service and possible US backup withholding (currently at a 28% rate). Backup withholding will generally not apply to a holder, however, if such holder furnishes a correct taxpayer identification number and makes any other required certification or if such holder is otherwise exempt from backup withholding. To establish its exempt status, a holder generally must provide its taxpayer identification number and required certifications on US Internal Revenue Service Form W-9.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a holder’s US federal income tax liability, and such holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the US Internal Revenue Service and furnishing any required information.
Documents on Display
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and other information with the Securities and Exchange Commission. These materials, including this Form 20-F and the exhibits thereto, may be read and copied at the Commission’s Public Reference Room at Room 1024 Judiciary Plaza, 450 Fifth Street NW, Washington DC 20549 and its regional reference rooms. You may request copies of the materials, upon payment of a duplicating fee, by writing to the Commission. You may obtain information on the operation of the Commission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330. The Commission also maintains a web site at http://www.sec.gov that contains reports, proxy statements and other information regarding issuers that file electronically with the Commission.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk related to changes in foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes. The majority of our expenditures and operating losses are derived from our UK operations. Accordingly, operating results can be affected by fluctuations in the US dollar exchange rate with the UK pound sterling. Currency exchange rates are determined by market factors beyond our control and may vary substantially over a period of time. If the UK pound sterling were to strengthen in relation to the US dollar, our sterling denominated income and expenditure would increase when reported in US dollars. The average exchange rate for the 2005 year was $1.81 / £1.00, for 2004 $1.84 / £1.00 and for fiscal 2003 $1.67 / £1.00. A 10% depreciation of the US dollar, giving an increase in the $ / £ average exchange rate, would have approximately increased our 2005 net loss by $1,983,000, our 2004 net loss by $1,236,000 and our 2003 net loss by $493,000. As we begin to expand our operations in continental Europe we will face similar risks relating to fluctuations in the Euro exchange rate.
Item 12. Description of Securities other than Equity Securities
Not applicable.
52
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
Material Modifications to the Rights of Security Holders
None.
Use of Proceeds
Not applicable.
Item 15. Controls and Procedures.
Upon assuming their new positions in 2005, the Company’s principal executive officer and the predecessor to the current principal financial officer evaluated the Company’s disclosure controls and procedures as of December 31, 2004 in the context of a broader review of the Company’s control environment under prior management. In conducting this evaluation, the principal executive officer and the predecessor to the current principal financial officer were concerned that the disclosure controls and procedures in place at the Company under the prior management as of December 31, 2004 may not have been effective to ensure that material information relating to the registrant, including its consolidated subsidiaries, was made known to the principal executive and principal financial officers by others within the entities for the period ended December 31, 2004 to enable disclosure on a timely basis in conformance with applicable rules and regulations. In particular, there was concern that prior management failed to enact adequate written control procedures and make employees sufficiently aware of existing control procedures (particularly expenditure controls) which may not have allowed for the prompt and careful disclosure of information within the organization.
As a result, in 2005 the Board of Directors engaged independent accountants to evaluate the Company’s controls and procedures (including disclosure controls) and information gathered and reported. The results of this evaluation were still being reviewed and analyzed at the time the Company filed its Annual Report on Form 20-F for the fiscal year ended December 31, 2004.
Although the independent accountants identified certain improvements that could be made in the Company’s controls and procedures, the matters arising from their review were not deemed to be materially significant to warrant the Company’s financial statements to be restated at the 2004 year end. This was confirmed by Grant Thornton UK LLP, the Company’s auditors.
Despite the fact that the independent accountants’ inquiry did not require a restatement of the Company’s financial statements, as a result of this inquiry, the Company’s principal executive officer and the predecessor to the current principal financial officer determined that the disclosure controls and procedures as of December 31, 2004 were not effective for purposes of disclosure of information and enacted relevant measures to improve the Company’s disclosure controls and procedures. They instituted new policies with respect to controls and procedures, including implementing a monetary threshold for expenditures, depending on the seniority of the employee and the division within which the employee is employed, above which direct personal approval of either the principal executive officer or principal financial officer is required. They also made these policies more widely known within the Company by notifying the Company’s employees, either orally or by email, of these policies and of the overall importance of these controls and procedures.
The principal executive officer and the predecessor to the current principal financial officer also oversaw certain changes within the Company’s management with the goal of strengthening the Company’s controls and procedures generally. These include the appointments of a new Company Secretary, Georgina Godby, on July 27, 2005; a new Non-Executive Chairman, Peter Ibbetson, on July 29, 2005; and a new Non-Executive Director, Anthony John Knight, on November 29, 2005. Management also initiated the practice of notifying all employees, either orally or by email, of the existing and new controls and procedures.
The predecessor to the current principal financial officer was employed by the Company as Chief Financial Officer from March 7, 2005. Due to ill health, during the last quarter of 2005 until his resignation on April 28, 2006 he was unable to regularly attend the offices of the Company to carry out his duties. The Company and Grant Thornton have identified the absence of the Chief Financial Officer during this period, and the transition period until the appointment of the new Chief Financial Officer, as a material weakness. As part of improving its internal and disclosure controls, the Company put in place interim measures and then appointed Peter Keen as the new Chief Financial Officer effective July 3, 2006. A material weakness is a significant deficiency, or a combination of significant deficiencies, that adversely affects a company’s ability to initiate, authorize, record, process or report external financial data reliably in accordance with generally accepted accounting principles so that there is more than a remote likelihood that a misstatement of the company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. Grant Thornton is not aware of any impact on the financial statements included in the Company’s annual report on Form 20-F for the fiscal year ended December 31, 2005 (the “2005 Form 20-F”) as a result of the material weakness noted above.
Because the Company’s Chief Financial Officer has only recently joined the Company, he is unable to provide the certifications required under Section 302 and 906 of the Sarbanes-Oxley Act of 2002 with respect to the 2005 Form 20-F. The new Chief Financial Officer intends to conduct a thorough review of the Company’s controls and procedures and has the full support of the Company’s Board of Directors, Audit Committee and Chief Executive Officer.
In light of the material weakness identified and the absence of the Section 302 and 906 certifications in connection with the Company’s filing of the 2005 Form 20-F, the Company has concluded that its disclosure controls were not effective.
The principal executive officer and principal financial officer have established as one of their highest priorities the continual monitoring of the Company’s disclosure controls and procedures throughout the rest of the current fiscal year and the enactment of further remedial measures as necessary to enable the gathering and review of information and the making of any required disclosures on a timely basis in conformance with applicable rules and regulations. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
53
Item 16A. Audit Committee Financial Expert.
The Board of Directors has determined that the Audit Committee has a “audit committee financial expert” as that term is defined in the Securities and Exchange Commission rules and regulations. It was determined that Alan Clarke is the “audit committee financial expert”. The Board of Directors believes that the members of the Audit Committee have demonstrated the capability of analyzing and evaluating the Company’s financial statements and understanding internal controls and procedures for financial reporting. As the Board of Directors believes that the current members of the Audit Committee are collectively qualified to carry out all of the duties and responsibilities of the Audit Committee.
Item 16B. Code of Ethics.
The Board of Directors adopted a code of ethics applicable to the Company’s principal executive officer, principle financial officer, principal accounting officer or controller, or for persons performing similar functions. The code of ethics was amended and restated effective as of June 8, 2006. In accordance with applicable SEC rules, the amended and restated code of ethics is filed as an exhibit to this annual report. The code is also publicly available on the Company’s website.
Item 16C. Principal Accountant Fees and Services.
During each of the last three fiscal years, Grant Thornton UK LLP (formerly know as Grant Thornton), Registered Auditors and Chartered Accountants, have acted as our independent auditors.
Audit Fees
Grant Thornton billed us approximately $131,926 in 2005 (as compared to $189,705 in 2004 and $55,928 in 2003) including fees associated with the annual audit, consultations on various accounting issues and performance of local statutory audits.
Audit-Related Fees
Grant Thornton billed us approximately $81,324 in 2005 (as compared to $158,395 in 2004 and $344,623 in 2003). Audit-related services principally include due diligence examinations, as well as acting as reporting accountants under U.K. Listing Authority regulations and related SEC regulations. Of the $344,623 Grant Thornton billed us for audit related services in 2003, $124,192 were charged to additional paid in capital in respect of work in connection with common stock issues in the year.
Tax Fees
Grant Thornton billed us approximately $104,818 in 2005 (as compared to $254,168 in 2004 and $35,060 in 2003) for tax advice, including fees associated with tax compliance services, tax planning services and other tax consulting services. For fiscal 2003, $7,513 of these fees were charged to additional paid in capital in respect of work in connection with common stock issues in the year.
All Other Fees
During 2005 the Company incurred no other fees from Grant Thornton (as compared to $51,570 in 2004 and $nil in 2003). The fees charged in 2004 related to due diligence work carried out as part of the acquisition of certain assets of Aquafilm.
Pre-Approval Policies and Procedures
Prior to the engagement of Grant Thornton UK LLP (formally known as Grant Thornton) each year as auditor, the engagement as auditor is approved by the Audit Committee of our Board of Directors and by vote of our shareholders at our Annual General Meeting of Shareholders. Our Audit Committee has also adopted its own rules of procedure. Our Audit Committee’s rules of procedure provide for a process with respect to the prior approval of all services, including non-audit services, to be performed by our independent auditors.
54
Item 16D. Exemptions from the listing Standards for Audit Committees.
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Not applicable.
55
PART III
Item 17. Financial Statements
Not Applicable.
Item 18. Financial Statements
The following financial statements, together with the report of our independent auditors and our independent accountants thereon, are filed as a part of this Form 20-F.
| | |
| | | Page |
Report of Independent Registered Public Accounting Firm | | F-2 |
Consolidated Balance Sheets as of December 31, 2005 and 2004 | | F-3 |
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003 | | F-4 |
Consolidated Statement of Changes in Stockholders’ Equity as of December 31, 2005, 2004 and 2003 | | F-5 |
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 | | F-6 |
Notes to the consolidated financial statements for the years ended December 31, 2005, 2004 and 2003 | | F-7 |
Item 19. Exhibits
| | |
Exhibit No. | | Description of Exhibits |
| 1.1 | | Certificate of Incorporation(7) |
| |
| 2.1 | | Specimen Share Certificate(7) |
| |
| 2.2 | | Memorandum of Association(7) |
| |
| 2.3 | | Articles of Merger(7) |
| |
| 2.4 | | Articles of Association adopted as of June 20, 2006(11) |
| |
| 2.5 | | Audit Committee Terms of Reference(11) |
| |
| 4.1 | | Reorganization Agreement between the Company and BioProgress Technology (2) |
| |
| 4.2 | | Acquisition Agreement—DHA Nutrition(3) |
| |
| 4.3 | | Acquisition Agreement—BioProgress Limited (UK)(3) |
| |
| 4.4 | | Amendment to Acquisition Agreement—BioProgress Limited (1) |
| |
| 4.5 | | Employment Agreement—Edward I. Nowak(3) |
| |
| 4.6 | | Professional Services Agreement—The Jade Partnership International, Inc.(3) |
| |
| 4.7 | | Professional Services Agreement—Company and Ormiston-Gore Securities Limited(3) |
| |
| 4.8 | | Professional Services Agreement—BioProgress Technology Limited and Ormiston-Gore Securities Limited(3) |
| |
| 4.9 | | TruTona Purchase Agreement(3) |
| |
| 4.10 | | Exclusive Evaluation Agreement, dated February 18, 2000 between the Company and the Fortune 500 company(4) |
| |
| 4.11 | | Technology Collaboration Agreement for the Development of Non-Gelatin Paintballs, dated March 7, 2000 between the Company and JT USA(4) |
| |
| 4.12 | | Master License Agreement, dated as of February 3, 2004, between FMC Corporation (“FMC”) and BioProgress Technology International, Inc. a Nevada Corporation which is a wholly owned subsidiary of the Company (8)* |
| |
| 4.13 | | Framework Agreement, dated as of February 3, 2004, between FMC and the Company (8)* |
| |
| 4.14 | | Intellectual Property License Agreement, dated as of March 8, 2004, between BioProgress Technology International, Inc., Perrigo R&D Company and Perrigo Company (8)* |
| |
| 4.15 | | Equipment Purchase Agreement, dated February 3, 2004, between FMC Corporation, FMC BioPolymer and the Company (8)* |
| |
| 4.16 | | Film Supply Agreement, dated February 3, 2004, between FMC Corporation, FMC BioPolymer and the Company (8)* |
56
| | |
| 4.17 | | Option Agreement—Barry J. Muncaster(5) |
| |
| 4.18 | | Option Agreement—Edward Nowak(5) |
| |
| 4.19 | | Option Agreement—Gregory L. Bowers(5) |
| |
| 4.20 | | Option Agreement—Graham R. M. Hind(5) |
| |
| 4.21 | | Option Agreement—James T. C. Longley(5) |
| |
| 4.22 | | Option Agreement—Larry C. Shattles(5) |
| |
| 4.23 | | Option Agreement—Malcolm D. Brown(5) |
| |
| 4.24 | | Premises lease—Hostmoor property(6) |
| |
| 4.25 | | Agreement to lease—Hostmoor property(6) |
| |
| 4.26 | | Agreement for Supply of Prototype Machine, dated July 10th, 2001, between the Company and Farmasierra, S.A.(6) |
| |
| 4.27 | | 2002 Common Stock Offering of up to 600 units, including warrants(6) |
| |
| 4.28 | | Product Development Agreement, dated November 26, 2001, between the Company and The Boots(7) |
| |
| 4.29 | | Product Development Agreement (Stage 1), dated April 19, 2002 between the Company and Boots Healthcare International Limited (7) |
| |
| 4.30 | | License Agreement between Convatec, a division of E.R. Squibb & Sons, L.L.C. and BioProgress Technology International, Inc., together with an amendment dated 11 November 2002(7) * |
| |
| 4.31 | | Consultancy Agreement, dated March 10, 2003, between Barry J. Muncaster and the Company (7) |
| |
| 4.32 | | Agreement and Plan of Merger and First Amendment thereto (7) |
| |
| 4.33 | | Loan Agreement, dated January 29, 2003, between BioProgress Technology International, Inc. and Farmasierra, S.A. (7) |
| |
| 4.34 | | Memorandum of Variation #7, dated as of August 22, 2002, between BioProgress Technology International, Inc. and Consolidated EcoProgress Technology, Inc. (7) |
| |
| 4.35 | | Service Agreement, dated April 17, 2003, between the Company and Graham Hind(7) |
| |
| 4.36 | | Deed of Termination, dated April 7, 2004, among Peter Black Advanced Technologies Limited, Peter Black Healthcare Limited, BioProgress Technology International, Inc. and BioProgress Technology Limited (8) |
| |
| 4.37 | | Asset Purchase Agreement, dated March 7, 2004, by and among Bio Films LLC, Aquafilm LLC, Aquafilm USA, Inc. and Each of the Stockholders of Aquafilm, Inc. (8) |
| |
| 4.38 | | Service Agreement, dated April 17, 2003, between the Company and Malcolm David Brown (7) |
| |
| 4.39 | | Appointment as Non-Executive Director, between the Company and Peter Glynn-Jones (8) |
| |
| 4.40 | | Appointment as Non-Executive Director, between the Company and Alan Clarke (8) |
| |
| 4.41 | | Appointment as Non-Executive Director, between the Company and Graham Cole (8) |
| |
| 4.42 | | Appointment as Non-Executive Director, between the Company and Tony Fabrizi (10) |
| |
| 4.43 | | Subscription Agreement, dated September 30th, 2004, between the Company, the Investor named therein and Collins Stewart Limited (10) |
| |
| 4.44 | | Supplemental Agreement, dated June 1st, 2005, between the Company and Citadel Equity Fund Ltd (10) |
| |
| 4.45 | | Equipment Purchase Agreement, dated February 3rd, 2004, between Harro Hoefliger Verpackungsmaschinen GmbH and the Company (10) |
| |
| 4.46 | | Agreement for the developments of a proof-of-principal automated tablet encapsulating machine, dated March 2nd, 2005, between the GB Innomech Limited and BioProgress Technology Limited (10) |
| |
| 4.47 | | Agreement relating to Production of XGel™ Film, dated February 4th, 2005, between the Biocustom Limited and Custom Pharmaceuticals Limited (10) |
| |
| 4.48 | | Supply Agreement, dated September 30th, 2004, between Bio Tec Films, LLC and AXM Pharma (Shenyang) Inc. (10)* |
57
| | |
| 4.49 | | Net Lease – Florida property (10) |
| |
| 4.50 | | Net Lease – Florida property (10) |
| |
| 4.51 | | Deposit Agreement relating to American Depositary Receipts, dated September 9th, 2004, between the Company and JPMorgan Chase Bank and the Holders of American Depositary Receipts (9) |
| |
| 4.52 | | Resignation as Non-Executive Director, between the Company and Tony Fabrizi (11) |
| |
| 4.53 | | Rules of Executive Share Option Scheme (11) |
| |
| 4.54 | | Contract for Sale – Hostmoor property (11) |
| |
| 4.55 | | Form of Joint Venture Agreement, dated December 20th, 2005, between Dexo Biopharm Limited, Crescent Pharma Limited, Luma Auchi, Mohammed Aldoori and Dexo Biogenerics Limited (11) |
| |
| 4.56 | | License Agreement, dated December 20th, 2005, between Crescent Pharma Limited and Dexo Biogenerics Limited (11) |
| |
| 4.57 | | License Agreement, dated December 20th, 2005, between the Company and Dexo Biogenerics Limited (11) |
| |
| 4.58 | | Loan Agreement, dated December 20th, 2005, between Dexo Biopharm Limited and Dexo Biogenerics Limited (11) |
| |
| 4.59 | | Services Agreement, dated December 20th, 2005, between the Company and Dexo Biogenerics Limited (11) |
| |
| 4.60 | | Services Agreement, dated December 20th, 2005, between Crescent Pharma Limited and Dexo Biogenerics Limited (11) |
| |
| 4.61 | | Share Purchase Agreement, dated December 20th, 2005, between the Company and Dexo Biopharm France-In-Formation (11) |
| |
| 4.62 | | Orderly Market Agreement, dated January 6th, 2006, between the Company, Bridgewell Securities Limited and the Shareholders (11) |
| |
| 4.63 | | Lock-up Agreement, dated January 5, 2006, between the Company, Bridgewell Securities Limited and the Shareholders (11) |
| |
| 4.64 | | Appointment as Non-Executive Director, between the Company and Tony Knight (11) |
| |
| 4.65 | | Appointment as Non-Executive Director, between the Company and Alan Clarke (11) |
| |
| 4.66 | | Appointment as Non-Executive Director, between the Company and Peter Ibbetson (11) |
| |
| 4.67 | | Research Collaboration and Option Agreement, dated May 3rd, 2006, between Dexo Biopharm Limited and Uluru Inc. (11) |
| |
| 4.68 | | Service Agreement, dated June 14th, 2006, between the Company and Peter Keen (11) |
| |
| 4.69 | | License to Assign and Authorized Guarantee Agreement – Hostmoor property (11) |
| |
| 4.70 | | Transfer of Title – Hostmoor property (11) |
| |
| 4.71 | | Premises lease – Science Park property (11) |
| |
| 8.1 | | List of the Company’s Subsidiaries (11) |
| |
| 10.1 | | Consent of Grant Thornton UK LLP (11) |
| |
| 11.1 | | Code of Conduct of the Company, effective as of 8 June 2006 (11) |
| |
| 12.1 | | Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer(11) |
| |
| 13.1 | | Section 1350 Certification of Chief Executive Officer(11) |
| (1) | Filed as an exhibit to the Company’s Registration Statement on Form 10-KSB dated August 23,1994, or October 21, 1994 (Registration No. 0-24736). |
| (2) | Filed as an exhibit to the Company’s Form 10-KSB for the year ended December 31, 1997. |
| (3) | Filed as an exhibit to the Company’s Form 10-KSB for the year ended December 31, 1998. |
| (4) | Filed as an exhibit to the Company’s Form 10-KSB for the year ended December 31, 1999. |
| (5) | Filed as an exhibit to the Company’s Form 10-KSB for the year ended December 31, 2000. |
| (6) | Filed as an exhibit to the Company’s Form 10-KSB for the year ended December 31, 2001. |
| (7) | Filed as an exhibit to the Registration Statement/Proxy Statement of BioProgress PLC and BioProgress Technology International, Inc. filed December 20, 2002 and amended March 19, 2003, May 7, 2003 and May 16, 2003 (Registration Number 333-102045). |
| (8) | Filed as an exhibit to the Company’s Form 20-F for the year ended December 31, 2003. |
| (9) | Filed as an exhibit to the Company’s Form F-6 dated September 21, 2004. |
| (10) | Filed as an exhibit to the Company’s Form 20-F for the year ended December 31, 2004. |
| (11) | Filed as an exhibit herewith. |
| * | Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the Commission. |
58
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| | |
| BIOPROGRESS PLC |
| |
| By: | | /s/ Richard Trevillion |
| Name: | | Richard Trevillion |
| Title: | | Chief Executive Officer |
|
| Date: July 21, 2006 |
BIOPROGRESS PLC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
BIOPROGRESS PLC AND SUBSIDIARIES
Consolidated Financial Statements
As of December 31, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of BioProgress PLC:
We have audited the accompanying consolidated balance sheets of BioProgress PLC as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in certain circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BioProgress PLC at December 31, 2005 and 2004 and the consolidated results of their operations and their cash flows for each of the three years in the periods ended December 31, 2005, in conformity with generally accepted accounting principles generally accepted in the United States of America.
Grant Thornton UK LLP
/s/ Grant Thornton UK LLP
Cambridge
July 18, 2006
F-2
BIOPROGRESS PLC
Consolidated Balance Sheets
As of December 31,
| | | | | | |
| | | 2005 | | | 2004 | |
| | | $ | | | $ | |
ASSETS | | | | | | |
CURRENT ASSETS: | | | | | | |
Cash and cash equivalents | | 11,216,448 | | | 27,353,598 | |
Accounts receivable, net of allowance for doubtful debts of $734,495 (2004: $501,200) | | 1,071,950 | | | 509,389 | |
Amounts due from related parties | | — | | | 237,913 | |
Inventories | | 780,716 | | | 3,333,825 | |
Prepaid expenses and other current assets | | 1,157,297 | | | 994,626 | |
| | | | | | |
Total current assets | | 14,226,411 | | | 32,429,351 | |
| | | | | | |
PROPERTY, PLANT AND EQUIPMENT, net | | 3,225,822 | | | 3,740,247 | |
OTHER LONG TERM ASSETS | | 422,342 | | | 465,776 | |
DEBT ISSUE COSTS | | — | | | 4,239,468 | |
INTANGIBLE ASSETS, net | | 3,236,826 | | | 3,791,764 | |
GOODWILL | | 3,875,395 | | | 3,688,009 | |
| | | | | | |
Total assets | | 24,986,796 | | | 48,354,615 | |
| | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
CURRENT LIABILITIES: | | | | | | |
Accounts payable | | 2,003,597 | | | 1,926,545 | |
Accrued rent deposit | | 422,342 | | | 465,776 | |
Accrued expenses and other current liabilities | | 1,020,304 | | | 490,683 | |
| | | | | | |
Total current liabilities | | 3,446,243 | | | 2,883,004 | |
| | | | | | |
LONG TERM LIABILITIES | | | | | | |
4% convertible bond | | — | | | 9,467,000 | |
Commitments and contingent liabilities | | 3,324,830 | | | 3,324,830 | |
| | | | | | |
| | 3,324,830 | | | 12,791,830 | |
| | | | | | |
Convertible 4% preference shares of £0.005 each, 80,000 authorized; | | — | | | — | |
| | |
4% redeemable preference shares of £0.005 each, 90,000 authorized; | | — | | | — | |
| | |
STOCKHOLDERS’ EQUITY: | | | | | | |
Common stock, £0.01 par value 240,000,000 shares authorized; 123,076,259 shares issued and outstanding as of December 31, 2005 and 117,797,637 shares issued and outstanding as of December 31, 2004 | | 2,082,265 | | | 1,986,870 | |
Additional paid-in capital | | 86,327,701 | | | 75,690,040 | |
Accumulated deficit | | (69,439,842 | ) | | (46,687,366 | ) |
Subscriptions receivable | | — | | | (500,000 | ) |
Accumulated other comprehensive income | | (754,401 | ) | | 2,190,237 | |
| | | | | | |
Total stockholders’ equity | | 18,215,723 | | | 32,679,781 | |
| | | | | | |
Total liabilities and stockholders’ equity | | 24,986,796 | | | 48,354,615 | |
| | | | | | |
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.
F-3
BIOPROGRESS PLC
Consolidated Statements of Operations
For the years ended December 31,
| | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | $ | | | $ | | | $ | |
NET REVENUE | | 8,004,642 | | | 4,618,564 | | | 1,684,911 | |
| | | |
COST AND EXPENSES: | | | | | | | | | |
| | | |
Cost of revenues | | 4,804,063 | | | 3,142,247 | | | 275,549 | |
General and administrative expenses | | 10,203,773 | | | 7,813,347 | | | 4,384,395 | |
Depreciation and amortization | | 1,477,855 | | | 1,040,667 | | | 292,879 | |
Research & development | | 3,439,772 | | | 513,457 | | | 171,959 | |
Consulting fees | | 871,040 | | | 2,154,619 | | | 357,499 | |
Professional fees | | 4,176,330 | | | 3,204,785 | | | 273,905 | |
| | | | | | | | | |
Total cost and expenses | | 24,972,833 | | | 17,869,122 | | | 5,756,186 | |
| | | | | | | | | |
Loss from operations | | (16,968,191 | ) | | (13,250,558 | ) | | (4,071,275 | ) |
| | | |
OTHER INCOME AND EXPENSES | | | | | | | | | |
| | | |
Transactional foreign currency gain / (loss) | | 1,644,552 | | | (788,290 | ) | | (845,635 | ) |
Loss on redemption of convertible bond | | (7,542,619 | ) | | — | | | — | |
Interest income | | 785,662 | | | 932,912 | | | 50,639 | |
Interest expense | | (671,880 | ) | | (313,379 | ) | | (32,266 | ) |
| | | | | | | | | |
Loss from continued operations before income tax | | (22,752,476 | ) | | (13,419,315 | ) | | (4,898,537 | ) |
Income tax benefit | | — | | | — | | | 30,484 | |
| | | | | | | | | |
Loss from continuing operations | | (22,752,476 | ) | | (13,419,315 | ) | | (4,868,053 | ) |
Gain from discontinued operations | | — | | | — | | | 291,541 | |
| | | | | | | | | |
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS | | (22,752,476 | ) | | (13,419,315 | ) | | (4,576,512 | ) |
| | | | | | | | | |
NET LOSS PER COMMON SHARE — BASIC AND DILUTED: | | | | | | | | | |
Loss per share from continuing operations | | (0.19 | ) | | (0.12 | ) | | (0.07 | ) |
Loss per share from discontinued operations | | — | | | — | | | — | |
NET LOSS PER COMMON SHARE | | (0.19 | ) | | (0.12 | ) | | (0.07 | ) |
| | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | | 121,001,000 | | | 113,325,006 | | | 70,372,161 | |
| | | | | | | | | |
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.
F-4
BIOPROGRESS PLC
Consolidated Statement of Changes in Stockholders’ Equity
For the years ended December 31, 2005, 2004 and 2003
| | | | | | | | | | | | | | | | | | | | | |
| | | Common | | | Additional
Paid-in Capital | | | Accumulated Deficit | | | Subscriptions
Receivable | | | Accumulated
Other
Comprehensive
Income/(loss) | | | Total | |
| | | Share | | | Amount | | | | | | |
| | | | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | |
BALANCE at December 31, 2002 | | 50,120,846 | | | 50,121 | | | 28,742,177 | | | (28,691,539 | ) | | — | | | 242,171 | | | 342,930 | |
Net loss | | — | | | — | | | — | | | (4,576,512 | ) | | — | | | — | | | (4,576,512 | ) |
Currency translation adjustment | | — | | | — | | | — | | | — | | | — | | | 484,318 | | | 484,318 | |
| | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | (4,092,194 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Unit penalty liability converted into equity | | — | | | — | | | 535,875 | | | — | | | — | | | — | | | 535,875 | |
Cash contributions from investors | | — | | | — | | | 300,236 | | | — | | | — | | | — | | | 300,236 | |
Accrued directors salaries converted into equity | | 450,021 | | | — | | | 236,500 | | | — | | | — | | | — | | | 236,500 | |
Re-incorporation | | (50,570,867 | ) | | (50,121 | ) | | (14,143,660 | ) | | — | | | — | | | — | | | (14,193,781 | ) |
Issuance of common stock | | 101,876,614 | | | 1,694,280 | | | 34,451,550 | | | — | | | — | | | — | | | 36,145,830 | |
Common stock issue costs | | — | | | — | | | (2,305,627 | ) | | — | | | — | | | — | | | (2,305,627 | ) |
Re-incorporation expenses | | — | | | — | | | (367,816 | ) | | — | | | — | | | — | | | (367,816 | ) |
Conversion of series B preference shares | | — | | | — | | | 853,571 | | | — | | | — | | | — | | | 853,571 | |
Exercise of options | | 561,457 | | | 10,051 | | | 366,473 | | | — | | | — | | | — | | | 376,524 | |
| | | | | | | | | | | | | | | | | | | | | |
BALANCE at December 31, 2003 | | 102,438,071 | | | 1,704,331 | | | 48,669,279 | | | (33,268,051 | ) | | — | | | 726,489 | | | 17,832,048 | |
| | | | | | | |
Net loss | | — | | | — | | | — | | | (13,419,315 | ) | | — | | | — | | | (13,419,315 | ) |
Currency translation adjustment | | — | | | — | | | — | | | — | | | — | | | 1,463,748 | | | 1,463,748 | |
| | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | (11,955,567 | ) |
Re-incorporation | | — | | | — | | | (542,795 | ) | | — | | | — | | | — | | | (542,795 | ) |
Issuance of common stock | | 10,341,373 | | | 190,762 | | | 20,625,033 | | | — | | | — | | | — | | | 20,815,795 | |
Subscriptions receivable | | — | | | — | | | — | | | — | | | (500,000 | ) | | — | | | (500,000 | ) |
Common stock issue costs | | — | | | — | | | (838,019 | ) | | — | | | — | | | — | | | (838,019 | ) |
Redemption of preference shares | | — | | | — | | | (865,360 | ) | | — | | | — | | | — | | | (865,360 | ) |
Warrants granted related to debt issuance costs | | — | | | — | | | 4,357,750 | | | — | | | — | | | — | | | 4,357,750 | |
Exercise of options and warrants | | 5,018,193 | | | 91,777 | | | 4,284,152 | | | — | | | — | | | — | | | 4,375,929 | |
| | | | | | | | | | | | | | | | | | | | | |
BALANCE at December 31, 2004 | | 117,797,637 | | | 1,986,870 | | | 75,690,040 | | | (46,687,366 | ) | | (500,000 | ) | | 2,190,237 | | | 32,679,781 | |
| | | | | | | |
Net loss | | — | | | — | | | — | | | (22,752,476 | ) | | — | | | — | | | (22,752,476 | ) |
Currency translation adjustment | | — | | | — | | | — | | | — | | | — | | | (2,944,638 | ) | | (2,944,638 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | (25,697,114 | ) |
Issuance of common stock | | 5,278,622 | | | 95,395 | | | 3,519,005 | | | — | | | — | | | — | | | 3,614,400 | |
Deemed equity element on redemption of convertible bond | | — | | | — | | | 7,118,656 | | | — | | | — | | | — | | | 7,118,656 | |
Subscriptions received in the year | | — | | | — | | | — | | | — | | | 500,000 | | | — | | | 500,000 | |
| | | | | | | | | | | | | | | | | | | | | |
BALANCE at December 31, 2005 | | 123,076,259 | | | 2,082,265 | | | 86,327,701 | | | (69,439,842 | ) | | — | | | (754,401 | ) | | 18,215,723 | |
| | | | | | | | | | | | | | | | | | | | | |
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.
F-5
BIOPROGRESS PLC
Consolidated Statements of Cash Flows
For the years ended December 31,
| | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | $ | | | $ | | | $ | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
Net loss | | (22,752,476 | ) | | (13,419,315 | ) | | (4,576,512 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | |
Depreciation and amortization | | 1,477,855 | | | 1,040,667 | | | 292,879 | |
Amortization of debt issue costs | | 371,885 | | | 223,131 | | | — | |
Gain from discontinued operations | | — | | | — | | | (291,541 | ) |
Loss on redemption of convertible bond | | 7,542,619 | | | — | | | — | |
Non-cash share issue re settlement | | 632,520 | | | — | | | — | |
Changes in operating assets and liabilities: | | | | | | | | | |
Accounts receivable | | (608,969 | ) | | (483,124 | ) | | 16,116 | |
Amounts receivable from related parties | | 216,238 | | | 69,102 | | | 50,270 | |
Amounts due to related parties | | — | | | (74,514 | ) | | (324,113 | ) |
Inventories | | 2,249,378 | | | (2,875,217 | ) | | — | |
Prepaid expenses and other current assets | | (253,288 | ) | | 189,755 | | | (913,580 | ) |
Accounts payable | | 252,571 | | | 1,220,929 | | | (559,366 | ) |
Accrued expenses and other current liabilities | | 944,706 | | | 147,907 | | | (472,620 | ) |
Other long term assets | | 1,000 | | | (48,320 | ) | | — | |
Deferred tax | | — | | | — | | | (30,484 | ) |
| | | | | | | | | |
Net cash used in operating activities | | (9,925,961 | ) | | (14,008,999 | ) | | (6,808,951 | ) |
| | | | | | | | | |
CASH FROM INVESTING ACTIVITIES: | | | | | | | | | |
Re-incorporation expenses | | — | | | — | | | (367,816 | ) |
Purchases of property, plant and equipment | | (486,137 | ) | | (1,561,846 | ) | | (122,980 | ) |
Purchase of patents and trademarks | | — | | | — | | | (25,043 | ) |
Purchase of Aquafilm | | — | | | (3,500,000 | ) | | — | |
| | | | | | | | | |
Net cash used in investing activities | | (486,137 | ) | | (5,061,846 | ) | | (515,839 | ) |
| | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
Proceeds from issue of common stock | | 500,000 | | | 30,087,164 | | | 12,223,392 | |
Common stock issue expenses | | — | | | (838,019 | ) | | (2,305,627 | ) |
Cash contributions from investors | | — | | | — | | | 300,236 | |
Proceeds from exercise of options and warrants | | — | | | 3,880,663 | | | 376,524 | |
Repayment of Preference shares | | — | | | (866,730 | ) | | — | |
Redemption of convertible bonds | | (2,981,880 | ) | | — | | | — | |
Proceeds from issue of convertible bonds | | — | | | 8,915,500 | | | — | |
Costs of convertible bond issue | | — | | | (104,849 | ) | | — | |
Repayment of bank overdraft | | — | | | — | | | (644,823 | ) |
| | | | | | | | | |
Net cash (used)/provided by financing activities | | (2,481,880 | ) | | 41,073,729 | | | 9,949,702 | |
| | | | | | | | | |
Effects of exchange rate changes on cash and cash equivalents | | (3,243,172 | ) | | 2,000,784 | | | 713,622 | |
| | | | | | | | | |
Net (decrease)/increase in cash and cash equivalents | | (16,137,150 | ) | | 24,003,668 | | | 3,338,534 | |
CASH AND CASH EQUIVALENTS, beginning of year | | 27,353,598 | | | 3,349,930 | | | 11,396 | |
| | | | | | | | | |
CASH AND CASH EQUIVALENTS, end of year | | 11,216,448 | | | 27,353,598 | | | 3,349,930 | |
| | | | | | | | | |
Supplemental disclosure of cash flow information
| | | | | | |
| | | 2005 | | 2004 | | 2003 |
| | | $ | | $ | | $ |
Cash paid for interest | | 9,036 | | 887 | | — |
Cash paid for income taxes | | — | | — | | 127,749 |
Non Cash Transactions
On June 9, 2005 the Company issued 4,285,714 ordinary shares of £0.01 each at an issue price of £0.385 ($0.69) per share, proceeds being £1,650,000 less expenses ($2,981,800). These were used as part settlement of the Convertible Bond.
On June 15, 2005 the Company issued 992,908 ordinary shares of £0.01 at an issue price of £0.3525 ($0.64) per share, share proceeds being £350,000 ($632,520) in settlement of a legal dispute with Mr. Charles Tatnell.
In 2004, the Company exchanged 3.5 million warrants for the underwriting costs relating to the bond issuance. The fair value of the warrants was $4,357,750.
The purchase price of Aquafilm included a $7,500,000 earn out provision. At the date of acquisition, $3,324,830 was recorded as a contingent liability.
In December 2004 options were exercised over 1,000,000 ordinary shares at an issue price of $0.50 per share. Consideration for these shares was deferred for one year, and was received during the year ended December 31, 2005.
In 2003, the Company issued 53,612,544 ordinary shares at £0.01 each as non-cash consideration for the merger of the Company with BioProgress Technology International Inc.
In 2003, the Company issued 15,120,901 ordinary shares at £0.01 each for cash consideration of which $9,814,164 was received between January 2 and 5, 2004.
The accompanying notes to the consolidated financial statements are an integral part of these consolidated statements.
F-6
BIOPROGRESS PLC
Notes to the consolidated financial statements for the years ended 31 December, 2005, 2004 and 2003
The Company is engaged primarily in the research, development, manufacturing, marketing, sales and distribution of products that use water soluble and biodegradable films for the dietary supplement, pharmaceutical, recreational and cosmetic industries and other applications. The Company’s research and development operations are in the United Kingdom. The Company operates in one market segment.
| 2. | Summary of Significant Accounting Policies |
Principles of Consolidation
The accompanying consolidated financial statements include the financial statements of BioProgress plc (“the Company”) and its wholly owned subsidiaries: BioProgress Technology International, Inc., BioProgress Technology, Inc., BioProgress Technology Limited, BioTec Films, LLC and DHA Nutrition Limited. All significant intercompany transactions and balances have been eliminated.
Reclassification
Certain amounts in the 2003 and 2004 financial statements have been reclassified to conform to the 2005 financial statement presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include accounting for stock options, the assessment of recoverability of long-lived assets (specifically goodwill and acquired intangibles) and the establishment of an allowance for doubtful accounts. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents represent all highly liquid investments with maturities of three months or less when purchased.
Accounts Receivable
Credit is given based on evaluation of a customer’s financial condition. Accounts receivable are generally due within 30 days of invoicing. Accounts outstanding longer than contractual payment terms are considered past due. The Company records an allowance on a specific basis by considering a number of factors, including the length of time the accounts receivable are overdue, the Company’s previous loss history, and the condition of the general economy and industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited back to bad debt expenses in the period the payment is received.
F-7
Goodwill
Goodwill represents the excess purchase price of net tangible and intangible assets acquired in business combinations over their estimated fair value.
Goodwill is not amortized, but is tested for impairment annually and whenever an impairment indicator arises using a fair value approach. We recognize an impairment charge for any amount by which the carrying amount of goodwill exceeds its fair value. The Company carried out an annual impairment review and determined that no impairment provision is required.
Inventory
Inventory and work in progress are stated at the lower of cost and net realizable value and are maintained on a first-in, first-out basis. Costs includes direct costs plus attributable overheads for work in progress.
Revenue Recognition
A majority of revenue represents sales of inventory, and the related fees charged to the customer for shipping. The Company’s policy is to recognize revenue when title to the product, ownership and risk of loss transfer to the customer, which generally is at the time of shipment. Service revenues, from the creation of new products for customers, are recognized upon the completion of the service. The Company reduces revenue for customer returns and other allowances which totaled $192,864, $101,400 and $nil for the years ended December 31, 2005, 2004 and 2003 respectively.
The Company also generates revenue from licensing the rights to use intellectual property in the XGEL®, the sale of the XGEL®, and research and development services to assist customers in gaining maximum benefit from the license.
Revenues from license arrangements and the sale of XGEL®are recognized when there is persuasive evidence of an agreement with a customer, collectibility is reasonably assured, the fee is fixed or determinable, and the Company has no continuing obligations relating to the arrangements. These factors vary by contract, but generally revenue is recognized over the term of the contract.
Revenues from research and development contracts are recognized ratably over the period to which the contract relates, unless significant acceptance criteria exist. If acceptance criteria exist, revenues are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. With certain contracts, revenues are recognized on a milestone basis, when there is persuasive evidence of customer acceptance.
Earnings Per Share
Basic and diluted loss per common share were calculated based upon the net loss available to common stockholders divided by the weighted average number of shares of common stock outstanding during the period. There are 11,691,065 stock options outstanding at December 31, 2005, (2004: 5,560,447) and 12,453,895 warrants, (2004: 12,453,895) which are not included in the earnings per share calculation as they would be anti-dilutive.
Concentration of Credit Risk
In fiscal year 2005 one customer accounted for 81% of total revenues. At December 31, 2005 $856,203 was due from this customer.
F-8
In fiscal year 2004, two customers accounted for 60% of total revenues. The largest of these represented 49% of the total, the other 11%. At December 31, 2004 no amounts were due from these customers.
In fiscal year 2003, two customers accounted for 89% of total revenues. The largest of these represented 59% of the total, the other 30%. At December 31, 2003 no amounts were due from these customers.
The revenues of the Company relate to sales to corporations located in the United States of America and Great Britain.
Changes in the Company’s allowance for doubtful accounts are as follows:
| | | | | |
| | | 2005 | | | 2004 |
| | | $ | | | $ |
Balance as of January 1 | | 501,200 | | | — |
Bad debt expense | | 238,168 | | | 501,200 |
Accounts written off | | (4,873 | ) | | — |
| | | | | |
Balance as of December 31 | | 734,495 | | | 501,200 |
| | | | | |
Property, Plant and Equipment
Expenditure relating to property, plant and equipment is capitalized where this cost is greater than $1,000 individually or between aggregated transactions.
Depreciation of property, plant and equipment is provided for using the straight-line method over the estimated useful lives of the respective assets, ranging from 4 to 20 years. Amortization of leasehold improvements is provided for over the lesser of the useful life or the related lease term.
Intangibles
Trademarks, licenses and patents are included at cost and amortized in equal annual installments over a period of 10 years, which is their estimated useful economic life. Provisions are made for any known impairments, which generally occur through technological obsolescence.
Goodwill is not amortized, but tested for impairment, at least annually. Intangible assets with estimable useful lives, consisting primarily of non-compete agreements, technology and know-how, and customer relationships, are amortized on a straight-line basis over the estimated useful lives of 5 to 15 years.
Debt Issue Costs
Issue costs have been capitalized and amortized over the life of the underlying financial instrument.
Long-Lived Assets and Impairment Testing
Long-lived assets and certain amortizable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of such assets and eventual disposition. Measurement of an impairment loss for long-lived assets and certain amortizable intangible assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets and certain amortizable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
F-9
Financial Instruments
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash investments and trade receivables. The Company has cash investment policies that limit investments to investment grade securities and marketable securities. The Company performs ongoing credit evaluations of its customers’ financial positions.
The fair values of financial instruments are deemed to be equivalent to the carrying amounts as cash and cash equivalents, bank overdraft, accounts payable, certain accrued expenses and accounts receivable are short term items and readily convertible into cash.
The carrying amount of the convertible bond is a reasonable estimate of fair value, as the bond has terms based on market rates.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recorded when it is more likely than not that such tax benefits will not be realized.
Foreign Currency Translation
The functional currency of the Company is the British pound. The financial statements of non US companies are translated into US Dollars using the exchange rate in effect at year end for balance sheet accounts and the average exchange rate in effect during the year for revenue and expense accounts with currency translation adjustments reflected in other comprehensive loss in stockholders’ equity. Gains and losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables, are included in the consolidated statement of operations. The transactional currency gain for the year ended December 31, 2005 was $1,644,552, compared to a loss of $788,290 in the year ended December 31, 2004 and $845,635 in the year ended December 31, 2003.
Research and Development
Research and development costs are expensed as incurred.
Stock-based Compensation
The Company has adopted the disclosure provisions of SFAS No. 148 “Accounting for Stock-Based Compensation, Transition and Disclosure”. As permitted by the provisions of SFAS No. 123, the Company applies Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and related interpretations in accounting for share based awards to employees and for options granted. As a result, compensation expense related to options granted is measured based on the intrinsic value of the underlying common stock.
Pro-forma information regarding net loss and net loss per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee share options and the options granted by shareholders under the fair value method consistent with the method prescribed by that Statement. The weighted average fair value at date of grant for options granted during 2005 was $0.45, (2004: $0.98, 2003: $0.54) per option. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model assuming an annual forfeiture rate of nil (2004: 2.5%, 2003: 2.5%) together with the following weighted average assumptions:
| | | | | | |
| | | 2005 | | 2004 | | 2003 |
Risk-free interest rate | | 5.20% | | 5.06% | | 5% |
Dividend yield | | 0% | | 0% | | 0% |
Volatility factor | | 70% | | 70% | | 116% |
Estimated life | | 5 years | | 5 years | | 5 years |
F-10
Had the Company’s option plan and the options granted to stockholders been accounted for under SFAS No.123, the Company’s charge to income for 2005 would have been $nil (2004: $nil, 2003: $3,883,022) for warrants and for options it would have been $3,180,643 (2004: $416,426, 2003: $301,964). Net loss and loss per share would have been increased to the following pro-forma amounts.
| | | | | | | | | | | | |
| | | Year ended December 31, 2005 | | | Year ended December 31, 2004 | | | Year ended December 31, 2003 | |
Net loss applicable to common shareholders | | $ | (22,752,476 | ) | | $ | (13,419,315 | ) | | $ | (4,576,512 | ) |
Employee compensation | | $ | (3,180,643 | ) | | | (416,426 | ) | | | (4,184,986 | ) |
| | | | | | | | | | | | |
Pro-forma net loss applicable to common shareholders | | $ | (25,933,119 | ) | | $ | (13,835,741 | ) | | $ | (8,761,498 | ) |
| | | | | | | | | | | | |
Pro-forma net loss per share applicable to common stockholders — basic and diluted | | $ | (0.21 | ) | | $ | (0.12 | ) | | | (0.12 | ) |
| | | | | | | | | | | | |
Retirement benefits
Pension charges in the statement of operations represent the amount of the contributions payable to defined contribution pension schemes during the year. The pension cost included in the statement of operations for 2005 was $153,612 (2004: $226,541, 2003: $99,646)
New Accounting Pronouncements
In January 2006 the FASB issued FASB Statement No. 155 ‘Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140’ (‘FAS 155’). FAS 155 provides entities with relief from having to separately determine the fair value of an embedded derivative that would otherwise be required to be bifurcated from its host contract. FAS 155 is effective for all financial instruments acquired, issued or subject to a re-measurement event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is currently evaluating the impact the adoption of FAS 155 will have.
In June 2005, the Financial Accounting Standards Board issued SFAS 154; Accounting Changes and Error Corrections, a replacement for APB Opinion No. 20 and FAS 3 (SFAS154). This statement replaces Opinion 20 and FAS 3, and changes the requirements for the accounting for, and reporting of, a change in accounting principle. APB Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle. SFAS 154 is effective for BioProgress PLC for the period beginning January 1, 2006. This standard is not expected to have an impact on the results of operations, financial position and cash flows.
In November, 2005 The Financial Accounting Standards Board issued this FASB Staff Position (FSP) which addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of impairment other than temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other than temporary impairments. The guidance of this FSP amends FASB Statements No. 115, Accounting for Certain Investments in Debt and Equity Securities, and No. 24 Accounting for Certain Investments Held by Not-for-Profit Organizations, and APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. FSP FAS 115-1 is effective for BioProgress PLC for the period beginning January 1, 2006. This standard is not expected to have an impact on the results of operations, financial position and cash flows.
F-11
Other recent accounting pronouncements issued by the FASB (including the Emerging Issues Task Force), the AICPA and the SEC are not believed by management to have a material impact on BioProgress’s present or future financial statements.
On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123(R) (revised 2004), “Share-Based Payment”, which is a revision of SFAS No. 123. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123 permitted, but did not require, share-based payments to employees to be recognized based on their fair values while SFAS No. 123(R) requires all share-based payments to employees to be recognized based on their fair values. SFAS No. 123(R) also revises, clarifies and expands guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to reporting periods. The new standard will be effective for the Company in the first period beginning after June 15, 2005. The Company has not yet completed its analysis of the impact of adopting SFAS No. 123(R) and is therefore currently unable to quantify the effect on its financial statements. However, the adoption of this new statement may have a significant impact on the results of operations and net earnings per share of the Company as the Company will be required to expense the fair value of all share based payments.
In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107 (SAB 107) to give guidance on implementation of SFAS 123R, which the Company plans to consider in implementing SFAS 123R.
In December 2004, SFAS No. 153 “Exchanges of Nonmonetary Assets” was issued. The Statement modifies prior standards related to nonmonetary exchanges by establishing that all transactions that have commercial substance should be measured based on the fair value of the assets exchanged. The Statement eliminates the prior narrow exception for nonmonetary exchanges of similar productive assets, which had allowed such an exchange to be recorded at the asset basis of the relinquished asset. Transactions are considered to have commercial substance if the future cash flows are expected to change significantly as a result of the exchange. The Statement is not expected to have a material effect on net income or shareholders equity.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4”. SFAS No. 151 amends Accounting Research Bulletin (“ARB”) No. 43, “Restatement and Revision of Accounting Research Bulletins”, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight handling costs and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect that the adoption of SFAS No. 151 will have a material effect on its financial position or results of operations.
| 3. | Property, Plant and Equipment |
Property, plant and equipment are stated at cost, net of accumulated depreciation, and consist of the following at December 31:
| | | | | | | | | | |
| | | 2005 | | Estimated
Useful
Lives(years) | | 2004 | | Estimated
Useful
Lives(years) |
Leasehold improvements | | $ | 473,731 | | 6 | | $ | 485,038 | | 6 |
Heavy equipment and plant | | $ | 2,084,010 | | 20 | | $ | 2,292,907 | | 20 |
Machinery and equipment | | $ | 2,290,690 | | 4 | | $ | 1,777,589 | | 4 |
Office equipment | | $ | 833,014 | | 4 | | $ | 894,361 | | 4 |
Laboratory equipment | | $ | 180,978 | | 6 | | $ | 181,806 | | 6 |
| | | | | | | | | | |
| | $ | 5,862,423 | | | | $ | 5,631,701 | | |
Less — Accumulated depreciation | | $ | 2,636,601 | | | | $ | 1,891,454 | | |
| | | | | | | | | | |
Total | | $ | 3,225,822 | | | | $ | 3,740,247 | | |
| | | | | | | | | | |
The depreciation expense was $927,094 for 2005, (2004: $626,573, 2003: $288,785)
F-12
The components of the Company’s intangible assets subject to amortization are as follows:
| | | | | | |
| | | 2005 | | 2004 |
Trademarks, licenses and patents | | $ | 1,470,118 | | $ | 1,470,118 |
Non-compete agreements | | $ | 1,610,000 | | $ | 1,610,000 |
Technology & know-how | | $ | 2,140,000 | | $ | 2,140,000 |
Customer relationships | | $ | 410,000 | | $ | 410,000 |
| | | | | | |
| | $ | 5,630,118 | | $ | 5,630,118 |
Less accumulated amortization | | $ | 2,393,292 | | $ | 1,838,354 |
| | | | | | |
Net intangible assets | | $ | 3,236,826 | | $ | 3,791,764 |
| | | | | | |
Amortization expense relating to intangible assets during 2005 was $550,761, (2004: $414,094, 2003: $4,094). The following table provides information regarding estimated amortization expense on the remaining intangibles for each of the following years ended December 31:
| | | |
Year | | Amortization Expense |
2006 | | $ | 550,761 |
2007 | | $ | 550,761 |
2008 | | $ | 550,761 |
2009 | | $ | 247,761 |
2010 | | $ | 146,761 |
Costs relating to the issue of the convertible bond were capitalized and amortized over the original life of the bond, being 5 years. The convertible bond was redeemed during the year, consequently the residual carrying amount of the capitalized finance costs relating to the bond has been written off to the statement of operations.
| | | | | | |
| | | 2005 | | 2004 |
Capitalized issue costs | | $ | 4,462,599 | | $ | 4,462,599 |
Less accumulated amortization | | $ | 595,016 | | $ | 223,131 |
Less write off of capitalized finance costs | | $ | 3,867,583 | | | — |
| | | | | | |
| | $ | — | | $ | 4,239,468 |
| | | | | | |
| | | | | | |
| | | 2005 | | 2004 |
Raw materials | | $ | 534,446 | | $ | 613,462 |
Work in progress | | $ | 217,861 | | $ | 2,637,053 |
Finished goods | | $ | 28,409 | | $ | 83,310 |
| | | | | | |
| | $ | 780,716 | | $ | 3,333,825 |
| | | | | | |
As at December 31, 2004, work in progress included an amount of $1,949,723 which was written off to development expenditure during the year ended December 31, 2005.
F-13
| 7. | Prepaid expenses and other current assets |
| | | | | | |
| | | 2005 | | 2004 |
Prepaid expenses | | $ | 897,086 | | $ | 468,545 |
Other current assets | | $ | 260,211 | | $ | 526,081 |
| | | | | | |
| | $ | 1,157,297 | | $ | 994,626 |
| | | | | | |
| 8. | Commitments and Contingencies |
a) Operating Lease Obligations
Minimum future lease payments under the non-cancelable operating leases entered into are summarized as follows:
| | | |
| | | 2005 |
2006 | | $ | 197,681 |
2007 | | $ | 49,101 |
2008 | | $ | 1,419 |
2009 | | | — |
2010 | | | — |
Thereafter | | | — |
| | | |
TOTAL | | $ | 248,201 |
| | | |
Rental expenses under operating leases totaled $381,852 for the year ended December 31, 2005 (2004: $220,182, 2003: $205,349). There is no contingent rent or option to purchase under these lease agreements as at December 31, 2005.
During 2005 the Company gave notice of its intention to move out of its existing UK premises in Hostmoor, March, and relocated to Cambridge during February, 2006.
b) Legal Proceedings
In 2004, BioTec Films, LLC was named as Defendant in a proceeding by Momentus Solutions LLC who are claiming damages in excess of US $1 million for breach of contract. The Company believes it has a meritorious defence and intends to defend its interests vigorously.
On 05 January, 2006 the Company settled the litigation with Stanelco Plc, whereby BioProgress Technology Limited and Stanelco RF Technologies Limited were disputing entitlement to three families of patents relating to the making of water-soluble capsules sealed using radio frequency. Under the main terms of settlement, both parties will be able to commercially exploit all three patent families. Stanelco Plc issued to BioProgress new ordinary 0.1p shares with a market value of £1,000,000 ($1,720,900).
c) Earn-out Provision
Under the terms of the acquisition of certain assets of Aquafilm which were then transferred into BioTec Films, LLC, part of the consideration ($7.5 million) is based on an earn-out against the future net earnings of the business on a dollar for dollar basis. At the year-end the directors’ estimate of the probable liability is $3,324,830 (2004: $3,324,830). A further $4,175,170 (2004: $4,175,170) of contingent consideration has not been provided for in accordance with SFAS 141. The directors’ believe that it is not possible to determine the fair value of the earn-out, given the indefinite period over which the liability will be payable.
F-14
The Company does not have any current income taxes expense because of tax net operating losses for the years ended December 31, 2005, 2004 and 2003. The 2003 year tax benefit is from the change in the deferred tax liability. The Company has net operating loss carry forwards of approximately $38,962,000 (2004: $26,535,000) available in the US and in the UK for 2005, 2004 or 2003 available to carry forward against taxable profits in each country, subject to agreement with the relevant tax authorities. These net operating loss carry forwards begin to expire in the fiscal year ending 2015. The Company has provided a 100% valuation allowance against the deferred tax asset arising on the net operating losses due to the uncertainty of their ultimate realization.
The following table summarizes the differences between the Company’s effective tax rate and the statutory federal rate as follows:
| | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
Statutory federal rate | | (34 | )% | | (34 | )% | | (34 | )% |
Increase (decrease) resulting from: | | | | | | | | | |
Non-deductible items | | 15.1 | % | | 0.4 | % | | 1.9 | % |
Valuation allowance | | 18.9 | % | | 33.6 | % | | 33.5 | % |
Foreign taxes differential | | 0.0 | % | | 0.0 | % | | (1.4 | )% |
| | | | | | | | | |
Effective tax rate | | 0 | % | | 0 | % | | 0 | % |
| | | | | | | | | |
Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
| | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | $ | | | $ | | | $ | |
Write down in investments | | — | | | — | | | 855,514 | |
Accrued expenses | | — | | | — | | | 89,562 | |
Book vs. tax depreciation | | 178,569 | | | 110,676 | | | 77,524 | |
Net operating loss and other carried forwards | | 13,068,687 | | | 9,022,922 | | | 4,685,004 | |
| | | | | | | | | |
Deferred tax assets | | 13,247,256 | | | 9,133,598 | | | 5,707,604 | |
Less valuation allowance | | (13,247,256 | ) | | (9,133,598 | ) | | (5,707,604 | ) |
| | | | | | | | | |
Net deferred tax assets | | — | | | — | | | — | |
| | | | | | | | | |
The following table provides a breakdown of amounts due from/(to) related parties. A summary of the transactions is shown after the table:
| | | | |
| | | Amounts due
from/(to) related parties 2005 | | Amounts due
from/(to) related parties 2004 |
| | | $ | | $ |
Jade Partnership International, Inc | | — | | 237,913 |
F-15
Jade Partnership International, Inc
Mr. M D Brown, was a director of the Company until May 2004, and is a shareholder in Jade Partnership International Inc. The balance had arisen due to historical trading and the amount outstanding at December 31, 2004 was settled during the year.
On June 9, 2005 the Company issued 4,285,714 ordinary shares of £0.01 each at an issue price of $0.69 (£0.385) per share, being $2,981,800 (£1,650,000). These were used as part settlement of the Convertible Bond, as detailed in Note 15.
On June 15, 2005 the Company issued 992,908 ordinary shares of £0.01 each at an issue price of $0.64 (£0.3525) per share, being $632,520 (£350,000) in settlement of the legal dispute with Mr. Charles Tatnell.
On March 5, 2004 the Company issued 10 million ordinary shares of £0.01 each at an issue price of $2.03 (£1.10) per share proceeds being $20.3 million (£11 million) less expenses.
On April 1, 2004 options were exercised in respect of 625,000 ordinary shares of £0.01 each at an issue price of $0.35 (£0.18) per ordinary share, total proceeds were $220,574 (£121,528). Warrants were also exercised on that date in respect of 2,327,086 ordinary shares of £0.01 each at prices ranging from $1.00 (£0.55) to $2.50 (£1.38) per ordinary share, total proceeds were $2,504,319 (£1,379,790).
On April 30, 2004 options and warrants were exercised over 320,000 ordinary shares of £0.01 each, at issue prices between $0.33 (£0.18) and $1.00 (£0.55) per share, total proceeds were $164,046 (£91,644).
On October 5, 2004 options were exercised over 420,158 ordinary shares of £0.01 each at issue prices ranging from $1.00 (£0.55) to $2.50 (£1.38) per share, total proceeds were $476,211 (£262,375).
On October 18, 2004 warrants were exercised over 225,949 ordinary shares of £0.01 each at prices ranging from $1.00 (£0.55) to $1.50 (£0.84) per share, total proceeds were $316,132 (£200,184).
On October 31, 2004 options were exercised over 100,000 ordinary shares of £0.01 each at an issue price of $1.54 (£0.84), total proceeds were $154,381 (£84,269).
On November 16, 2004 the Company issued 341,373 ordinary shares of £0.01 each at an issue price of $ 1.59 (£0.84) in consideration for the transfer to the Company of an equivalent number of shares of series C preferred stock in BioProgress Technology International, Inc.
On December 31, 2004 options were exercised over 1,000,000 ordinary shares of £0.01 each at an issue price of $0.50 (£0.26). $500,000 (£261,575) was received during 2005.
F-16
The Company has two stock option plans for employees and directors of the Company. Details of the options outstanding as at December 31 are given below.
| | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | Options | | | Weighted Average exercise price | | | Options | | | Weighted Average exercise price | | | Options | | | Weighted average exercise price | |
Options outstanding at January 1 | | 5,560,447 | | | $ | 0.96 | | | 6,286,393 | | | $ | 0.68 | | | 6,366,457 | | | $ | 0.95 | |
Exercised | | — | | | | — | | | (2,362,500 | ) | | $ | (0.59 | ) | | (561,457 | ) | | $ | (0.67 | ) |
Granted * | | 11,000,000 | | | $ | 0.50 | | | 2,341,439 | | | $ | 1.46 | | | 2,486,393 | | | $ | 0.76 | |
Expired | | — | | | | — | | | (2,500 | ) | | $ | (0.54 | ) | | — | | | | — | |
Cancelled or forfeited | | (4,869,382 | ) | | $ | (0.88 | ) | | (702,385 | ) | | $ | (1.45 | ) | | (2,005,000 | ) | | $ | (1.63 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Options outstanding at December 31 | | 11,691,065 | | | $ | 0.53 | | | 5,560,447 | | | $ | 0.96 | | | 6,286,393 | | | $ | 0.68 | |
| | | | | | | | | | | | | | | | | | | | | |
The weighted average fair value of the options granted during the year was $0.45, (2004: $0.98, 2003: $0.50).
| * | During the year 5,000,000 options were granted to Mr. D Farrow and 6,000,000 options were granted to Mr. R Trevillion. Of these, 1,500,000 and 2,000,000 respectively will only vest and be exercisable if, in respect of three out of 5 consecutive dealing days following after the date of grant the closing middle market quotation of a share shall have been no less than 87.3 pence ($1.50). The remaining 3,500,000 and 4,000,000 respectively vested immediately. |
The following share options were outstanding over ordinary shares of £0.01 each as of December 31, 2005:
| | | | | | | | | | | | |
Range of exercise prices | | Number
outstanding | | Weighted average
remaining
contractual life
(in years) | | Weighted
average
exercise price | | Number exercisable | | Weighted
average
exercise price |
$0.35- 0.50 | | 11,000,000 | | 9.83 | | $ | 0.50 | | 7,500,000 | | $ | 0.50 |
$0.98- 1.50 | | 691,065 | | 8.13 | | $ | 1.06 | | — | | | — |
| | | | | | | | | | | | |
Total | | 11,691,065 | | | | $ | 0.53 | | 7,500,000 | | $ | 0.50 |
| | | | | | | | | | | | |
The Company’s authorized share capital is sufficient to allow the exercise of all options and warrants outstanding as at December 31, 2005.
F-17
| 13. | Redeemable Convertible Preferred Stock & Preference Shares |
The redeemable convertible preferred stock and preference shares are recorded in the accompanying balance sheet outside the stockholders’ equity section due to their mandatory redemption feature.
| | | | | | | | | | | |
| | | Series B redeemable
convertible
preferred stock | | Convertible 4%
preference shares | | | 4% redeemable
preference shares | |
Number of shares authorized | | | 1,500,850 | | | 80,000 | | | | 90,000 | |
| | | | | | | | | | | |
Shares outstanding at December 31, 2003 | | | — | | | 79,000 | | | | 88,000 | |
Number of shares issued during year | | | — | | | — | | | | — | |
Mandatory redemption during the year | | | — | | | (79,000 | ) | | | (88,000 | ) |
Number of shares converted during year | | | — | | | — | | | | — | |
| | | | | | | | | | | |
Shares outstanding at December 31, 2004 | | | — | | | — | | | | — | |
Number of shares issued during year | | | — | | | — | | | | — | |
Mandatory redemption during the year | | | — | | | — | | | | — | |
Number of shares converted during year | | | — | | | — | | | | — | |
| | | | | | | | | | | |
Shares outstanding at December 31, 2005 | | | — | | | — | | | | — | |
| | | |
Subscription price per share | | $ | 2.73 | | $ | 0.005 | | | $ | 0.005 | |
Value based on redemption rate at December 31, 2003 | | $ | 456,720 | | $ | 385,520 | | | $ | 456,720 | |
| | | |
Conversion date and rate to common shares | | | | | | | | | | | |
| | | |
From January 1, 2003 to December 31, 2003 and January 1, 2004 to December 31, 2004 | |
| 1:0.5 (issued in
2001) | |
| 1:0.5 (issued
in 2003) |
| | | N/A | |
| | | |
Expiry of conversion rights | |
| 12/31/2003
(issued in 2001) | | | 12/31/2003 | | | | N/A | |
| | | |
Conversion at discretion of | | | Holder | | | Holder | | | | N/A | |
Redemption date and amount per share From January 1, 2003 to December 31, 2003 and January 1, 2004 to December 31, 2004 | | | | | $ | 4.88 | | | $ | 5.19 | |
Redemption at discretion of | | | Company | | | Company | | | | Holder | |
Mandatory redemption date | |
| After 3/31/2003
(issued in 2000);
After 3/31/04
(issued in 2001) | | | 03/31/2004 | | | | — | |
Mandatory redemption price | | $ | 5.19 | | $ | 4.88 | | | $ | 5.19 | |
Dividend rate | |
| 4% per annum of
subscription
amount
computed
quarterly in
arrears March,
June, September
and December | |
| 4% per
annum of
subscription
amount
computed
quarterly in
arrears
March, June,
September
and
December |
| |
| 4% per annum
of subscription
amount
computed
quarterly in
arrears
March, June,
September and
December |
|
Voting rights | | | None | | | None | | | | None | |
Preferential liquidation rights | | | None | | | None | | | | None | |
F-18
During 2005 no unit warrants were issued (2004: none). The total amount of warrants outstanding from the issuance of units is 8,953,895. During 2004 as a part of the bond issue, warrants were issued to the broker in lieu of fees. In 2004, according to the terms of the warrants, the Company served notice on the series A warrants.
The total warrants outstanding as at December 31, 2005 was 12,453,895 (2004: 12,453,895).
At January 1, 2003 BioProgress Technology International, Inc. had in issue 308 unit warrants. On the merger of BioProgress Technology International, Inc. with BioProgress PLC the unit warrants were reissued by BioProgress PLC to accredited investors who had previously held similar unit warrants in BioProgress Technology International, Inc. prior to the merger. These warrants continue to carry the same rights as they did before the merger. An additional 84 units were issued during 2003 for cash, services, commissions and employee compensations. One warrant, defined as Common Stock Purchase Warrant Services December 31, 2006, comprises six common stock purchase warrants “A” to “F” each exercisable to purchase 2,500 additional shares of common stock.
The units have a registration rights clause which states, “In the event the Registration Statement has not been declared effective by the Commission by September 30, 2002, the Company shall issue to each investor a unit equal to one-tenth of the units they purchased in the Offering and every 30 days thereafter shall issue an additional one-tenth of the units subject to an additional maximum of nine-tenths if the units purchase by such investor in the offering until the Registration Statement is declared effective”. As a result, on November 13, 2003, the Company issued 353 unit warrants which represented the maximum amount of units to be issued under the terms of the registration rights clause of the warrants originally issued by BioProgress Technology International, Inc.
All of the unit warrants can be exercised at any time before December 31, 2006.
In the event that the volume weighted average trading price of the Company’s shares is greater than or equal to the price per share (the “Early Termination Price”) for any period of at least 10 consecutive trading days, the Company will have the right to serve notice (the “Notice of Early Termination Price”) on the Purchaser granting the Purchaser a period of 10 trading days from the date upon which the Notice of Early Termination Price is served in which to exercise any remaining warrants exercisable at a price below the prevailing Early Termination Price. Any warrant remaining unexercised at the end of such 10-day exercise period will be cancelled forthwith and without further notice and will be of no further force or effect.
The following warrants were outstanding over ordinary shares of £0.01 each as at December 31, 2005:
| | | | | | | | | | | | | | | | | | |
Warrant | | Range of
exercise
prices | | Number
outstanding | | Weighted
average
remaining
contractual
life
(in years) | | Weighted
average
exercise
price | | Number exercisable | | Weighted
average
exercise
price | | Early
Termination
Price |
B | | $ | 1.50 | | 1,187,726 | | 1.00 | | $ | 1.50 | | 1,187,726 | | $ | 1.50 | | $ | 2.25 |
C | | $ | 2.00 | | 1,790,593 | | 1.00 | | $ | 2.00 | | 1,790,593 | | $ | 2.00 | | $ | 3.00 |
D | | $ | 2.50 | | 1,852,192 | | 1.00 | | $ | 2.50 | | 1,852,192 | | $ | 2.50 | | $ | 3.75 |
E | | $ | 5.00 | | 1,861,692 | | 1.00 | | $ | 5.00 | | 1,861,692 | | $ | 5.00 | | $ | 7.50 |
F | | $ | 10.00 | | 1,861,692 | | 1.00 | | $ | 10.00 | | 1,861,692 | | $ | 10.00 | | $ | 15.00 |
| | | | | | | | | | | | | | | | | | |
Total | | | | | 8,553,895 | | | | $ | 3.67 | | 8,553,895 | | $ | 3.67 | | | |
| | | | | | | | | | | | | | | | | | |
F-19
The following warrants were outstanding over ordinary shares of £0.01 each as at December 31, 2004:
| | | | | | | | | | | | | | | | | | |
Warrant | | Range of
exercise
prices | | Number
outstanding | | Weighted
average
remaining
contractual
life (in years) | | Weighted
average
exercise
price | | Number exercisable | | Weighted
average
exercise
price | | Early
Termination
Price |
B | | $ | 1.50 | | 1,187,726 | | 2.00 | | $ | 1.50 | | 1,187,726 | | $ | 1.50 | | $ | 2.25 |
C | | $ | 2.00 | | 1,790,593 | | 2.00 | | $ | 2.00 | | 1,790,593 | | $ | 2.00 | | $ | 3.00 |
D | | $ | 2.50 | | 1,852,192 | | 2.00 | | $ | 2.50 | | 1,852,192 | | $ | 2.50 | | $ | 3.75 |
E | | $ | 5.00 | | 1,861,692 | | 2.00 | | $ | 5.00 | | 1,861,692 | | $ | 5.00 | | $ | 7.50 |
F | | $ | 10.00 | | 1,861,692 | | 2.00 | | $ | 10.00 | | 1,861,692 | | $ | 10.00 | | $ | 15.00 |
| | | | | | | | | | | | | | | | | | |
Total | | | | | 8,553,895 | | | | $ | 3.67 | | 8,553,895 | | $ | 3.67 | | | |
| | | | | | | | | | | | | | | | | | |
The following warrants were outstanding over ordinary shares of £0.01 each as at December 31, 2003:
| | | | | | | | | | | | | | | | | | |
Warrant | | Range of
exercise
prices | | Number
outstanding | | Weighted
average
remaining
contractual
life (in years) | | Weighted
average
exercise
price | | Number exercisable | | Weighted
average
exercise
price | | Early
Termination
Price |
A | | $ | 1.00 | | 1,862,500 | | 3.00 | | $ | 1.00 | | 1,862,500 | | $ | 1.00 | | $ | 1.50 |
B | | $ | 1.50 | | 1,862,500 | | 3.00 | | $ | 1.50 | | 1,862,500 | | $ | 1.50 | | $ | 2.25 |
C | | $ | 2.00 | | 1,862,500 | | 3.00 | | $ | 2.00 | | 1,862,500 | | $ | 2.00 | | $ | 3.00 |
D | | $ | 2.50 | | 1,862,500 | | 3.00 | | $ | 2.50 | | 1,862,500 | | $ | 2.50 | | $ | 3.75 |
E | | $ | 5.00 | | 1,862,500 | | 3.00 | | $ | 5.00 | | 1,862,500 | | $ | 5.00 | | $ | 7.50 |
F | | $ | 10.00 | | 1,862,500 | | 3.00 | | $ | 10.00 | | 1,862,500 | | $ | 10.00 | | $ | 15.00 |
| | | | | | | | | | | | | | | | | | |
Total | | | | | 11,175,000 | | | | $ | 3.67 | | 11,175,000 | | $ | 3.67 | | | |
| | | | | | | | | | | | | | | | | | |
In addition, warrants have been granted over ordinary shares of £0.01 each to the non-executive directors, and at December 31, 2005 the terms were as follows:
| | | | | | | | | | | | | | | |
Warrant | | Range of
exercise
prices | | Number
outstanding | | Weighted
average
remaining
contractual
life
(in years) | | Weighted
average
exercise
price | | Number exercisable | | Weighted
average
exercise
price |
B | | $ | 1.50 | | 80,000 | | 1.00 | | $ | 1.50 | | 80,000 | | $ | 1.50 |
C | | $ | 2.00 | | 80,000 | | 1.00 | | $ | 2.00 | | 80,000 | | $ | 2.00 |
D | | $ | 2.50 | | 80,000 | | 1.00 | | $ | 2.50 | | 80,000 | | $ | 2.50 |
E | | $ | 5.00 | | 80,000 | | 1.00 | | $ | 5.00 | | 80,000 | | $ | 5.00 |
F | | $ | 10.00 | | 80,000 | | 1.00 | | $ | 10.00 | | 80,000 | | $ | 10.00 |
| | | | | | | | | | | | | | | |
Total | | | | | 400,000 | | | | $ | 3.67 | | 400,000 | | $ | 3.67 |
| | | | | | | | | | | | | | | |
At December 31, 2004 the following warrants were outstanding:
| | | | | | | | | | | | | | | |
Warrant | | Range of
exercise
prices | | Number
outstanding | | Weighted
average
remaining
contractual
life
(in years) | | Weighted
average
exercise
price | | Number exercisable | | Weighted
average
exercise
price |
B | | $ | 1.50 | | 80,000 | | 2.00 | | $ | 1.50 | | 80,000 | | $ | 1.50 |
C | | $ | 2.00 | | 80,000 | | 2.00 | | $ | 2.00 | | 80,000 | | $ | 2.00 |
D | | $ | 2.50 | | 80,000 | | 2.00 | | $ | 2.50 | | 80,000 | | $ | 2.50 |
E | | $ | 5.00 | | 80,000 | | 2.00 | | $ | 5.00 | | 80,000 | | $ | 5.00 |
F | | $ | 10.00 | | 80,000 | | 2.00 | | $ | 10.00 | | 80,000 | | $ | 10.00 |
| | | | | | | | | | | | | | | |
Total | | | | | 400,000 | | | | $ | 3.67 | | 400,000 | | $ | 3.67 |
| | | | | | | | | | | | | | | |
F-20
At December 31, 2003 the following warrants were outstanding:
| | | | | | | | | | | | | | | |
Warrant | | Range of
exercise
prices | | Number
outstanding | | Weighted
average
remaining
contractual
life (in years) | | Weighted
average
exercise
price | | Number exercisable | | Weighted
average
exercise
price |
A | | $ | 1.00 | | 80,000 | | 3.00 | | $ | 1.00 | | 80,000 | | $ | 1.00 |
B | | $ | 1.50 | | 80,000 | | 3.00 | | $ | 1.50 | | 80,000 | | $ | 1.50 |
C | | $ | 2.00 | | 80,000 | | 3.00 | | $ | 2.00 | | 80,000 | | $ | 2.00 |
D | | $ | 2.50 | | 80,000 | | 3.00 | | $ | 2.50 | | 80,000 | | $ | 2.50 |
E | | $ | 5.00 | | 80,000 | | 3.00 | | $ | 5.00 | | 80,000 | | $ | 5.00 |
F | | $ | 10.00 | | 80,000 | | 3.00 | | $ | 10.00 | | 80,000 | | $ | 10.00 |
| | | | | | | | | | | | | | | |
Total | | | | | 480,000 | | | | $ | 3.67 | | 480,000 | | $ | 3.67 |
| | | | | | | | | | | | | | | |
These warrants expire on December 31, 2006.
On October 6, 2004 3,500,000 warrants were issued to the broker for professional services. At December 31, 2005 the following warrants were outstanding:
| | | | | | | | | | | | | | | | |
Warrant | | Range of
exercise
prices | | | Number
outstanding | | Weighted
average
remaining
contractual
life (in years) | | Weighted
average
exercise
price | | Number exercisable | | Weighted
average
exercise
price |
Broker | | $ | 2.11 | (£1.15) | | 1,000,000 | | 3.75 | | $ | 2.11 | | 1,000,000 | | $ | 2.11 |
| | $ | 2.30 | (£1.265) | | 1,000,000 | | 3.75 | | $ | 2.30 | | 1,000,000 | | $ | 2.30 |
| | $ | 2.54 | (£1.38) | | 1,500,000 | | 3.75 | | $ | 2.54 | | 1,500,000 | | $ | 2.54 |
| | | | | | | | | | | | | | | | |
Total | | | | | | 3,500,000 | | | | $ | 2.35 | | 3,500,000 | | $ | 2.35 |
| | | | | | | | | | | | | | | | |
These warrants expire on October 6, 2009.
On October 6, 2004 the Company raised $8.9 million (£5 million) via the issue of 4.0% unsecured convertible bonds due 2009. The bonds had been privately placed, subject to customary closing conditions, with a leading institutional investor in a fund raising that had been structured and arranged by the broker, who in addition subscribed for warrants over 3.5 million ordinary BioProgress shares.
The bond could be converted into ordinary shares at any time during its term at the option of the bondholder at the conversion price of $2.88 (£1.52) per share. The institutional investor had an option to subscribe for up to a further $8.9 (£5) million of the convertible bonds within the following two years. The bonds were convertible into 3,289,474 fully paid ordinary shares in the Company at any time during the five year life of the bonds.
On June 1, 2005 the Company concluded an agreement to repurchase in full the $9.4 (£5) million, five year 4.0% unsecured convertible bonds that were issued on October 6, 2004. The option to subscribe for further bonds up until October 6, 2006 was also cancelled.
Under this agreement, the $9.4 (£5) million bonds were repurchased for a total consideration of $6.0 (£3.3) million, being $3.4 (£1.7) million less than the carrying value of the bond. This consideration was satisfied by $3.0 (£1.65) million in cash and the issuance of 4,285,714 new shares with a market value of $3.0 (£1.65) million to the Bondholder, representing 3.5 per cent of the enlarged issued share capital of the Company. The number of new shares issued was calculated on the basis of a share price of $0.69 (£0.385), being a 1.3% premium to the closing share price on May 31, 2005.
As there were 996,240 more shares issued on early redemption than would have been issued had the bond been converted under the terms of the original agreement, the provisions of FAS 84 – Induced conversions of convertible debt apply. As such, a debt expense of $3,675,036, being the market value of the 996,240 shares issued amounting to $693,156 plus the cash consideration of $2,981,880, is included in the statement of operations, and paid in capital has increased by $10,023,085 in total as a result of the redemption. Finance costs incurred on the original fund raising had been capitalized in 2004 and were being amortized over the life of the bond. On redemption the carrying value of these costs of $3,867,583 was written off to the statement of operations. The total loss on redemption of the convertible bond, being the debt expense and finance costs written off is $7,542,619 in the statement of operations.
F-21
| 16. | Discontinued Operations |
During 2003, the Company’s subsidiaries Aronrate Limited and Prodesign Technology Limited were liquidated which resulted in a net gain of $291,541. The gain represents the net liabilities of the subsidiaries at the time of liquidation and is stated after liquidation costs of $18,365. These companies had no trading activities in the period from January 1, 2003 to the date of liquidation.
| 17. | Segment and Major Customer Information |
The Company has one reportable segment: that of research and development and manufacture of non-gelatin replacement materials for the dietary supplement, pharmaceutical, cosmetics and recreational industries and other related applications. The Company believes that there is only one reportable segment as there is one overall development program for the end users. As there is only one reportable segment, reconciliations have not been deemed necessary.
A summary of the Company’s net sales, identifiable assets, and cash balances by geographical area follows:
| | | | | | |
| | | 2005 | | 2004 | | 2003 |
| | | $ | | $ | | $ |
Net revenue | | | | | | |
United States | | 7,728,222 | | 4,032,589 | | 1,530,329 |
United Kingdom | | 276,420 | | 585,975 | | 154,582 |
| | | | | | |
| | 8,004,642 | | 4,618,564 | | 1,684,911 |
| | | | | | |
| | | |
| | | 2005 | | 2004 | | |
| | | $ | | $ | | |
Long-lived assets | | | | | | |
United States | | 2,381,232 | | 2,619,885 | | |
United Kingdom | | 844,590 | | 1,120,362 | | |
| | | | | | |
| | 3,225,822 | | 3,740,247 | | |
| | | | | | |
| | | |
| | | 2005 | | 2004 | | |
| | | $ | | $ | | |
Cash balances | | | | | | |
United States | | 1,190,933 | | 893,387 | | |
United Kingdom | | 10,025,515 | | 26,460,211 | | |
| | | | | | |
| | 11,216,448 | | 27,353,598 | | |
| | | | | | |
Sales and purchases between billing locations have been accounted for on the basis of prices set between the geographic areas, generally at cost plus 15%. Identifiable assets by geographic area are those assets that are used in the Company’s operations in each location. Net revenue by geographic area has been determined based upon the country from which the product was shipped or services provided.
F-22
On January 5, 2006, BioProgress PLC acquired the whole issued share capital of Dexo S.A. (“Dexo”), a French specialty pharmaceutical company. This acquisition was through a newly formed vehicle, Dexo.
BioPharm Limited (“Dexo BioPharm”), signals a significant change from a drug delivery and material sciences company into an integrated specialty pharmaceutical and healthcare business, which can develop and market its core technologies in combination with other innovative products.
The consideration for the acquisition of Dexo was €12,500,000 ($14,975,000). €8,000,000 ($9,584,000) was paid in cash and €4,500,000 ($5,391,000) in sterling denominated ordinary shares, representing 5,866,791 new ordinary shares.
The Company issued 12,285,328 shares at a price of £0.47 ($0.82) on January 3, 2006 for cash, in order to part finance the Dexo deal.
| b) | Acquisition of Segix Farma S.R.L. |
On July 14, 2006 the Company acquired the entire issued and to be issued share capital of Segix Farma S. R. L. (“Segix”), an Italian specialty pharmaceutical company based near Rome. The acquisition was made through a newly-formed subsidiary of Dexo BioPharm Limited, the Company’s pharmaceutical division.
The consideration for the acquisition, of up to €1,950,000, will be satisfied in cash and equity in BioProgress PLC. The cash element comprises a payment of €700,000 on completion, and a further payment to reflect the stock and net cash of Segix held on completion. The equity element comprises up to €1,250,000 in sterling denominated ordinary shares, contingent upon certain events occurring, including the extension or renewal of various product distribution agreements. The shares to be issued will be subject to lock-in periods of up to eighteen months.
F-23
EXHIBIT INDEX
| | |
| Exhibit No. | | Description of Exhibits |
| 1.1 | | Certificate of Incorporation(7) |
| |
| 2.1 | | Specimen Share Certificate(7) |
| |
| 2.2 | | Memorandum of Association(7) |
| |
| 2.3 | | Articles of Merger(7) |
| |
| 2.4 | | Articles of Association adopted as of June 20, 2006(11) |
| |
| 2.5 | | Audit Committee Terms of Reference(11) |
| |
| 4.1 | | Reorganization Agreement between the Company and BioProgress Technology (2) |
| |
| 4.2 | | Acquisition Agreement—DHA Nutrition(3) |
| |
| 4.3 | | Acquisition Agreement—BioProgress Limited (UK)(3) |
| |
| 4.4 | | Amendment to Acquisition Agreement—BioProgress Limited (1) |
| |
| 4.5 | | Employment Agreement—Edward I. Nowak(3) |
| |
| 4.6 | | Professional Services Agreement—The Jade Partnership International, Inc.(3) |
| |
| 4.7 | | Professional Services Agreement—Company and Ormiston-Gore Securities Limited(3) |
| |
| 4.8 | | Professional Services Agreement—BioProgress Technology Limited and Ormiston-Gore Securities Limited(3) |
| |
| 4.9 | | TruTona Purchase Agreement(3) |
| |
| 4.10 | | Exclusive Evaluation Agreement, dated February 18, 2000 between the Company and the Fortune 500 company(4) |
| |
| 4.11 | | Technology Collaboration Agreement for the Development of Non-Gelatin Paintballs, dated March 7, 2000 between the Company and JT USA(4) |
| |
| 4.12 | | Master License Agreement, dated as of February 3, 2004, between FMC Corporation (“FMC”) and BioProgress Technology International, Inc. a Nevada Corporation which is a wholly owned subsidiary of the Company (8)* |
| |
| 4.13 | | Framework Agreement, dated as of February 3, 2004, between FMC and the Company (8)* |
| |
| 4.14 | | Intellectual Property License Agreement, dated as of March 8, 2004, between BioProgress Technology International, Inc., Perrigo R&D Company and Perrigo Company (8)* |
| |
| 4.15 | | Equipment Purchase Agreement, dated February 3, 2004, between FMC Corporation, FMC BioPolymer and the Company (8)* |
| |
| 4.16 | | Film Supply Agreement, dated February 3, 2004, between FMC Corporation, FMC BioPolymer and the Company (8)* |
| |
| 4.17 | | Option Agreement—Barry J. Muncaster(5) |
| |
| 4.18 | | Option Agreement—Edward Nowak(5) |
| |
| 4.19 | | Option Agreement—Gregory L. Bowers(5) |
| |
| 4.20 | | Option Agreement—Graham R. M. Hind(5) |
| |
| 4.21 | | Option Agreement—James T. C. Longley(5) |
| |
| 4.22 | | Option Agreement—Larry C. Shattles(5) |
| |
| 4.23 | | Option Agreement—Malcolm D. Brown(5) |
| |
| 4.24 | | Premises lease—Hostmoor property(6) |
| |
| 4.25 | | Agreement to lease—Hostmoor property(6) |
| |
| 4.26 | | Agreement for Supply of Prototype Machine, dated July 10th, 2001, between the Company and Farmasierra, S.A.(6) |
| | |
| Exhibit No. | | Description of Exhibits |
| 4.27 | | 2002 Common Stock Offering of up to 600 units, including warrants(6) |
| |
| 4.28 | | Product Development Agreement, dated November 26, 2001, between the Company and The Boots(7) |
| |
| 4.29 | | Product Development Agreement (Stage 1), dated April 19, 2002 between the Company and Boots Healthcare International Limited (7) |
| |
| 4.30 | | License Agreement between Convatec, a division of E.R. Squibb & Sons, L.L.C. and BioProgress Technology International, Inc., together with an amendment dated 11 November 2002(7) * |
| |
| 4.31 | | Consultancy Agreement, dated March 10, 2003, between Barry J. Muncaster and the Company (7) |
| |
| 4.32 | | Agreement and Plan of Merger and First Amendment thereto (7) |
| |
| 4.33 | | Loan Agreement, dated January 29, 2003, between BioProgress Technology International, Inc. and Farmasierra, S.A. (7) |
| |
| 4.34 | | Memorandum of Variation #7, dated as of August 22, 2002, between BioProgress Technology International, Inc. and Consolidated EcoProgress Technology, Inc. (7) |
| |
| 4.35 | | Service Agreement, dated April 17, 2003, between the Company and Graham Hind(7) |
| |
| 4.36 | | Deed of Termination, dated April 7, 2004, among Peter Black Advanced Technologies Limited, Peter Black Healthcare Limited, BioProgress Technology International, Inc. and BioProgress Technology Limited (8) |
| |
| 4.37 | | Asset Purchase Agreement, dated March 7, 2004, by and among Bio Films LLC, Aquafilm LLC, Aquafilm USA, Inc. and Each of the Stockholders of Aquafilm, Inc. (8) |
| |
| 4.38 | | Service Agreement, dated April 17, 2003, between the Company and Malcolm David Brown (7) |
| |
| 4.39 | | Appointment as Non-Executive Director, between the Company and Peter Glynn-Jones (8) |
| |
| 4.40 | | Appointment as Non-Executive Director, between the Company and Alan Clarke (8) |
| |
| 4.41 | | Appointment as Non-Executive Director, between the Company and Graham Cole (8) |
| |
| 4.42 | | Appointment as Non-Executive Director, between the Company and Tony Fabrizi (10) |
| |
| 4.43 | | Subscription Agreement, dated September 30th, 2004, between the Company, the Investor named therein and Collins Stewart Limited (10) |
| |
| 4.44 | | Supplemental Agreement, dated June 1st, 2005, between the Company and Citadel Equity Fund Ltd (10) |
| |
| 4.45 | | Equipment Purchase Agreement, dated February 3rd, 2004, between Harro Hoefliger Verpackungsmaschinen GmbH and the Company (10) |
| |
| 4.46 | | Agreement for the developments of a proof-of-principal automated tablet encapsulating machine, dated March 2nd, 2005, between the GB Innomech Limited and BioProgress Technology Limited (10) |
| |
| 4.47 | | Agreement relating to Production of XGel™ Film, dated February 4th, 2005, between the Biocustom Limited and Custom Pharmaceuticals Limited (10) |
| |
| 4.48 | | Supply Agreement, dated September 30th, 2004, between Bio Tec Films, LLC and AXM Pharma (Shenyang) Inc. (10)* |
| |
| 4.49 | | Net Lease – Florida property (10) |
| |
| 4.50 | | Net Lease – Florida property (10) |
| |
| 4.51 | | Deposit Agreement relating to American Depositary Receipts, dated September 9th, 2004, between the Company and JPMorgan Chase Bank and the Holders of American Depositary Receipts (9) |
| | |
| Exhibit No. | | Description of Exhibits |
| 4.52 | | Resignation as Non-Executive Director, between the Company and Tony Fabrizi (11) |
| |
| 4.53 | | Rules of Executive Share Option Scheme 2005 (11) |
| |
| 4.54 | | Contract for Sale – Hostmoor property (11) |
| |
| 4.55 | | Form of Joint Venture Agreement, dated December 20th, 2005, between Dexo Biopharm Limited, Crescent Pharma Limited, Luma Auchi, Mohammed Aldoori and Dexo Biogenerics Limited (11) |
| |
| 4.56 | | License Agreement, dated December 20th, 2005, between Crescent Pharma Limited and Dexo Biogenerics Limited (11) |
| |
| 4.57 | | License Agreement, dated December 20th, 2005, between the Company and Dexo Biogenerics Limited (11) |
| |
| 4.58 | | Loan Agreement, dated December 20th, 2005, between Dexo Biopharm Limited and Dexo Biogenerics Limited (11) |
| |
| 4.59 | | Services Agreement, dated December 20th, 2005, between the Company and Dexo Biogenerics Limited (11) |
| |
| 4.60 | | Services Agreement, dated December 20th, 2005, between Crescent Pharma Limited and Dexo Biogenerics Limited (11) |
| |
| 4.61 | | Share Purchase Agreement, dated December 20th, 2005, between the Company and Dexo Biopharm France-In-Formation (11) |
| |
| 4.62 | | Orderly Market Agreement, dated January 6th, 2006, between the Company, Bridgewell Securities Limited and the Shareholders (11) |
| |
| 4.63 | | Lock-up Agreement, dated January 5, 2006, between the Company, Bridgewell Securities Limited and the Shareholders (11) |
| |
| 4.64 | | Appointment as Non-Executive Director, between the Company and Tony Knight (11) |
| |
| 4.65 | | Appointment as Non-Executive Director, between the Company and Alan Clarke (11) |
| |
| 4.66 | | Appointment as Non-Executive Director, between the Company and Peter Ibbetson (11) |
| |
| 4.67 | | Research Collaboration and Option Agreement, dated May 3rd, 2006, between Dexo Biopharm Limited and Uluru Inc. (11) |
| |
| 4.68 | | Service Agreement, dated June 14th, 2006, between the Company and Peter Keen (11) |
| |
| 4.69 | | License to Assign and Authorized Guarantee Agreement – Hostmoor property (11) |
| |
| 4.70 | | Transfer of Title – Hostmoor property (11) |
| |
| 4.71 | | Premises lease – Science Park property (11) |
| |
| 8.1 | | List of the Company’s Subsidiaries (11) |
| |
| 10.1 | | Consent of Grant Thornton UK LLP (11) |
| |
| 11.1 | | Code of Conduct of the Company, effective as of 8 June 2006 (11) |
| |
| 12.1 | | Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer(11) |
| |
| 13.1 | | Section 1350 Certification of Chief Executive Officer(11) |
| (1) | Filed as an exhibit to the Company’s Registration Statement on Form 10-KSB dated August 23,1994, or October 21, 1994 (Registration No. 0-24736). |
| (2) | Filed as an exhibit to the Company’s Form 10-KSB for the year ended December 31, 1997. |
| (3) | Filed as an exhibit to the Company’s Form 10-KSB for the year ended December 31, 1998. |
| (4) | Filed as an exhibit to the Company’s Form 10-KSB for the year ended December 31, 1999. |
| (5) | Filed as an exhibit to the Company’s Form 10-KSB for the year ended December 31, 2000. |
| (6) | Filed as an exhibit to the Company’s Form 10-KSB for the year ended December 31, 2001. |
| (7) | Filed as an exhibit to the Registration Statement/Proxy Statement of BioProgress PLC and BioProgress Technology International, Inc. filed December 20, 2002 and amended March 19, 2003, May 7, 2003 and May 16, 2003 (Registration Number 333-102045). |
| (8) | Filed as an exhibit to the Company’s Form 20-F for the year ended December 31, 2003. |
| (9) | Filed as an exhibit to the Company’s Form F-6 dated September 21, 2004. |
| (10) | Filed as an exhibit to the Company’s Form 20-F for the year ended December 31, 2004. |
| (11) | Filed as an exhibit herewith. |
| * | Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the Commission. |
