U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section13 or 15(d)
Of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
Commission file number: 000-31479
Biogan International, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware | 58-1832055 |
(State of incorporation) | (IRS Employer ID Number) |
150 King Street West
Suite 2315
Toronto, Ontario, Canada
(Address of principal executive offices)
M5H 1J9
(Zip Code)
(416) 214-3270
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such 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. Yes | | No |X |.
APPLICABLE ONLY TO CORPORATE ISSUER:
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:
As of July 19, 2002, the issuer had outstanding 108,066,199 shares of its Common Stock, $0.001 par value.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BIOGAN INTERNATIONAL, INC. | |||
BALANCE SHEET | |||
JUNE 30,2002 | DECEMBER 31, 2001 | ||
| ASSETS | |||
| CASH | $59,379 | $ - | |
| TOTAL CURRENT ASSETS | 59,379 | - | |
| FIXED ASSETS, NET OF ACCUMULATED DEPRECIATION OF $31,098 | 5,537 | 6,495 | |
| COOPERATIVE JOINT VENTURE INVESTMENT | 1,700,000 | 1,700,000 | |
| TOTAL ASSETS | $1,764,916 | $1,706,495 | |
| LIABILITIES & STOCKHOLDERS' DEFICIT | |||
| BANK OVERDRAFT | $ - | $10,076 | |
| ACCOUNTS PAYABLE | 462,852 | 499,526 | |
| NOTES PAYABLE | 269,967 | 269,967 | |
| ACCRUED EXPENSES | 1,308,948 | 759,016 | |
| CONVERTIBLE DEBENTURES | |||
| - NET OF DEFERRED DEBENTURE ISSUE COSTS OF $0 | 2,490,000 | - | |
| TOTAL CURRENT LIABILITIES | 4,531,767 | 1,538,585 | |
| CONVERTIBLE DEBENTURES | |||
| - NET OF DEFERRED DEBENTURE ISSUE COSTS OF $0 | - | 2,129,339 | |
| COMMITMENTS | - | ||
| STOCKHOLDERS' DEFICIT | |||
| SERIES A CONVERTIBLE PREFERRED STOCK $.001 PAR VALUE, | |||
| 10,000,000 SHARES AUTHORIZED 1,100 SHARES ISSUED | 1 | 1 | |
| COMMON STOCK $.001 PAR VALUE 300,000,000 | |||
| SHARES AUTHORIZED, 91,416,199 AND 91,266,199 ISSUED AND OUTSTANDING | |||
| AT JUNE 30, 2002 AND DECEMBER 31, 2001 RESPECTIVELY | 91,416 | 91,266 | |
| ADDITIONAL PAID IN CAPITAL | 8,358,727 | 8,354,377 | |
| SPECIAL WARRANTS | 474,500 | - | |
| ACCUMULATED DEFICIT | (11,691,495) | (10,407,073) | |
| TOTAL STOCKHOLDERS' DEFICIT | (2,766,851) | (1,961,429) | |
| TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT | $1,764,916 | $1,706,495 | |
SEE ACCOMPANYING NOTES | |||
BIOGAN INTERNATIONAL, INC. | |||||||||
FOR THE THREE MONTHS ENDING | FOR THE SIX MONTHS ENDING | THROUGH FROM INCEPTION | |||||||
June 30, 2002 | June 30, 2001 | June 30, 2002 | June 30, 2001 | June 30, 2002 | |||||
SALES | $ - | $ - | $ - | $ - | $7,150 | ||||
REVENUE | - | - | - | - | 1,470 | ||||
TOTAL SALES | - | - | - | - | 8,620 | ||||
EXPENSES | |||||||||
WAGES | 45,000 | 53,200 | 118,200 | 116,400 | 1,135,389 | ||||
STOCK SUBSCRIPTION LOSS | - | - | - | - | 101,006 | ||||
DEPRECIATION EXPENSE | 479 | 1,278 | 958 | 3,574 | 31,248 | ||||
AMORTIZATION | - | 66,854 | 70,661 | 132,310 | 535,000 | ||||
STOCK BASED EXPENSES | - | - | - | - | 1,878,000 | ||||
INTEREST EXPENSE | 55,750 | 35,736 | 106,720 | 68,718 | 437,325 | ||||
INTEREST EXPENSE - BENEFICIAL CONVERSION | - | - | - | - | 508,750 | ||||
INCENTIVE BONUS | - | - | - | 149,364 | |||||
LEGAL & ACCOUNTING FEES | 432,719 | 14,870 | 494,655 | 185,225 | 1,809,181 | ||||
RENT | 2,763 | 3,738 | 6,770 | 9,633 | 66,718 | ||||
START UP COSTS | - | - | - | - | 180,941 | ||||
RESEARCH AND DEVELOPMENT | - | - | - | - | 343,681 | ||||
SUBSIDIARIES LOSSES | - | - | - | - | 158,380 | ||||
OTHER OPERATING EXPENSES | 112,163 | 6,823 | 186,458 | 24,337 | 690,808 | ||||
TOTAL EXPENSES | 648,874 | 182,499 | 984,422 | 540,197 | 8,025,791 | ||||
NET OPERATING INCOME (LOSS) | (648,874) | (182,499) | (984,422) | (540,197) | (8,017,171) | ||||
STOCK RECOVERY INCOME | - | - | - | - | (2,676,409) | ||||
INTEREST INCOME | - | - | - | - | 7,417 | ||||
OTHER INCOME | - | - | - | - | 248 | ||||
DEBENTURE SETTLEMENT COSTS | (150,000) | - | (300,000) | - | (1,000,000) | ||||
MISCELLANEOUS EXPENSE | - | - | - | - | (5,580) | ||||
TOTAL OTHER | (150,000) | - | (300,000) | - | (3,674,324) | ||||
NET INCOME (LOSS) | $(798,874) | $(182,499) | $(1,284,422) | $(540,197) | $(11,691,495) | ||||
PRIMARY INCOME (LOSS) PER SHARE | ($0.01) | ($0.00) | ($0.01) | ($0.01) | ($0.23) | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING | 91,366,199 | 88,766,199 | 91,291,199 | 85,386,710 | 50,834,574 | ||||
SEE ACCOMPANYING NOTES | |||||||||
BIOGAN INTERNATIONAL, INC. | ||||||||||||||||||||
| AMOUNT | ADDITIONAL | |||||||||||||||||||
COMMON STOCK | PREFERRED STOCK | SPECIAL WARRANTS | PER | PAID-IN | ACCUMULATED | STOCKHOLDERS' | ||||||||||||||
ISSUED: | SHARES | AMOUNT | SHARES | AMOUNT | WARRANTS | AMOUNT | SHARE | CAPITAL | DEFICIT | EQUITY (DEFICIT) | ||||||||||
1988 | 2,250,000 | $2,250 | $- | $- | $22,750 | $(15,052 | ) | $9,950 | ||||||||||||
1989 | 21,387,347 | 21,387 | 197,352 | (149,448 | ) | 79,241 | ||||||||||||||
1995 | 56,858,115 | 56,858 | 3,246,860 | (3,261,573 | ) | 121,386 | ||||||||||||||
1996 | 4,573,939 | 4,574 | 1,123,417 | (1,263,513 | ) | (14,136 | ) | |||||||||||||
1997 | 2,785,054 | 2,785 | 560,139 | (678,716 | ) | (129,927 | ) | |||||||||||||
1998 | (2,731,571 | ) | (2,732 | ) | (782,711 | ) | 582,555 | (332,815 | ) | |||||||||||
1999 | 263,826 | 264 | 442,868 | (238,263 | ) | (127,946 | ) | |||||||||||||
2000 | 3,379,489 | 3,379 | 1,100 | 1 | 3,491,192 | (3,598,578 | ) | (231,953 | ) | |||||||||||
MARCH 31, 2001 | ||||||||||||||||||||
CONTRIBUTED CAPITAL | - | - | - | 25,010 | 25,010 | |||||||||||||||
SEPTEMBER 30, 2001 | ||||||||||||||||||||
STOCK ISSUED - DEBENTURE | ||||||||||||||||||||
SETTLEMENT | 2,500,000 | 2,500 | 0.00 | (2,500 | ) | 0 | ||||||||||||||
STOCK BASED COMPENSATION | - | - | 30,000 | 30,000 | ||||||||||||||||
NET LOSS DECEMBER 31, 2001 | (1,784,485 | ) | (1,784,485 | ) | ||||||||||||||||
91,266,199 | 91,266 | 1,100 | 1 | - | - | 8,354,377 | (10,407,073 | ) | (1,961,429 | ) | ||||||||||
STOCK/WARRANTS ISSUED - MAY 3 | 150,000 | 150 | 15,816,667 | - | 0.03 | 478,850 | 479,000 | |||||||||||||
NET LOSS JUNE 30, 2002 | - | - | - | - | - | (1,284,422 | ) | (1,284,422 | ) | |||||||||||
91,416,199 | $91,416 | 1,100 | $1 | - | $- | $8,833,227 | $(11,691,495 | ) | $(2,766,851 | ) | ||||||||||
SEE ACCOMPANYING NOTES | ||||||||||||||||||||
BIOGAN INTERNATIONAL, INC. | |||
FROM FEBRUARY 5, 1988 (INCEPTION) | |||
FOR THE SIX MONTH PERIOD ENDING | THROUGH | ||
JUNE 30, 2002 | JUNE 30, 2001 | JUNE 30, 2002 | |
CASH FLOWS FROM OPERATIONS | |||
NET INCOME (LOSS) | $(1,284,422) | $(540,197) | $(10,892,621) |
| ADJUSTMENTS TO RECONCILE NET LOSS TO | |||
| NET CASH USED BY OPERATING ACTIVITIES: | |||
| ADD BACK STOCK ISSUED FOR: | |||
| MANAGEMENT | 61,294 | ||
| CONTRACT LABOR, INCENTIVE BONUSES, PROFESSIONAL | - | ||
| SERVICES, AND RESEARCH AND DEVELOPMENT | 485,054 | ||
| IMPUTED EXECUTIVE COMPENSATION | 278,901 | ||
| RESTITUTION | 2,676,409 | ||
| STOCK BASED COMPENSATION | 1,878,000 | ||
| INTEREST EXPENSE | 44,442 | ||
| INTEREST EXPENSE - BENEFICIAL CONVERSION | 508,750 | ||
DISPUTE SETTLEMENTS | 10,603 | ||
STOCK CANCELLATION | (57,570) | ||
OTHER ADJUSTMENTS: | |||
SUBSIDIARIES LOSSES | 158,380 | ||
STOCK SUBSCRIPTION LOSS | 101,006 | ||
FIRST DEVELOPMENT STAGE LOSS | 142,733 | ||
AMORTIZATION | 70,661 | 132,310 | 535,000 |
DEPRECIATION | 958 | 3,574 | 30,768 |
TOTAL ADJUSTMENTS | 71,619 | 135,884 | 6,853,770 |
ACCOUNTS PAYABLE | (36,674) | 73,339 | 560,830 |
ACCRUED LIABILITIES | 549,932 | 180,118 | 1,004,680 |
NET CASH (USED) | |||
BY OPERATING ACTIVITIES | (699,545) | (150,856) | (2,473,341) |
CASH FLOWS FROM INVESTING ACTIVITIES | |||
PURCHASE FURNITURE/EQUIPMENT | (37,032) | ||
DISPOSAL FURNITURE/EQUIPMENT | 475 | ||
ADVANCE ON BUSINESS COMBINATION | (1,700,000) | ||
INVESTMENT IN SUBSIDIARIES | (158,380) | ||
NET CASH (USED) | |||
BY INVESTING ACTIVITIES | - | - | (1,894,937) |
CASH FLOWS FROM FINANCING ACTIVITIES | |||
NOTE PAYABLE-STOCKHOLDER RECEIVED | 99,967 | 259,192 | |
NOTES PAYABLE - OTHER RECEIVED | 220,141 | ||
PAYMENT OF NOTES PAYABLE - OTHER | (58,680) | ||
CONVERTIBLE DEBENTURES | 300,000 | 2,650,000 | |
PAYMENTS OF DEBENTURES | (10,000) | (6,000) | (10,000) |
ISSUANCE OF COMMON STOCK | 4,500 | 821,952 | |
DEFERRED BOND ISSUE COSTS | (300,000) | ||
CONTRIBUTED CAPITAL | 25,010 | 822,610 | |
STOCK SUBSCRIPTION DEPOSITS | 474,500 | - | |
OTHER | (228) | ||
ELIMINATION OF BANK OVERDRAFT | (10,076) | (228) | |
NET CASH PROVIDED | |||
BY FINANCING ACTIVITIES | 758,924 | 118,977 | 4,404,987 |
NET INCREASE(DECREASE) IN CASH | 59,379 | (31,879) | 36,709 |
BEGINNING CASH BALANCE | - | 38,025 | - |
CASH ENDING BALANCE | $59,379 | $6,146 | $36,709 |
SUPPLEMENTAL INFORMATION | |||
CASH PAYMENTS FOR INTEREST EXPENSE | $ - | $ - | $2,711 |
CASH PAYMENTS FOR INCOME TAXES | - | - | - |
NONMONETARY TRANSACTIONS | |||
STOCK ISSUED FOR: | |||
DEBT REDUCTION | - | - | 141,461 |
MANAGEMENT | - | - | 61,294 |
CONTRACT LABOR, INCENTIVE BONUSES, PROFESSIONAL | |||
SERVICES, AND RESEARCH AND DEVELOPMENT | - | - | 485,054 |
IMPUTED EXECUTIVE COMPENSATION | - | - | 278,901 |
RESTITUTION | - | - | 2,676,409 |
INTEREST EXPENSE - BOND CONVERSION | - | - | 44,442 |
INTEREST EXPENSE - BENEFICIAL CONVERSION | - | - | 508,750 |
DISPUTE SETTLEMENT | - | - | 10,603 |
STOCK CANCELLATION | - | - | (57,570) |
BOND ISSUANCE COSTS CAPITALIZED | - | - | 235,000 |
BOND CONVERSION INTO COMMON STOCK | - | - | 530,000 |
STOCK BASED COMPENSATION | - | - | 1,878,000 |
SEE ACCOMPANYING NOTES | |||
BIOGAN INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002
BASIS OF PRESENTATION
In the opinion of the company, the accompanying unaudited financial statements contain all adjustments (which are of a normal and recurring nature) necessary for a fair presentation of the financial statements. The results of operations for the three and six-month periods ended June 30, 2002 are not necessarily indicative of the results to be expected for the entire year.
These unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes for the company for the year ended December 31, 2001.
1. HISTORY
Background
Biogan International, Inc. ("Biogan" or the "company") was incorporated under the laws of the State of Delaware on February 5, 1988 under the name H.W. Ronney and Company and has been a development stage company since its inception. The company changed its name to Biogan Medical International, Inc. in March 1989 after merging with a company of that name, and then engaged in various medical-related enterprises under the company's new name. Prior to 1995, either directly or indirectly, through subsidiaries or other affiliates, the company also engaged in business operations in a variety of other industries, undergoing several corporate restructurings during that time.
In 1995, the company began development of a new concept in electrical motors called the IntorCorp Motor. To assist in the development of the company's electrical motor concept, the company entered into a consulting agreement with Technical Development Consultants, Inc. ("TDC"), an independent electrical engineering consulting firm. As part of the research and development process, the company's consultants formed a company called Collective Technologies, LLC, which company acquired any intellectual property rights held by TDC with respect to the IntorCorp Motor concept. The company changed its name to Biogan International, Inc. in September 1997 to avoid any confusion that could result from the use of the word "medical" in the company's name when the company's emphasis at that time was to promote the development of the IntorCorp Motor.
Effective February 1998, the company entered into a joint venture agreement with Collective Technologies, LLC to continue the development of the IntorCorp Motor through an Idaho corporation, IntorCorp, Inc., in which the company held a 50% ownership interest. In August 1999, the company transferred all of its rights and interest in IntorCorp, Inc., including the company's interest in the IntorCorp Motor and the patent application to the electromagnetic motor, in connection with an agreement with R-Tec Engineering Corporation. Under the terms of the agreement, the parties created an Idaho corporation, R-Tec Holding, Inc., into which the company transferred its 50% ownership interest in IntorCorp, Inc. in exchange for 4,266,797 shares of common stock of R-Tec Holding, Inc. In September 1999, the company distributed these shares to its stockholders. Following this transaction, and having divested itself of certain assets related to the electrical motor industry and disposed of all of its subsidiaries and other interests in other affiliates and other entities, the company began to focus its attention, experience and resources on developing a base metal mining and smelting operation in the People's Republic of China.
Cooperative Joint Venture
Effective July 1, 2000 the company entered into an asset purchase agreement with Hechi Industrial Co., Ltd. (Hechi) under the laws of the People's Republic of China. A Cooperative Joint Venture, Guangxi Guanghe Metals Co., Ltd. (GGM), was formed for the purpose of engaging in the mining and milling of non-ferrous metals and for the purpose of operating a copper smelter to produce blister copper in the Guangxi Province of China.
Pursuant to the transaction, the company paid $1,700,000 and issued 16,800,000 shares of the company's common stock and 30,200 shares of Series A preferred stock to Hechi in exchange for a 92% equity interest and a 95% profits interest in GGM.
On July 27, 2001, the company was advised that the transactions contemplated under the original agreements were not in compliance with certain laws of the People's Republic of China.
Following discussions with Hechi and U.S., Chinese and Canadian legal counsel, the company implemented the acquisition on a restructured basis on July 19, 2002, in compliance with Chinese legal requirements, more fully described in Note 7 "Subsequent Events." As a result, Biogan acquired, as intended under the original agreement with Hechi, a 92% equity interest and a 95% profits interest in GGM in exchange for 78.4% of Biogan's voting capital stock. For accounting purposes, the transaction will be treated as a reverse takeover, with Hechi treated as having acquired Biogan.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONTINUED EXISTENCE
The company has had recurring losses from development stage activities, negative working capital of $4,472,388 and a stockholders' deficit of $2,766,851. In addition, there is also an uncertainty in connection with the company meeting its $7,300,000 funding requirement (Note 7).
The above financial factors raise a substantial doubt about the company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or amounts and classifications of liabilities that may result from the possible inability of the company to continue as a going concern. Management plans to continue in existence are set forth in Note 1 "Cooperative Joint Venture" and Note 7 "Subsequent Events". There can be no assurance that the Cooperative Joint Venture will be successful.
3. NOTES PAYABLE
Unsecured notes payable, with interest at 10% per annum, are payable on demand, with payments applied first to any unpaid interest. As of June 30, 2002 the balance consists of the following:
| Ronald J. Tolman, Stockholder, November 13, 1996 | 40,000 |
| Rulon L. Tolman, Stockholder, November 13, 1996 | 40,000 |
| Rulon L. Tolman, Stockholder, April 29, 1999 | 10,000 |
| Ronald J. Tolman, Stockholder, September 7, 1999. | 5,000 |
| Hechi Industrial Company Limited, January 3, 2001. | 50,000 |
| Hechi Industrial Company Limited, February 6, 2001. | 19,985 |
| Gilles Laverdiere, Vice Chairman & CEO of Biogan, August 20, 2001. | 60,000 |
| Hechi Industrial Company Limited, May 29, 2001. | 19,982 |
| Hechi Industrial Company Limited, August 20, 2001. | 25,000 |
| Total Notes Payable | $269,967 |
4. CONVERTIBLE DEBENTURES
The company issued convertible debentures on March 29, 2000 to Thomson Kernaghan & Co. Ltd. (TK) and Carbon Mesa Partners, LLC (Carbon Mesa) for aggregate proceeds of $2,035,000 to assist in financing required contributions to the joint venture with Hechi under its original terms. Out of the net proceeds of $1,800,000 from the sale of the debentures, $1,500,000 was contributed to GGM and $300,000 was retained for working capital purposes.
Prior to September 24, 2001, Biogan defaulted under the provisions of the debentures and the registration rights agreement due to its failure to maintain its listing on the NASD's OTC Electronic Bulletin Board and its failure to timely register with the SEC for resale the shares of common stock issued or issuable upon conversion of the debentures and exercise of the warrants. As a result of this failure, penalties totaling $956,000 became due. The company renegotiated the terms of the TK debenture and, on September 24, 2001, amended the debenture and the Registration Rights Agreement. Under the amendment, TK waived defaults under the TK debenture and agreed to extend the maturity date of the TK debenture from February 28, 2002 to February 28, 2003, and provide that unpaid interest shall continue to accrue on the TK debenture payable quarterly in arrears beginning March 31, 2002. The company also agreed to increase the principal balance of the TK debenture by $650,000 to $2,120,000 and issue 2,500,000 shares of common stock to TK in settlement of penalties outstanding under the registration rights agreement. Accrued interest under both the TK and Carbon Mesa debentures continues to be payable upon conversion in the form of either cash or additional shares of common stock, at the company's option, at the then-applicable conversion rate. Biogan remains in default of the Carbon Mesa Debenture.
The company also agreed that on or before November 30, 2001, it would file with the SEC all securities filings that are required to be filed prior to that date and secure and maintain the listing of Biogan common stock on an exchange or on the NASD's OTC Electronic Bulletin Board. In addition, the company agreed to file by January 31, 2002 a registration statement covering, among other things, the shares of common stock issued or issuable upon conversion of the debentures and exercise of the warrants. Penalty for failure to comply with the filing or relisting requirements, was that the principal amount of the TK debenture would increase by $50,000 for each 30-day period of non-compliance, with a maximum aggregate increase of $350,000. As a result of the company's failure to comply with the above filing and listing requirements, the principal amount of the debentures has increased by a further $350,000, resulting in a balance at June 30, 2002 of $2,490,000. At June 30, 2002 accrued interest amounted to $319,650.
5. RELATED PARTY TRANSACTIONS
a) Thomson Kernaghan & Co. Limited (TK) owned 9.9% of the company's common stock at June 30, 2002. Disregarding beneficial ownership limitations, the remaining debentures convert into approximately 174,000,000 shares of common stock and the Series A preferred stock converts into 13,200,000 shares of common stock.
b) The company's Vice Chairman and three former officers/stockholders contributed capital of $993,810 for which no shares of stock were issued. "Stockholders Deficit"). Also a $60,000 10% unsecured demand note (Note 3) was due the company's Vice Chairman. Accrued salary of $150,000 was due the company's Vice Chairman, $115,000 to its President and $36,000 to its Executive Vice President.
c) There are four 10% unsecured demand notes aggregating $114,967 due Hechi Industrial Company Limited (Note 3), a co-owner in GGM. In addition Hechi advanced $81,747 on behalf of Biogan.
6. SPECIAL WARRANT FINANCING
The company completed a non-brokered private placement on May 3, 2002 of 15,816,664 special warrants and 150,000 restricted common shares at a price of U.S. $0.03 per special warrant or common share, for proceeds of U.S. $479,000. The proceeds of the offering will be used for working capital purposes. The special warrants, which were offered outside of the U.S., entitle holders to acquire, at no additional cost, one common share for each special warrant held, at any time before the earlier of five days after the issuance of a receipt for a final prospectus from the Ontario Securities Commission and two years from closing. The common shares issued in the U.S. are subject to restrictions on resale imposed by the U.S. Securities Act of 1933.
7. SUBSEQUENT EVENTS
On July 19, 2002 Hechi and the company implemented the revised structure by completing the following steps:
a) The Hechi shareholders established a wholly-owned British Virgin Islands corporation, Fushan Industrial Co., Ltd. (Fushan);
b) Fushan established a British Virgin Islands corporation, Biogan International (BVI) Inc.;
c) The company and Hechi terminated the original Asset Purchase Agreement;
d) The company contributed its interest in Guangxi Guanghe Metals Co., Ltd. to Biogan International (BVI) Inc. in exchange for a non-interest bearing promissory note in the principal amount of $1.7 million;
e) Hechi and the company amended and restated the agreement establishing the Cooperative Joint Venture to provide for the replacement of the company by Biogan (BVI) Inc. and
f) Fushan and the company entered into a share exchange agreement pursuant to which the company acquired 100% of Biogan International (BVI) Inc. in exchange for 16,800,000 shares of the company's common stock and 3,624,000 shares of Series B Preferred stock.
The Series B Preferred Stock is convertible into 362,400,000 shares of common stock following shareholder authorization of additional issuable stock at Biogan's next meeting of shareholders.
In order for the company to earn its 92% equity interest in GGM, it must contribute additional capital of $7,300,000 to GGM by September 2003. Should the company not contribute the $7,300,000 or contribute only a partial amount, its ownership equity will be reduced proportionately. Regardless of any additional capital contributed, the profit and loss sharing remains at 95%.
As a result of this transaction, the company's business will be completely concentrated in the People's Republic of China. Consequently its continued existence depends on the success of the Cooperative Joint Venture. Because the company conducts its principal operations in China, it is subject to significant risks not typically associated with investments in equity securities of the United States and Western European companies. These include risks associated with, among others, the political, economic and legal environment, influence of the State Council over substantially all aspects of its operations and competition in the mining and refining industry.
It is the company's management belief that the events outlined above, along with its plans to raise at least $7,300,000 for modernizing the properties of GGM will allow the company to continue in existence. As set forth in Note 2 "Continued Existence" there can be no assurance that these plans will be successfully effected and the company will operate as a going concern.
ITEM 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis should be read in conjunction with our financial statements and notes to financial statements included elsewhere in this Annual Report on Form 10-KSB. This report and our financial statements and notes to financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding capital we might need and revenues we might earn pursuant to the revised joint venture and implementation of our business strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors including, without limitation, anticipated trends in our financial condition and results of operations.
Any of the factors described above or in the "Risk Factors" section below could cause our financial results, including our net income (loss) or growth in net income (loss) to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially.
Overview
We were incorporated on February 5, 1988 under the laws of the State of Delaware. Historically, we had been engaged in medical and medical related enterprises and subsequently the development of electrical motors. In 1999, we entered into certain transactions with R-Tec Corporation through which we divested ourselves of assets related to the electrical motor industry.
In the year 2000, we entered into a joint venture agreement with Hechi Industrial Co. Ltd, a mining company operating in the Guangxi Province of China, in anticipation of changing the focus of our business to the smelting and mining of non-ferrous metals in China. However, in July 2001, we were advised that the transactions were not in compliance with the laws of the PRC. Following discussion with Hechi and our U.S., Chinese and Canadian legal counsel, on July 19, 2002, we implemented our transaction with Hechi on a restructured basis, in compliance with Chinese legal requirements. Hechi and the Company implemented the revised structure for the acquisition by completing the following steps: (1) the Hechi shareholders established a wholly-owned British Virgin Islands corporation, Fushan Industrial Co. Ltd.; or Fushan, (2) Fushan established a British Virgin Islands corporation, Biogan International (BVI) Inc., or Biogan (BVI); (3) the company and Hechi terminated the Asset Purchase Agreement; (4) the company contributed its interest in GGM to Biogan (BVI) in exchange for a non-interest bearing demand promissory note in the principal amount of $1.7 million; (5) Hechi and the company amended and restated the agreement establishing GGM to provide for the replacement of the company by Biogan (BVI); and (6) Fushan and the company entered into a share exchange agreement dated July 19, 2002 pursuant to which the company acquired 100% of Biogan (BVI) in exchange for 16,800,000 shares of the company's common stock, 3,624,000 shares of the company's Series B Convertible Preferred Stock and additional capital contributions of $7,300,000 which are to be paid by September 1, 2003.
The Series B Convertible Preferred Stock is convertible into 362,400,000 shares of our common stock following stockholder authorization of additional issuable common stock at our next meeting of stockholders. Accordingly, as a result of these transactions, we acquired, as intended under the original agreement with Hechi, a 92% equity interest and a 95% profits interest in GGM in exchange for 78.4% of our voting capital stock (assuming the conversion of all of the outstanding shares of Series A Convertible Preferred Stock and all of the outstanding shares of Series B Convertible Preferred Stock). For accounting purposes the transaction will be accounted for as a reverse takeover with Hechi treated as having acquired Biogan.
Results of Operations
Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30, 2001
We had no revenues in the three-month period ended June 30, 2002. For the three month period ended June 30, 2002, we had a net loss of $798,874, compared to a net loss loss of $182,499 for the same period in 2001. The increased loss in 2002 relates to increased legal, accounting and other fees associated with completing our revised transaction with Hechi as well as $150,000 in penalties incurred on the convertible debentures.
For the six months ended June 30, 2002, the company reported a net loss of $1,284,422 as compared to a net loss of $540,197 for the first six months in 2001. The increased loss in 2002 relates to increased legal, accounting and other fees associated with completing our revised transaction with Hechi as well as $300,000 in penalties incurred on the convertible debentures.
Effective July 1, 2000, we entered into an asset purchase agreement with Hechi. The Asset Purchase Agreement provided for our acquisition of certain of Hechi's assets, including a 9% interest in Gaofeng Mining Company Limited (which owns and operates the Gaofeng mine and processing facilities) a 100% interest in the Wuxu Mine and ore processing facilities and a 100% interest in the Hechi copper smelter. On July 27, 2001, we were advised that the transactions contemplated under the original agreements were not in compliance with certain laws of the PRC and, therefore, void. Between the effective date of the acquisition agreement and prior to the determination that the transaction was void under the laws of the PRC, we believed that we had properly consummated the joint venture transactions with Hechi and, therefore, had focused corporate resources entirely upon managing the mining operations of Hechi and did not engage in any other business operations. Since July 27, 2001 we have focused our resources on restructuring the transaction with Hechi. In effecting the transaction in its original form and subsequently restructuring it, we incurred substantial expenses in fiscal years 2000, 2001 and in the first six months of 2002, which contributed significantly to our losses over these periods. In addition, because the original transaction was deemed void we did not benefit from revenue generated by Hechi during 2000, 2001 and the first six months of 2002.
Employees
The company currently has 3 full time employees. As a result of our transaction with Hechi, substantially all of our personnel will be located in China. As of June 2002, GGM employed 1068 people, of which 60 were employed at the Wuxu mineral processing mill, 683 at the Gaofeng mine and 325 at the Hechi copper smelter. Of these 28 were employed in an administrative capacity.
Liquidity and Capital Resources
During and since 1999, we have funded our activities primarily from loans from private parties in exchange for promissory notes, and capital contributions from Gilles Laverdiere, our current Vice Chairman and Chief Executive Officer. In March 2000, we completed an offering of two debentures in the initial principal amounts of $2,000,000 and $35,000, respectively. From the net proceeds of $1,800,000 from the sale of the debentures, we contributed $1,500,000 to GGM, which was used primarily to purchase metal concentrates, and we retained $300,000 for working capital purposes.
On August 18, 2000 and December 5, 2000, TK converted an aggregate of $530,000 of the principal balance of its debenture plus related interest into 3,379,489 shares of our common stock. In 2000 we repaid $5,000 of the $35,000 principal amount of the Carbon Mesa Debenture. An additional $10,000 was paid on the Carbon Mesa Debenture in 2002. Under amendments to the TK debenture and registration rights agreement, TK waived defaults under the debenture and agreed to extend its maturity date from February 28, 2002 to February 28, 2003, and provided that unpaid interest would continue to accrue on the TK debenture payable quarterly in arrears beginning March 31, 2002. We also agreed to increase the principal balance of the TK debenture by $650,000 to $2,120,000 and issue 2,500,000 shares of common stock to TK in settlement of penalties outstanding under the registration rights agreement. Accrued interest under both the TK and Carbon Mesa debentures continues to be payable upon conversion in the form of either cash or additional shares of our common stock, at our option, at the then-applicable conversion rate. We remain in default of the Carbon Mesa Debenture.
In addition, we agreed that on or before November 30, 2001, we would file with the SEC all securities filings that are required to be filed prior to that date and secure and maintain the listing of our common stock on an exchange or on the NASD's OTC Electronic Bulletin Board. In addition, we agreed to file by January 31, 2002 a registration statement covering, among other things, the shares of common stock issued or issuable upon conversion of the debentures and exercise of the warrants. Penalty for failure to comply with the filing or relisting requirements, was that the principal amount of the TK debenture would increase by $50,000 for each 30-day period of non-compliance, with a maximum aggregate increase of $350,000. As a result of our failure to comply with the above filing and listing requirements, the principal amount of the TK debenture has increased by $350,000, to $2,470,000.
On May 3, 2002 we raised $479,000 pursuant to a private placement. These funds were used by the company to pay expenses related to the implementation of the revised structure and for general expenses including overhead, travel expenses and professional fees.
The execution and success of our strategy is largely dependent on our ability to raise necessary funds. The company intends to contribute $7,300,000 to GGM. Currently the assets of GGM are self sustaining and can continue to be so for the foreseeable future. However, because of capital limitations these assets are operating below capacity and are therefore earning less revenue and are less profitable than they could be given additional capital. It is our expectation that both revenue and profitability will rise with the introduction of additional capital in an amount that will provide reasonable returns on the capital investment. Additionally, management expects to diversify its product offering in an attempt to smooth out the effects of market cyclicality. To the extent we are not successful in raising capital to further contribute to the GGM we will continue to operate our assets at their current capacity until such time as additional capital becomes available. In the event, we do not contribute the agreed to $7,300,000 to GGM by September 1, 2003 our equity interest in GGM will be proportionately reduced but will in no event be less than 70%. Our profits interest in GGM will remain fixed at 95% regardless of the amount and timing of our capital contributions. In addition, under Chinese law, in the event a joint venture party fails to make an agreed to capital contribution the government may in some cases revoke the joint venture license forcing the joint venture to begin winding-up proceedings. The joint venture parties may, in such cases, renegotiate the terms of the capital contribution subject to approval from the relevant authorities. There can be no assurance that we will be able to obtain public or private third-party sources of financing or that favorable terms for such financing will be available. If we raise additional funds by issuing equity or convertible debt securities, options or warrants, further dilution to our existing stockholders may result. In addition, any debt financing or other financing of securities senior to common stock may include financial and other covenants that will restrict our flexibility. Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition and results of operations. If adequate funds are not available, we may be required to delay, scale back or eliminate portions of our planned operations or to obtain funds through arrangements with partners or others that may require us to relinquish rights to some of our assets. Accordingly, the inability to obtain financing could result in a significant loss of ownership and/or control of our assets and could also adversely affect our ability to fund our planned operations.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
Not applicable
Item 3. DEFAULTS ON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during this period.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed with this report
None
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Biogan International, Inc. | |
| (Registrant) | |
| Date: August 14, 2002 | By: /s/ Gilles Laverdiere |
| Gilles Laverdiere | |
| Vice Chairman and Chief Executive Officer | |
| Date: August 14, 2002 | By: /s/ Robert Doyle |
| Robert Doyle | |
| Executive Vice-President and Chief Financial Officer | |
