UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended September 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to _________________
Commission File No. 0-11472
DONLAR BIOSYNTREX, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 87-0380088
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6502 South Archer Road, Bedford Park, Illinois 60501
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(Address of principal executive offices)
(708) 563-9200
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
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 [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant's common stock as of
September 30, 2002 was 48,816,740.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
INDEX
PART I. FINANCIAL INFORMATION
1. Financial Statements
Condensed and Consolidated Balance Sheet as of
September 30, 2002 1
Condensed and Consolidated Statements of Operations
for the three months and nine months ended September 30, 2001 and 2002 2
Condensed and Consolidated Statement of Shareholders' Deficit
for the nine months ended September 30, 2002 3
Condensed and Consolidated Statements of Cash Flows
for the nine months ended September 30, 2001 and 2002 4
Notes to Condensed and Consolidated Financial Statements 5
2. Management's Discussion and Analysis or Plan of Operation 9
3. Controls and Procedures 12
PART II. OTHER INFORMATION
6. Exhibits and Reports on Form 8-K 12
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements
DONLAR BIOSYNTREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 15,737
Receivables, less allowance for doubtful accounts of $0 528,127
Inventories, net 1,074,774
Prepaid expenses 85,181
------------
Total current assets 1,703,819
Property and equipment, net 8,931,947
Other assets 261,424
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$ 10,897,190
============
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LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Current portion of convertible debt $ 2,549,472
Short term notes payable 8,252,507
Accounts payable 328,014
Accrued expenses 7,481,485
------------
Total current liabilities 18,611,478
Notes payable 9,000,000
Convertible debt 21,307,400
Shareholders' deficit
Preferred stock, $.0001 par value 197,797
Common stock, $.0001 par value -
Additional paid-in capital 59,462,722
Stock subscriptions receivable (31,987)
Accumulated deficit (97,650,220)
------------
Total shareholders' deficit (38,021,688)
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$ 10,897,190
============
The accompanying notes are an integral part of this unaudited condensed
consolidated balance sheet statement.
DONLAR BIOSYNTREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues $ 915,918 $ 455,382 $ 2,808,005 $ 1,687,902
Cost of revenue 658,817 624,868 2,268,876 2,043,022
Research and Development 141,952 190,597 412,104 670,245
Selling, general and administrative 637,543 508,412 1,667,086 4,542,536
------------ ------------ ------------ ------------
Total operating expenses 1,438,312 1,323,877 4,348,066 7,255,803
------------ ------------ ------------ ------------
Loss from operations (522,394) (868,495) (1,540,061) (5,567,901)
Other income (expense)
Interest income 3 22 263 8,975
Interest expense (1,193,208) (1,206,421) (4,170,904) (5,255,854)
Debt conversion expense - - (289,655) -
Gain on disposal of fixed assets - 360 74,478 360
Other 147,344 - 308,087 -
------------ ------------ ------------ ------------
Total other expense (1,045,861) (1,206,039) (4,077,731) (5,246,519)
------------ ------------ ------------ ------------
Loss before income taxes (1,568,255) (2,074,534) (5,617,792) (10,814,420)
Provision for income taxes - - - -
------------ ------------ ------------ ------------
Net loss before extraordinary item (1,568,255) (2,074,534) (5,617,792) (10,814,420)
Extraordinary loss on retirement of debt - - (1,212,120) -
------------ ------------ ------------ ------------
Net loss (1,568,255) (2,074,534) (6,829,912) (10,814,420)
Preferred stock dividends and beneficial conversion premium - (656) - (1,969)
------------ ------------ ------------ ------------
Net loss applicable to common shares (1,568,255) (2,075,190) (6,829,912) (10,816,389)
------------ ------------ ------------ ------------
Per common share:
Basic:
Net loss (0.03) (0.05) (0.14) (0.24)
Diluted:
Net loss (0.03) (0.05) (0.14) (0.24)
Weighted average shares of common stock outstanding:
Basic 48,816,740 45,780,150 48,095,523 44,489,825
Diluted 48,816,740 45,780,150 48,095,523 44,489,825
The accompanying notes are an integral part of these unaudited condensed
consolidated statements.
2
DONLAR BIOSYNTREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------
2002 2001
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Cash flows from operating activities
Net loss $ (6,829,912) $(10,814,420)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 818,475 1,034,021
Issuance of Common Stock for services 23,787 -
Compensation expense related to options and warrants - 1,983,146
Interest expense related to amortization of debt discount 2,335,101 2,512,235
Debt conversion expenses 289,655 -
Gain on disposal of fixed assets (74,478) (360)
Change in assets and liabilities
Receivables (23,214) (124,721)
Inventories 767,470 655,334
Prepaid expenses and other assets 47,435 293,603
Accounts payable (1,170,382) 741,122
Accrued expenses 2,596,605 2,220,494
------------ ------------
Net cash used in operating activities (1,219,458) (1,499,546)
Cash flows from investing activities
Proceeds from sale of property and equipment 103,942 4,278
Purchase of property and equipment (136,046) (126,204)
------------ ------------
Net cash used in investing activities (32,104) (121,926)
Cash flows from financing activities
Principal repayments of convertible notes - (135,498)
Proceeds from issuance of convertible notes 1,785,972 121,000
Principal repayments of notes payable (263,000) -
Proceeds from notes payable 11,000 -
Issuance of common stock - 714,593
Proceeds from exercise of stock options and warrants - 49,000
Deferred financing costs (270,419) -
------------ ------------
Net cash provided by financing activities 1,263,553 749,095
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Net (decrease) increase in cash and cash equivalents 11,991 (872,377)
Cash and cash equivalents at beginning of period 3,746 876,434
------------ ------------
Cash and cash equivalents at end of period $ 15,737 $ 4,057
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 75,177 $ 1,313,321
Income tax paid - -
The accompanying notes are an integral part of these unaudited condensed
consolidated statements.
3
DONLAR BIOSYNTREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
Nine Months Ended September 30, 2002
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Series A Series B Additional
Common Stock Preferred stock Preferred stock paid-in Stock
Shares Amount Shares Amount Shares Amount capital Subscription
----------- ------- -------------------- ------ --------- ------------ ------------
Begin Balance 45,816,740 $ - 39,124 $ 191,057 449 $6,740 $ 58,575,407 $ (31,987)
Issuance of capital stock 3,000,000 - - - - - 938,710 -
Amortization of Deferred Compensation - - - - - - - -
Debt conversion expenses - - - - - - 289,655 -
Cancellation of stock options - - - - - - (341,050) -
Net Loss - - - - - - - -
----------- ------- -------- ---------- ----- ------- ------------ ----------
End Balance 48,816,740 $ - 39,124 $ 191,057 449 $6,740 $ 59,462,722 $ (31,987)
=========== ======= ======== ========== ===== ======= ============ ==========
- ------------------------------------------------------------------------------------------
Deferred Accumulated
Compensation Deficit Total
------------- ------------- -------------
Begin Balance $ (115,208) $(90,820,308) $(32,194,299)
Issuance of capital stock - - 938,710
Amortization of Deferred Compensation 115,208 - 115,208
Debt conversion expenses - - 289,655
Cancellation of stock options - - (341,050)
Net Loss - (6,829,912) (6,829,912)
----------- ------------- -------------
End Balance $ - $(97,650,220) $(38,021,688)
=========== ============= =============
The accompanying notes are an integral part of this unaudited condensed
consolidated statement.
4
Notes to Condensed Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements
of Donlar Biosyntrex Corporation ("Donlar Biosyntrex") and subsidiaries (the
"Company") have been prepared in accordance with instructions to Form 10-QSB
and, therefore, do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations and cash flows in
conformity with accounting principles generally accepted in the United States of
America. For further information refer to the Consolidated Financial Statements
and footnotes included in Donlar Biosyntrex's Annual report on Form 10-KSB for
the year ended December 31, 2001.
In management's opinion, the unaudited condensed consolidated financial
statements include all adjustments, consisting only of normal recurring
adjustments except as discussed below, which the Company considers necessary for
a fair presentation of the results for the period. Operating results for the
period presented are not necessarily indicative of the results that may be
expected for the entire year.
The accompanying unaudited condensed consolidated financial statements
have been prepared assuming that the Company will continue as a going concern.
As of September 30, 2002, the Company had an accumulated deficit of $97,650,220,
a shareholders' deficit of $38,021,688 and has had substantial recurring losses.
The consolidated operations of the Company have not achieved profitability and
the Company has relied upon financing from the sale of its equity securities,
liquidation of assets and debt financing to satisfy its obligations. These
conditions raise substantial doubt about the ability of the Company to continue
as a going concern. The unaudited condensed consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
The Company's ability to continue as a going concern is subject to the
attainment of profitable operations or obtaining necessary funding from outside
sources. Management's plan with respect to this uncertainty includes
reorganizing the Company and converting debt to equity, increasing sales of
existing products to attempt to attain a positive cashflow, evaluating new
products and markets, and minimizing overhead and other costs. However, there
can be no assurance that management will be successful.
EQUITY TRANSACTIONS
In January 2001, the Company's majority shareholder, Donlar Corporation
("Donlar"), sold 1,500,000 shares of its common stock to an investor for
$714,593. Since November 3, 2000, the financial statements of the Company
include the activity of both the Company and Donlar. Accordingly, for accounting
purposes, the issuance of these shares has been treated as a Company
transaction.
In January 2001, the Company entered into an agreement with a media
relations firm. This agreement was for a period of one year, and Donlar
Biosyntrex issued the firm a warrant to purchase 1,250,000 shares of its common
stock at an exercise price of $0.01 per share. This
5
warrant could only be exercised if, in the Company's opinion, the media
relations firm satisfied its obligations under the agreement. This agreement and
the warrant were cancelled in April 2001 when the Company entered into a new
agreement effective January 20, 2001 with the same media relations firm. The
term of the new agreement is one year and Donlar Biosyntrex issued 500,000
shares of its common stock to the media relations firm in connection with the
execution of the agreement. The Company recorded $468,750 of general and
administrative expenses upon the execution of the agreement, which is the fair
value of the stock issued as of that date. Additionally, in April 2001, Donlar
Biosyntrex issued the media relations firm 750,000 shares of its common stock
which are being held in an escrow account by the media relations firm until
satisfaction of the terms of the agreement. The fair value of these 750,000
shares was recorded as deferred expense in the amount of $703,125, representing
the fair market value of the shares as of the date of the agreement, January 20,
2001. This amount was being amortized over one year, the life of the agreement,
as adjusted for changes in fair value over the term of the agreement. The
Company believes that the conditions for release of the 750,000 shares from
escrow have not been satisfied by the media relations firm and the Company has
requested return of the shares.
In March 2001, an investment advisor exercised a warrant to purchase
400,000 shares of Donlar Biosyntrex common stock for $0.01 a share, pursuant to
its August 2000 agreement with the Company.
In March 2002, Donlar Biosyntrex issued 2,000,000 shares of its common
stock to the same investment advisor in satisfaction of a two year agreement,
under which the advisor was entitled to $15,000 per month for 24 months. This
agreement was terminated after fifteen months, and in lieu of additional
payments under the agreement, Donlar Biosyntrex issued to the investment advisor
2,000,000 shares of its common stock in full satisfaction of the Company's
obligations to the advisor under the agreement. The fair value assigned to the
shares was $0.40 per share, the closing price of the shares at the date of the
agreement, for consulting expense of $800,000.
In February 2002, Donlar Biosyntrex issued a total of 1,000,000 shares
of its common stock to two investor relations firms as payment for services
rendered pursuant to agreements with these firms. The fair value assigned to the
shares was $0.40 per share, the closing price of the shares at the date of the
agreement, for consulting expense of $400,000.
DEBT TRANSACTIONS
In the first quarter of 2002, the Company began implementing a plan
which is intended to significantly restructure its debt and capital structure in
order to eliminate a substantial portion of its debt and to ultimately result in
the merger of Donlar and Donlar Biosyntrex (the "Restructuring Plan"). The
Restructuring Plan is scheduled to be completed in December 2002.
As part of the Restructuring Plan, on March 18, 2002, the Company
entered into a Bridge and Consolidated Term Loan Agreement with Tennessee
Farmers Life Insurance Company (the "Loan Agreement"). Pursuant to the terms of
the Loan Agreement, the Company obtained a bridge loan facility in the amount of
$2,127,000 to be used to refinance certain short term debt,
6
provide working capital, pay certain accounts payable creditors and pay expenses
of the transaction.
In addition, the terms of existing loans to the Company in the original
principal amount of approximately $17.64 million were restated to the total
amount of $19.20 million, reflecting the original amount of the loans and
accrued, unpaid interest thereon (the "Restated Loans"). Each of the loans is
collateralized by substantially all of the assets of the Company.
Loans under the bridge loan facility bear interest at a rate of eleven
percent (11%) per annum with one half of such interest payable on a quarterly
basis on the last business day of March, June, September and December and the
other half payable at maturity on March 18, 2003.
The Restated Loans are divided into two loans. The first such loan is
in the principal amount of approximately $10.18 million, bears interest at a
rate of nine percent (9%) per annum until March 18, 2003, at which time such
interest is payable, and thereafter bears interest at eleven percent (11%) per
annum payable on a quarterly basis on the last business day of March, June,
September and December. The principal balance of the loan is payable in equal
quarterly installments of not less than $222,500 commencing on March 31, 2003
and thereafter on the last business day of March, June, September and December.
Any remaining unpaid principal and interest is payable on March 31, 2007. The
second such loan is in the principal amount of $9.0 million, bears interest at a
rate of one percent (1%) per annum, but neither interest nor principal is
payable until the first to occur of one of certain events described in the Loan
Agreement, the latest of which is March 18, 2005, after which time the interest
that has accrued is payable in full within thirty (30) days and thereafter is
payable quarterly on the last business day of March, June, September and
December together with principal payments of not less than $222,500. Any
remaining unpaid principal and interest is payable on March 31, 2007.
As a condition of the loans and as part of the Restructuring Plan,
Donlar and Donlar Biosyntrex have agreed to use their best efforts to merge on
or before July 7, 2002 (the "Merger"). The date for completion of the Merger has
been extended to October 31, 2002 and the Company will bee requesting a further
extension. The merged company is referred to as the Combined Company. In the
Merger, each share of the Donlar Biosyntrex common stock other than shares owned
by Donlar will be exchanged for 0.26 shares of the common stock of the Combined
Company. As a result of the Merger and related transactions described herein,
Donlar Biosyntrex's shareholders (other than Donlar) will collectively receive
approximately 4.04 million shares of the Combined Company common stock
representing approximately 19.44% of the shares of common stock of the Combined
Company outstanding following the Merger and approximately 4.32% of the shares
of common stock on a fully diluted basis. The Merger requires the approval of a
majority of the respective shareholders of Donlar and Donlar Biosyntrex.
The Company also made numerous representations, warranties and
covenants in the Loan Agreement. Among the covenants, the Company agreed to
limit its ability to incur additional indebtedness, make any investments or
loans, pay dividends, purchase, redeem or issue capital stock or sell or
encumber assets. In addition, the Company agreed to sell or discontinue the
nutritional and nutraceuticals business on or before March 18, 2003.
7
There can be no assurance that the Company will be able to comply with
the covenants and events of default in the Loan Agreement, some of which events
of default are entirely beyond its control. Each of the loans made or restated
pursuant to the Loan Agreement is subject to acceleration and the application of
higher default rates of interest in the event the Company defaults in the
payment of principal or interest when due, breaches any covenants contained in
the Loan Agreement that are not remedied within five calendar days or any other
specified event of default occurs.
Each of the loans is convertible at the option of the holder at any
time prior to repayment into common stock of Donlar Biosyntrex and, subsequent
to the Merger, into common stock of the Combined Company. Loans made under the
bridge loan facility convert into the Combined Company common stock at a rate of
one share per $0.29 of outstanding principal amount of the loans. The Restated
Loans convert into the Combined Company common stock at a rate of one share per
$0.68 of outstanding principal amount of the loans. The conversion rates are
subject to antidilution protection. The holders of the loans have certain
registration rights with respect to the shares issuable upon conversion.
In the first quarter of 2002, the Company also reached agreements with
Willis Stein and Partners, L.P. and Star Polymers, L.L.C. (collectively the
"Willis Stein Group") to (i) exchange $9.0 million of original principal amount
of notes plus accrued interest for shares of a new series of senior convertible
preferred stock with a stated liquidation value of $9.0 million and convertible
into approximately 13.23 million shares of the Combined Company common stock and
(ii) exchange all of the equity securities held by the Willis Stein Group in
Donlar for 1.0 million shares of the Combined Company common stock. The
foregoing exchanges are subject to the satisfaction of certain conditions
precedent. The Willis Stein Group also agreed to vote its shares of voting stock
of Donlar in favor of the Merger.
The Company also reached an agreement in 2002 with Dr. Robert Gale
Martin ("Martin"), a director of the Company, to (i) exchange approximately $9.9
million of original principal amount of notes plus accrued interest for shares
of senior convertible preferred stock with a stated liquidation value of $9.0
million and convertible into approximately 13.23 million shares of the Combined
Company common stock, (ii) relinquish rights to receive royalty payments from
the Company and all of his equity securities in the Company in exchange for 5.0
million shares of the Combined Company common stock and (iii) surrender for
cancellation any warrants to purchase shares of Donlar common stock for a
warrant to purchase 3.0 million shares of the Combined Company common stock at
an exercise price of $0.68 per share. Martin also agreed to vote his shares of
voting stock of Donlar in favor of the Merger.
To further eliminate debt from the Company's balance sheet, the Company
has reached agreement with the holders of convertible notes issued in 1998 and
2000 in the approximate principal amount of $1.9 million, to exchange those
notes for shares of senior convertible preferred stock with a stated liquidation
value equal to the total principal amount of the notes. The senior convertible
preferred are convertible into approximately 2.8 million shares of the Combined
Company common stock.
In the first quarter of 2002, the Company recorded a debt conversion
expense of $289,655 in connection with the bridge loan transaction. This debt
conversion expense was
8
incurred as a result of the price for converting the bridge loan into Donlar
Biosyntrex common stock of $0.29 per share being below the market price of the
Donlar Biosyntrex common stock as of the date of the loan agreement, which was
$0.33 per share.
The Restated Loans are convertible at a rate of $0.68 per share into
common stock of the Combined Company. The Restated Loans meet the criteria for
new debt. Because there are no induced conversion features associated with the
transaction, no beneficial conversion expense was recorded.
ITEM 2 - Management's Discussion and Analysis or Plan of Operation
Forward Looking Statements
This report and the documents incorporated by reference in this report
contain forward-looking statements. These forward-looking statements are based
on management's current expectations, estimates and projections about the
Company's industry, management's beliefs and certain assumptions made by the
Company. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, the Company's actual results could differ materially from
those expressed or forecasted in any forward-looking statements as a result of a
variety of factors, including those set forth in "Description of Business." The
Company undertakes no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
Description of Business
From 1997 until November of 2000, the Company was primarily engaged in
the distribution and sale of nutritional and nutraceutical products. Donlar
Biosyntrex's principal products were biologic nutraceutical supplements and
sports and nutrition bars. As a result of transactions that were completed in
2000 and in early 2001, all of the operational activities of Donlar are now
conducted by its subsidiary, Donlar Biosyntrex. For a description of the
acquisition of Donlar Biosyntrex by Donlar, see "Notes to Condensed Consolidated
Financial Statement" in Donlar Biosyntrex's Annual Report on Form 10-KSB for
2001. The former Donlar businesses are now Donlar Biosyntrex's principal
businesses and Donlar Biosyntrex is phasing out its nutritional and
nutraceutical business. Donlar Biosyntrex's marketing, sales, distribution and
administrative operations are conducted from Donlar's headquarters in Bedford
Park, Illinois, and its manufacturing operations are conducted from Donlar's
Peru, Illinois facility.
Donlar Biosyntrex's reorganized businesses are conducted through three
product lines:
- BioPolymers, consisting of the performance chemicals business
acquired from Donlar;
- AgriSciences, consisting of the agricultural business acquired
from Donlar; and
- Optim Nutrition, consisting of Donlar Biosyntrex's nutritional
and nutraceuticals business (being phased out).
9
Donlar Biosyntrex current business is the production and marketing of
products initially developed by Donlar. Historically, Donlar began as a research
and development company to exploit the possibilities of developing,
manufacturing and marketing a new family of biodegradable polymers known as
thermal polyaspartates (TPA). Although there was no market at the time of
Donlar's inception for a new so-called "green chemistry," Donlar concluded that
a market would develop if the technology and products were available. It also
determined that the development of this technology and market would also require
substantial capital.
It took about ten years and the use of extensive capital to reach the
point of commercialization whereby Donlar Biosyntrex's products and markets are
protected by a global intellectual property portfolio of patents. The products
are manufactured in a modern plant capable of producing high quality products at
low cost and are sold in a marketplace where Donlar Biosyntrex's TPA products
can compete on a cost/performance basis with conventional chemicals.
As a result of this historical development, Donlar Biosyntrex' revenues
from the sale of its products increased from $1.4 million in 2000 to $2.4
million in 2001. Commercialization of the products began approximately two years
ago focusing on the building of three market's in oil production, agriculture
and detergents.
Results of Operations
Comparison of the three months ended September 30, 2002 with the three
months ended September 30, 2001.
During the three months ended September 30, 2002, the Company had
revenues of $915,918, compared to $455,382 for the comparable three-month period
in 2001. The increase in revenues was due to growth in sales, principally in the
oil field market.
Cost of revenues was $658,817 for the three months ended September 30,
2002, compared to $624,868 for the same period in 2001. This increase in cost of
revenues is related to increased sales offset by decreased staff in the
manufacturing area, as well as, other cost reductions at the manufacturing
facility in Peru, Illinois.
Operating expenses were $1,438,312 for the three-month period ended
September 30, 2002, compared to $1,323,877 for the three month period ended
September 30, 2001. This increase is due to legal and accounting costs related
to the merger of Donlar and Donlar Biosyntrex.
Interest expense decreased from $1,206,421 for the three-month period
ended September 30, 2001 to $1,193,208 for the three-month period ended
September 30, 2002. This decrease was related to the different interest rate
structure in the new loans with Tennessee Farmers.
During the three months ended September 30, 2002, the Company had a net
loss of $1,568,255 compared to a net loss of $2,074,534 three months ended
September 30, 2001. This decrease in the net loss was attributable primarily to
the increased sales in conjunction with cost reductions related to operations of
the Company.
10
Comparison of the nine months ended September 30, 2002 with the nine
months ended September 30, 2001.
During the nine months ended September 30, 2002, the Company had
revenues of $2,808,005, compared to $1,687,902 for the comparable nine-month
period in 2001. The increase in revenues was due to growth in sales, principally
in the oil field market.
Cost of revenues was $2,268,876 for the nine months ended September 30,
2002, compared to $2,043,022 for the same period in 2001. This increase in cost
of revenues is related to increased sales offset by decreased staff in the
manufacturing area, as well as, other cost reductions at the manufacturing
facility in Peru, Illinois.
Operating expenses were $4,348,066 for the nine-month period ended
September 30, 2002, compared to $7,255,803 for the nine month period ended
September, 2001. This decrease is due to decreased staff, as well as other cost
reductions related to consulting, outside research products, professional fees
and travel expenses.
Interest expense decreased from $5,255,854 for the first nine months of
2001 to $4,170,904 for the first nine months of 2002. This decrease was due to a
decrease in the amortization of debt discount and different interest rate
structure in the new loans with Tennessee Farmers.
During the nine months ended September 30, 2002, the Company had a net
loss of $6,829,912 compared to a net loss of $10,814,420 for the nine months
ended September 30, 2001. This decrease in the net loss was attributable
primarily to the decrease in interest expense and increased sales offset by the
acceleration of debt discount amortization related to the debt restructuring.
Liquidity and Capital Resources
Historically, the Company has been unable to finance its operations
from cash flows from operating activities. As of September 30, 2002, the Company
had cash of $15,737. As a result of the recent agreement with certain creditors
to restructure principal and interest payments, the Company was able to pay
current operating expenses in the fourth quarter of 2001 and the first, second
and third quarters of 2002. In March of 2002, the Company obtained additional
bridge financing in connection with the restructuring of its debt, but has no
other plans for its continued financing. The Company, under its bridge
financing, has a quarterly interest payment of approximately $21,000 due on the
last business day of each quarter. The Company intends to carefully control its
use of cash for the balance of 2002. As a long-term matter, the Company will
require additional financing to maintain operations. The Company believes based
on its current budget and sales that it will be able to pay its expenses for the
next year other than payments under its bridge financing from Tennessee Farmers
Life Insurance Company due in March 2003 and it plans to enter into additional
negotiations with Tennessee Farmers regarding such payments.
In the first nine months of 2002, the Company had a net increase in
cash and cash equivalents of $11,991, compared to a net decrease in cash and
cash equivalents in the same
11
period of 2001 of $872,377. The increase in cash was the result of increased
sales and reduced operating costs.
The Company increased its cash flows used in operations from
($1,499,546) in the first nine months of 2001 to ($1,219,458) in the same period
in 2002, due to tighter cash management and budget controls in the 2002 period.
Cash flows used in investing activities decreased to $32,104 in the
first nine months of 2002 from $121,926 in the same period in 2001. This is due
to the Company limiting its capital expenditures.
Cash flows provided by financing activities increased from $749,095
during the first nine months of 2001 to $1,263,553 in the same period in 2002.
The cash from financing activities in 2002 resulted from borrowing activities in
the 2002 period.
Item 3. Controls and Procedures
Within 90 days prior to the date of filing of this report on Form
10-QSB, the Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including its Chief Executive
Officer and its Chief Financial Officer, of the design and operation of the
Company's disclosure controls and procedures. Based on this evaluation, the
Company's Chief Executive Officer and Controller and Chief Accounting Officer
concluded that the Company's disclosure controls and procedures are effective
for gathering, analyzing and disclosing the information the Company is required
to disclose in the reports it files under the Securities Exchange Act of 1934,
within the time periods specified in the SEC's rules and forms. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to the date of this
evaluation.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Exhibit Description
----------- -------------------
2.1$$$ Stock Purchase Agreement, dated as of August 7,
2000, between Biomune Systems, Inc. and Donlar
Corporation.
2.2$$$ Asset Purchase Agreement, dated as of August 7,
2000, between Biomune Systems, Inc. and Donlar
Corporation. 3.1+ Amended and Restated Articles of
Incorporation
3.2+ Amended and Restated Bylaws (adopted March 22,
1996)
12
3.3+ Certificate and Statement of Determination of Rights and Preferences of
Series A 10% Cumulative Convertible Preferred Stock
3.4+ Certificate and Statement of Determination of Rights and Preferences of
Series B 10% Cumulative Convertible Non-Voting Preferred Stock
3.5+ Certificate and Statement of Determination of Rights and Preferences of
Series D 8% Cumulative Convertible Non-Voting Stock
3.6+ Certificate of Amendment to the Designation of Rights and Preferences
Related to Series A 10% Cumulative Convertible Preferred Stock
3.7+ Certificate and Statement of Determination of Rights and Preferences of
Series C 8% Cumulative Convertible Non-Voting Preferred Stock
3.8++ Certificate and Statement of Determination of Rights and Preferences of
Series E, 8% Cumulative Convertible Preferred Stock
3.9++ Certificate of Amendment of Determination of Rights and Preferences of
Series F, 8% Cumulative Convertible Preferred Stock
3.10++ Amendment to Determination of Rights and Preferences of Series F
Preferred
3.11++ Certificate and Statement of Determination of Rights and Preferences of
Series G, 8% Cumulative Preferred Stock
3.12++ Amendment to Designation of Rights and Preferences of Series G Preferred
3.13++ Certificate and Statement of Determination of Rights and Preferences of
the Series J, 8% Cumulative Convertible Preferred Stock
4.1** Form of Common Stock Certificate
4.3** Form of Series A 10% Cumulative Convertible Preferred Stock Certificate
13
4.4* Form of Series B 10% Cumulative Convertible Preferred Stock
Certificate
4.5# Form of Series D 8% Cumulative Convertible Preferred Stock Certificate
4.6+ Form of Series C 8% Cumulative Convertible Preferred Stock Certificate
4.7++ Form of Series E Certificate
4.8++ Form of Series F Certificate
4.9++ Form of Series G Amendment
4.10++ Form of Series J Certificate
4.11%% Bridge and Consolidated Term Loan Agreement, dated March 18, 2002,
among the Company, Donlar and Tennessee Farmers Life Insurance Company
10.43* Office Lease Agreement
10.77# 1995 Stock Incentive Plan
10.82# Amended 1995 Stock Incentive Plan
10.123$$ 1999 Stock Option and Incentive Plan of Biomune effective as of
January 1, 1999
10.130@ Capital Contribution, Assignment and Assumption Agreement
10.131@@ Form of Consulting Agreement with Peter Frugone
10.132@@@ Form of Consulting Agreement with Media Relations Strategy, Inc.
10.133@ Form of Consulting Agreement with Peter Frugone
10.134%% Form of Employment Agreement dated September 7, 2001, between the
Company and Robert P. Pietrangelo
10.135%% Form of Employment Agreement dated July 1, 1996, between Donlar and
Larry Koskan
14
99.1 Statement of Chief Executive Officer Pursuant to Section 1350 of Title
18 of the United States Code
99.2 Statement of Controller and Chief Accounting Officer Pursuant to
Section 1350 of Title 18 of the United States Code
- -------------------------------------------
# Incorporated by reference to Biomune's Periodic Report on Form 10-K/A
for the fiscal year ended September 30, 1995.
* Incorporated by reference to Biomune's Periodic Report on Form 10-KSB
for the fiscal year ended September 30, 1994.
** Incorporated by reference to Biomune's Periodic Report on Form 10-K
for the fiscal year ended September 30, 1993 and the two month period
ended November 30, 1993.
*** Incorporated by reference to Biomune's Periodic Report on Form 10-K
for the fiscal year ended September 30, 1992.
+ Incorporated by reference to Biomune's Periodic Report on Form 10-KSB
for the fiscal year ended September 30, 1996.
++ Incorporated by reference to Biomune's Periodic Report on Form 10-KSB
for the fiscal year ended September 30, 1998.
$$ Incorporated by reference to Biomune's Periodic Report on Form S-8
filed on February 2, 2000.
$$$ Incorporated by reference to Biomune's Periodic Report on Form 8-K
filed on August 15, 2000.
@ Incorporated by reference to Biomune's Periodic Report on Form 8-K
filed on January 22, 2001.
@@ Incorporated by reference to Biomune's Periodic Report on Form S-8
filed on May 2, 2001.
@@@ Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 2001.
% Incorporated by reference to the Company's Proxy Statement filed on
June 20, 2001.
%% Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2001.
(b) Reports on Form 8-K.
None.
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DONLAR BIOSYNTREX CORPORATION
Dated: November 14, 2002 By: /s/ Larry P. Ksokan
-------------------------------------
Larry P. Koskan, President and
Chief Executive Officer
16
CERTIFICATION
I, Larry P. Koskan, certify that:
I have reviewed this quarterly report on Form 10-QSB of Donlar
Biosyntrex Corporation;
Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002 /s/ Larry P. Koskan
--------------------------------------------
Larry P. Koskan, President and
Chief Executive Officer
CERTIFICATION
I, Joel Lurquin, certify that:
I have reviewed this quarterly report on Form 10-QSB of Donlar
Biosyntrex Corporation;
Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002 /s/ Joel H. Lurquin
----------------------------------------
Joel H. Lurquin, Controller and
Chief Accounting Officer