CALCITECH LTD.
CONSOLIDATED FINANCIAL STATEMENTS
1
Report of Independent Auditors
CalciTech Ltd.
To the shareholders and board of directors of CalciTech Ltd.
- ----------------------------------------------------------
We have audited the accompanying consolidated balance sheets of CalciTech Ltd.
(a company in the development stage) as of February 28, 2003 and February 28,
2002, and the related consolidated statements of operations, shareholders'
deficiency, and cash flows for the three years in the period ended February 28,
2003. 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 International Standards on Auditing,
and with auditing standards generally accepted in the United States of America
and Canada. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CalciTech Ltd. (a
development stage company) as of February 28, 2003 and February 28, 2002, and
the consolidated results of its operations and its cash flows for the three
years in the period ended February 28, 2003 in accordance with International
Financial Reporting Standards.
As described in Note 2 to the financial statements, the Company has restated its
financial statements for each of the years in the two year period ended February
28, 2002 to adjust the accounting for certain deferred development costs and
convertible debt.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3.1 to the
financial statements, the Company has incurred losses and negative cash flows
from operations for the years ended February 28, 2003, February 28, 2002 and
February 28, 2001. These matters raise substantial doubt about its ability to
continue as a going concern. Management plans in regard to these matters are
also described in Note 3.1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
International Financial Reporting Standards vary in certain significant respects
from accounting principles generally accepted in the United States. The
application of United States generally accepted accounting principles, as
restated, would have affected the determination of net loss and shareholders'
deficiency for the financial years ended February 28, 2003, February 28, 2002
and February 28, 2001 to the extent summarized in Note 15 to the consolidated
financial statements.
PricewaterhouseCoopers
Paris, France
October 10, 2003
2
Comments by Auditor for Canadian Readers on Canadian-International Standards on
Auditing Reporting Differences
- --------------------------------------------------------------------------------
Canadian reporting standards for auditors do not permit a reference to
conditions and events that cast a substantial doubt on a company's ability to
continue as a going concern, such as those described in the above paragraph,
when these are adequately disclosed in the financial statements. Under Canadian
reporting standards for auditors, the going concern paragraph would be excluded
from this report.
3
CALCITECH LTD.
(a company in the development stage)
CONSOLIDATED BALANCE SHEETS
February 28, 2003 and February 28, 2002
(amounts in thousands of US dollars)
Notes 2003 2002 restated
ASSETS
Current assets
Cash and cash equivalents 3.6 $ 79 $ 11
Receivables, prepaid expenses and other current assets 4 200 87
-------------- ------------
Total current assets 279 98
Non-current assets
Property, plant and equipment, net 5 75 120
Deferred development expenditure 3.9 - -
Patents, net 3.8 and 6 43 67
-------------- ------------
Total non-current assets 118 187
-------------- ------------
TOTAL ASSETS $ 397 $ 285
============== ============
The accompanying notes are integral part of the consolidated financial statements
4
CALCITECH LTD.
(a company in the development stage)
CONSOLIDATED BALANCE SHEET
February 28, 2003 and February 28, 2002
(amounts in thousands of US dollars, except per share data)
Notes 2003 2002 restated
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Accounts payable and accrued liabilities $ 902 $ 1,145
Convertible debentures - current portion of liability element 3.14 and 9.1 272 285
Provisions - current portion 12 419 -
--------------- ---------------
Total current liabilities 1,593 1,430
Provisions 12 - 325
Credit facility 7 1,202 2,043
Convertible debentures - non-current portion of liability element 3.14 and 9.1 176 87
--------------- ---------------
Total liabilities 2,971 3,885
Minority interest 10 - -
Shareholders' deficiency 9
Common stock, Cdn $ 0.001 par value;
120,000,000 shares authorized in 2003 and
in 2002; issued and outstanding:
53,889,165 shares in 2003 and 43,724,179 in 2002 1,784 1,778
Share premium, holders' options outstanding on
credit facility and contribution surplus 29,449 26,402
Convertible debentures 3,564 3,303
Accumulated deficit (37,301) (35,113)
Cumulative foreign currency translation adjustments (70) 30
--------------- ---------------
Total shareholders' deficiency (2,574) (3,600)
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 397 $ 285
=============== ===============
The accompanying notes are integral part of the consolidated financial statements
5
CALCITECH LTD.
(a company in the development stage)
CONSOLIDATED STATEMENT OF OPERATIONS
February 28, 2003, February 28, 2002 and February 28 2001
(amounts in thousands of US dollars, except per share data)
Notes 2003 2002 restated 2001 restated
Revenues $ - $ - $ -
Cost of revenues - - -
------------------ ------------------- -------------------
Gross margin - - -
Research and development expenses $ 719 $ 696 $ 1,618
General and administrative expenses 1,004 939 543
Settlement of legal dispute 12 - 400 -
------------------ ------------------- -------------------
Operating loss (1,723) (2,035) (2,161)
Interest expense, net (465) (201) (363)
------------------ ------------------- -------------------
Loss before income
taxes and minority interest (2,188) (2,236) (2,524)
Provision for income taxes 12 - (333) (9)
------------------ ------------------- -------------------
Loss from ordinary activities (2,188) (2,569) (2,533)
Minority interest 10 - 51 -
------------------ ------------------- -------------------
Net loss $ (2,188) $ (2,518) $ (2,533)
================== =================== ===================
Net loss per share:
Basic $ (0.044) $ (0.058) $ (0.063)
Diluted $ (0.044) $ (0.058) $ (0.063)
Shares used in net
loss per share calculation:
Basic 49,632,816 43,724,179 39,890,846
Diluted 49,632,816 43,724,179 39,890,846
The accompanying notes are integral part of the consolidated financial statements
6
CALCITECH LTD.
(a company in the development stage)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
February 28, 2003, February 28, 2002 and February 28, 2001
(amounts in thousands of US dollars except number of shares
Share premium, Cumulative Total
holders' option currency consolidated
outstanding and Convertible Accumulated translation shareholders'
Note Common stock contributed surplus debentures deficit adjustments deficiency
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Amounts
---------- -------
Balances,
February 29, 2000 as restated 39,724,179 1,775 25,897 - (30,062) 179 (2,211)
Net loss - - - - (2,533) - (2,533)
Drawing on credit facility 7 - - 6 - - - 6
Issuance of common
stock upon conversion
of credit facility 9.2 4,000,000 3 497 - - - 500
Issuance of convertible
debentures, net of finders fee 9.1 - - - 1,245 - - 1,245
Foreign currency
translation adjustments - - - - - (153) (153)
------------------------------------------------------------------------------------------
Balances,
February 28, 2001 as restated 43,724,179 1,778 26,400 1,245 (32,595) 26 (3,146)
Net loss - - - - (2,518) - (2,518)
Drawing on credit facility - - 2 - - - 2
Conversion of credit facility
into convertible debentures,
not of finders fee 9.1 - - - 2,058 - - 2,058
Foreign currency
translation adjustments - - - - - 4 4
------------------------------------------------------------------------------------------
Balances,
February 28, 2002 as restated 43,724,179 1,778 26,402 3,303 (35,113) 30 (3,600)
Net loss - - (2,188) - (2,188)
Issuance of common
stock upon conversion - -
of credit facility 9.2 3,955,695 3 1,047 - - - 1,050
Issuance of
convertible debentures 9.1 - - - 261 - - 261
Conversion of options 9.4 620,000 - 119 - - - 119
Exercise of warrants 656,200 - 184 - - - 184
Issuance of common stock
upon private placement 9.3 4,933,091 3 1,697 - - - 1,700
Foreign currency
translation adjustments - - - - - (100) (100)
------------------------------------------------------------------------------------------
Balances, February 28, 2003 53,889,165 1,784 29,449 3,564 (37,301) (70) (2,574)
==========================================================================================
The accompanying notes are integral part of the consolidated financial statements
7
CALCITECH LTD.
(a company in the development stage)
CONSOLIDATED STATEMENT OF CASH FLOWS
February 28, 2003, February 28, 2002 and February 28, 2001
(amounts in thousands of US dollars)
2003 2002 restated 2001 restated
Cash flows from operating activities
Loss before income taxes and minority interest $ (2,188) $ (2,236)$ (2,524)
Adjustments for:
Depreciation and amortization 88 3 1,205
Interest expense 465 201 363
-------------- -------------- -------------
Operating loss before working capital changes (1,635) (2,032) (956)
Changes in working capital :
Decrease /(increase) in receivables,
prepaid expenses and other current assets (113) (67) -
Increase/(decrease) in accounts
payable and accrued expenses, and provisions used (301) 202 125
-------------- -------------- -------------
Cash used in operations (2,049) (1,897) (831)
Interest paid to financial institutions - - (5)
Income taxes paid - (8) (9)
-------------- -------------- -------------
Net cash used in operating activities (2,049) (1,905) (845)
Cash flows from investing activities
Acquisition of property, plant and equipment (8) (164) (1)
-------------- -------------- -------------
Net cash used in investing activities (8) (164) (1)
Cash flows from financing activities
Payment of bank loans - - (7)
Proceeds from issuance of convertible debentures - 2,500 441
Proceeds from credit facility 2,358 2,316 1,080
Payment of credit facility (255) (2,643) (324)
Finders fee - (125) (52)
Cash received from share subscription of partner in Odda - - 51
Interest paid on convertible debentures - (210) -
-------------- -------------- -------------
Net cash provided by financing activities 2,103 1,838 1,189
Effect of exchange rate changes on cash 22 46 (153)
-------------- -------------- -------------
Net increase / (decrease) in cash and cash equivalents 68 (185) 190
Cash and cash equivalents, beginning of year 11 196 6
-------------- -------------- -------------
Cash and cash equivalents, end of year $ 79 $ 11 $ 196
============== ============== =============
The accompanying notes are integral part of the consolidated financial statements
8
(a company in the development stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - Year ended February 28, 2003
(amounts in thousands of US dollars, except per share data)
- --------------------------------------------------------------------------------
1. BUSINESS OF THE COMPANY
CalciTech Ltd. (the "Company") is incorporated in the jurisdiction of Bermuda.
Starting from the production of acetylene from which revenues were generated
until 1997, the Company changed its business model to concentrate on the
production of precipitated calcium carbonate (PCC). The production of acetylene
gas from calcium carbide generates significant quantities of carbide lime.
CalciTech decided to develop a process for producing a low cost PCC from waste
lime. PCC is a white pigment which can only be produced from pure, white
limestone deposits and is currently used in a wide range of applications,
including paper filling and high value pharmaceutical and food additives.
Revenue from the principal activity has not yet started.
2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company determined that it was required to restate the accounting for
development activities and convertible debt to conform the accounting to GAAP.
As a result of the foregoing, the Company has restated its financial statements
for the two years ended February 28, 2002.
Set forth below are the restatement adjustments included in the restatement of
the previously issued financial statements, each of which was a "fundamental
error" within the meaning of IAS 8.
Considering the following circumstances:
o There remains a technical and design risk that it will not be possible to
scale-up production in the manner envisaged and a risk that the cost,
timing and efficiency of commercial production will not be consistent with
the current plans;
o The production process is new and has not been tried before, so there are
several risks associated with the scale up to full commercial production;
o There are no firm sales contract;
the criteria set by International Financial Reporting Standards for the deferral
of development costs, as further described in Note 3.10, have not yet been met,
and consequently the Company restated the financial statements to expense
development costs, which had been deferred in previously issued financial
statements.
Considering that the small scale plant was constructed to provide final process
data and bulk samples and to reduce the technical risk in moving up to a full
scale plant, management has not demonstrated the technical feasibility of
completing the asset for use in commercial production. The small-scale
production plant, which had been considered a tangible asset in the previously
issued financial statements, was accordingly expensed as a development activity
in the restated consolidated financial statements.
9
Considering that being in the development stage does not preclude the Company
from obtaining reliable measure of the fair market value of its compound debt
instruments, the fair values on issue of the debt of the liability component and
the equity conversion component of convertible debt were determined and
classified separately. The fair value of the liability component was calculated
using the interest rate for an equivalent non-convertible debt. The residual
amount, representing the value of the conversion rights, was included in
shareholders' equity. The values of convertible debentures and credit facility,
which had been entirely posted to shareholders' equity and liabilities in the
previously issued financial statements, were accordingly split between
shareholders' equity and liabilities in the restated consolidated financial
statements and the reclassification of flows relating thereto in equity and the
statement of operations was amended accordingly.
Summary of Restatement Items
The following tables present the impact of the restatement adjustments on the
Company's previously reported 2002 and 2001 results and financial position on a
condensed basis:
2002 2001
Statement of operations:
As previously As previously
reported As restated reported As prestated
Gross margin - -
Research and development expenses $ 88 696 $ 1,640 1,618
General and administrative expenses 897 939 543 543
Settlement of legal dispute 400 400 - -
----------------------- -----------------------
Operating loss (1,385) (2,035) (2,183) (2,161)
Interest expense, net (142) (201) (263) (363)
----------------------- -----------------------
Loss before income
taxes and minority interest (1,527) (2,236) (2,446) (2,524)
Provision for income taxes (333) (333) (9) (9)
----------------------- -----------------------
Loss from ordinary activities (1,860) (2,569) (2,455) (2,533)
Minority interest 51 51 - -
----------------------- -----------------------
Net loss $ (1,809) (2,518)$ (2,455) (2,533)$
======================= =======================
Net loss per share:
Basic $ -0.041 -0.058 $ -0.062 -0.063 $
Diluted $ -0.041 -0.058 $ -0.062 -0.063 $
Shares used in net
loss per share calculation:
Basic 43,724,179 43,724,179 39,890,846 39,890,846
Diluted 43,724,179 43,724,179 39,890,846 39,890,846
10
2002
Balance sheet: As previously As
reported restated
ASSETS
Current assets
Cash and cash equivalents $ 11 11
Receivables 14 14
Prepaid expenses and other current assets 73 73
----------------------
Total current assets 98 98
Non-current assets
Property, plant and equipment, net 397 120
Patents, net 67 67
Deferred development costs, net 658 -
----------------------
Total non-current assets 1,122 187
----------------------
TOTAL ASSETS $ 1,220 285
======================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Accounts payable and accrued liabilities $ 1,145 1,145
Current portion of convertible debentures - 213
----------------------
Total current liabilities 1,145 1,358
Provisions 325 325
Credit facility 2,043 2,043
Convertible debentures - 159
----------------------
Total liabilities 3,513 3,885
Minority interest - -
Shareholders' deficiency
Common stock 1,778 1,778
Share premium 26,039 26,296
Holders' options outstanding on credit facility - 55
Contribution surplus - 51
Convertible debentures 3,948 3,303
Deficit accumulated during development stage (34,088) (35,113)
Cumulative foreign currency translation adjustments 30 30
----------------------
Total shareholders' deficiency (2,293) (3,600)
----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 1,220 285
======================
11
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
3.1 Going concern
The financial statements have been prepared assuming the Company will continue
as a going concern. Under the going concern assumption, an entity is ordinarily
viewed as continuing in business for the foreseeable future with neither the
intention nor the necessity of liquidation, ceasing trading or seeking
protection from creditors pursuant to laws or regulations. In assessing whether
the going concern assumption is appropriate, management takes into account all
available information for the foreseeable future, in particular for the twelve
months from the balance sheet date.
The Company is in the development stage and has therefore incurred cumulative
losses of $37,301 through February 28, 2003 and current liabilities exceed
current assets by $1,314. Accordingly, there is significant doubt about the
Company's ability to continue as a going concern. The ability to continue as a
going concern is dependent upon securing borrowing and raising further capital
until such time as the Company is generating adequate revenue as to be
self-supporting.
The credit facility agreement with Epsom Investment Services N.V. to provide up
to $5 million (see Note 7) was re-negotiated during February 2003 whereby the
maximum amount of draw down was reduced to $ 2,500 with a reduction in interest
charged to 7.5% per annum. This facility was extended to August 30, 2004. Also
at this time Epsom agreed to convert part of this facility into equity for $600.
As at February 28, 2003, $1,202 of this facility had been drawn down.
Also during February 2003, the Company's 8% convertible debentures with a value
of $3,390 and (euro)663 were re-negotiated by their retirement against the issue
of new 6% debentures of $297 to February 15, 2004, (euro)188 to February 15,
2004 and $3,805 to February 15, 2005. All other terms of the convertible
debentures remain unchanged.
Management is currently pursuing financing to further fund the development of
its products and markets and to carry out its business plan.
Assets and liabilities are recorded on the basis that the Company will be able
to realize its assets and discharge its liabilities in the normal course of
business. Accordingly, the financial statements do not include any adjustments
to the carrying values of assets and liabilities that might be necessary should
the Company be unable to continue as a going concern.
3.2 Basis of presentation
The consolidated financial statements are prepared and presented in accordance
with International Financial Reporting Standards. A reconciliation of net income
and shareholders' equity between IFRS and the accounting principles generally
accepted in the United States (US GAAP) is included in Note 15.
Certain disclosure differences between IFRS and Canadian GAAP are included in
Note 15.
12
3.3 Principles of consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. Intercompany balances and transactions have been
eliminated.
3.4 Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect 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. Actual results
could differ from those estimates.
3.5 Foreign currency translation
The reporting currency of the Company is the US dollar (USD), which is also the
measurement currency of the parent company. The parent company elected the US
dollar as its measurement currency rather than the Bermudan dollar (BMD), which
is the currency of its country of domicile, to reflect the fact that the
majority of its transactions are denominated in US dollars.
The measurement currency of the Company's operating foreign subsidiaries is
their local currency, generally the Euro. Assets and liabilities of the
Company's foreign subsidiaries are translated into US dollars using the exchange
rate in effect at the balance sheet date. Additionally, their expenses are
translated using exchange rates approximating average rates prevailing during
the year. Translation adjustments that arise from translating their financial
statements from their local currencies to US dollars are accumulated and
reflected as a separate component of shareholders' equity.
Gains and losses that arise from the effect of exchange rate changes on balances
denominated in currencies other than the measurement currency of each of the
Company and its subsidiaries are included in the statements of operations as
incurred.
3.6 Cash and cash equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
3.7 Property, plant and equipment
Property, plant and equipment are stated at cost and are depreciated on a
straight-line basis over their estimated useful lives set out below:
Leasehold improvements lesser of lease term or 10 years
Plant and equipment 10 years
Office furniture and equipment 5 to 10 years
Maintenance and repairs are charged to expense when incurred.
13
3.8 Patents
Expenditure on acquired patents is capitalized and amortized over their useful
lives. Legal expenditure for the protection of technology developed by the
Company is recognized as an expense as incurre, except when additional future
economic benefits can be attributed to such protection at closing date.
3.9 Research and development
Research and development costs are expensed as incurred, except for development
costs which are deferred as intangible assets when the Company can demonstrate
all of the following:
o the technical feasibility of completing the intangible asset so that it
will be available for use or sale;
o its intention and ability to use or sell the intangible asset;
o the existence of a market for the output of the intangible asset or the
intangible asset itself;
o the availability of adequate technical resources to complete the
development;
o the availability of adequate financial and other resources to complete the
development and to use or sell the intangible asset, subject to the ability
of the Company to continue as a going concern, as described in Note 3.1;
o its ability to measure the expenditure attributable to the intangible asset
during its development reliably.
Deferred development costs are originally recorded at cost, which includes:
o expenditure on materials and services used or consumed in generating the
intangible asset;
o the salaries, wages and other employment related costs of personnel
directly engaged in generating the asset, and
o any expenditure that is directly attributable to generating the asset, such
as the amortization of patents used to generate the asset.
Any costs capitalized are amortized on a straight-line basis over the period of
expected future benefit.
The Company has determined that its development activities do not meet the
aforementioned criteria for deferral.
3.10 Net loss per common share
Basic net loss per share is computed by dividing net loss by the weighted
average number of shares outstanding.
For the purpose of calculating diluted earnings per share, the net profit
attributable to ordinary shareholders and the weighted average number of shares
outstanding is adjusted for the effects of all dilutive potential ordinary
shares. The effects of anti-dilutive potential ordinary shares are ignored in
calculating diluted earnings per share. Potential ordinary shares are
anti-dilutive when their conversion to ordinary shares would decrease loss per
share from continuing operations.
14
3.11 Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts receivable, accounts payable, and accrued
expenses approximate fair value due to their short maturities, based on
borrowing rates currently available to the Company.
3.12 Deferred taxation
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. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts expected to be realized.
Deferred tax assets are recognized only to the extent that future taxable profit
will be available such that realization of the related tax benefit is more
likely than not.
3.13 Stock options
The Company does not recognize any compensation expense with respect to stock
options.
3.14 Convertible debt accounting
On issue of convertible debentures and credit facility, the fair value of the
conversion option is determined. This amount is recognized in shareholders'
equity. The obligation to make future payments of principal and interest to the
holder of the option is calculated using a deemed market interest rate for an
equivalent non-convertible bond. The obligation to make future payments of
interest is carried as a liability until extinguished on conversion or payment.
When the Company has the option to convert the principal and, if applicable, the
interest on these notes, the obligation to make future payments of principal to
the holder is carried as equity.
The fair value of the liability component, representing the obligation to make
future payments of interest to the holder of the conversion option is calculated
on the issue of the instrument using a deemed market interest rate for an
equivalent non-convertible instrument. The residual amount, representing the
value of the equity conversion component, is included in shareholders'
deficiency.
3.15 Modification of debt instruments
The Company may effect a modification or an exchange of debt instruments with a
creditor. The modification or exchange may include changes in the principal
amount, interest rate, term to maturity, borrowing currency or creditor. Whether
a modification or exchange of debt instruments represents a settlement of the
original debt or merely a renegotiation of that debt determines the accounting
treatment that is applied by the Company.
15
A modification or exchange of debt instruments represents a settlement when the
terms of the new or modified debt are substantially changed from the terms of
the original debt instrument. Substantial change occurs when:
a. The present value of the cash flows under the terms of the modified or new
debt instrument is at least 10% different from the present value of the
remaining cash flows under the terms of the original debt instrument;
b. There is a change in the borrowing currency; or
c. There is a change in the creditor and the original debt is legally
discharged by the debtor through a cash payment or otherwise.
If a modification or an exchange of debt instruments represents a settlement,
the Company calculates a loss or gain that is charged, or credited, to income
when settlement occurs. This loss or gain is the difference between the fair
value of the new debt instrument and the carrying amount of the original debt
instrument, together with all unamortized debits or credits related to the
original debt instrument.
If a modification or exchange of debt instruments does not represent a
settlement but, instead, is merely a renegotiation of a debt instrument, all
existing deferred debits and credits related to the original debt instrument are
maintained and are amortized over the remaining term of the renegotiated debt.
3.16 Government grants
Government grants are recognized when there is reasonable assurance that the
Company will comply with the conditions attaching to them, and the grants will
be received. A government grant that becomes receivable as compensation for
research and development expenses already incurred with no future related costs
is recognized as a reduction in research and development expenses in the period
in which it becomes receivable.
4. RECEIVABLES, PREPAID EXPENSES AND OTHER CURRENT ASSETS
Receivables, prepaid expenses and other current assets consist of the following:
2003 2002
Investment allowances $ 77 $ -
VAT receivable 65 39
Deposits 50 41
Prepaid expenses 8 7
------------ -----------
Total receivables, prepaid
expenses and other current assets $ 200 $ 87
============ ===========
16
The Company's German subsidiary is eligible to unconditional investment
allowances, which were recognized in accordance with the policies described in
Note 3.16.
5. Property, plant and equipment
Property, plant and equipment consists of the following:
2003 Office
Building, furniture
Leasehold Laboratory plant and and
improvements equipment equipment equipment Total
Net amount at beginning of the year $ 6 5 92 17 120
Additions - - - 8 8
Depreciated during the year (2) (1) (55) (6) (64)
Foreign currency translation adjustment 1 - 5 5 11
------------------------------------------------------------------
Balance at the end of the year 5 4 42 24 75
==================================================================
Gross amount 17 7 104 58 186
Accumulated depreciation (12) (3) (62) (34) (111)
------------------------------------------------------------------
Balance at the end of the year $ 5 4 42 24 75
==================================================================
Depreciation expense totaled $64, $12 and $11 for the years ended February 28,
2003, February 28, 2002 and February 28, 2001, respectively.
6. PATENTS
Patents can be summarized as following:
2003 2002
Net amount at beginning of the year $ 67 $ -
Additions - 71
Amortized during the year (24) (4)
----------- -------------
Balance at the end of the year 43 67
=========== =============
Gross amount 3,244 3,244
Accumulated amortization (3,201) (3,177)
----------- -------------
Balance at the end of the year $ 43 $ 67
=========== =============
The Company acquired certain rights to several patents in the field of Acetylene
production, equipment for this production and PCC with expiry dates up to the
year 2009.
Amortization expense amounted to $24, $4, and $1,193 for the years ended
February 28, 2003, February 28, 2002 and February 28, 2001, respectively.
17
7. CREDIT FACILITY AGREEMENT
On February 28, 1998 the Company entered in a credit facility agreement of up to
$2,330 with Epsom Investment Services N.V., which represented 100% of the
lenders and acting in a non-discretionary role, bearing interest at 8% per annum
and due year 2000. In April 1999, the Company re-negotiated an extension of the
existing credit facility agreement to provide up to $5 million for a term to
February 28, 2001. Interest rate per annum was reduced to 7 3/4%.
In February 2001, the Company re-negotiated a further extension of the existing
credit facility agreement for a term to March 4, 2002 at an annual interest rate
of 7 3/4%. A further extension has been negotiated extending the facility to
March 5, 2003 with the same rate of interest. On February 28, 2003, this credit
facility agreement was re-negotiated with Epsom whereby the maximum amount of
draw down was reduced to $ 2,500 with a reduction in interest charged to 7.5%
per annum. This facility was extended to August 30, 2004.
The balance due on the credit facility agreement can be converted in part or in
whole into shares of common stock at any time at the option of the holder. The
conversion price is equal to 80% of the trading price per share of common stock
on the date such note was made or additional advances were made. The facility is
collateralized by the assets of the Company.
The credit facility is presented as follows:
2003 2002 2000
Face value of note issued during the year 2,358 2,174 1,684
Less equity conversion component - (2) (50)
------------ ----------- ------------
2,358 2,172 1,634
Interest expense 109 144 244
Conversion of note into common shares (1,050) - (600)
Conversion of note into convertible debentures - (2,500) -
Payments made during the year (2,258) (143) -
------------ ----------- ------------
(841) (327) 1,278
Liability component at the beginning of the year 2,043 2,370 1,543
------------ ----------- ------------
Liability component at end of the year 1,202 2,043 2,821
============ =========== ============
Effective interest rate at year end 7.75% 7.75% 9.65%
------------ ----------- ------------
The caption "Payments made during the year" includes the effect of direct offset
to the credit facility of various transactions in the total amount of $2,003, as
further described in Note 17.
The carrying amount of the credit facility approximates its fair value.
18
8. COMMITMENT
The Company leases its principal management services office under an operating
lease expiring in October 2004. Under the terms of the lease agreement, the
Company has the option to extend the term of the lease for three years. At
February 28, 2003, future minimum payments amounted to $4.
9. SHAREholders' DEFICIENCY
9.1. Convertible debentures
In February 2001, the Company entered into an agreement for the placement of 8%
convertible debentures in the sum of $1,500 for a term to February 2003, of
which $890 were denominated in USD and $610 were denominated in Euro. Of this
amount, $441 was paid in cash and $1,059 was exchanged for the credit facility.
Interest was payable quarterly. Investors may after two years or on any prior
dividend payments date up to maturity, have converted into common shares at the
greater of 75% of the average closing price for the ten trading days prior to
the conversion or the market price per share at the time of closing. This
instrument qualifies for equity classification under IFRS as long as there is no
indication that the shares of the Company may be delisted. If that future event
was to occur within 270 days after the date of conversion, the investors may
have put the debentures to the Company at 100% of their original amount plus
accrued and unpaid interest. Accordingly, the instrument would have been
reclassified to debt from the date that the decision to delist the shares was
made. The investors also received 20,000 warrants for every $100 invested,
exercisable for a two year period at 125% of the closing average offer price for
the previous ten trading days.
The Company may have redeemed the convertible debentures in whole or in part at
any time up to two years. On the maturity date, the Company also had the right
to convert any or all of the amounts of principal and any unpaid interest, into
common stock. A finders fee of 5% and 1,000 common stock purchase warrants per
$100 invested was paid.
In July 2001, the Company entered into a further agreement for the placement of
7.5% convertible debentures in the sum of $2,500 for a term to November 2003.
The terms of the note were exactly the same as those on the notes issued in
February 2001. The investors also received 20,000 warrants for every $100
invested, exercisable for a two year period at 125% of the closing average offer
price for the previous ten trading days.
In April 2002, the Company entered into a further agreement for the placement of
7.5% convertible debentures in the sum of $300 for a term to July 2004. The
terms of the note were exactly the same as those on the notes issued in February
2001 and November 2001. The investors also received 20,000 warrants for every
$100 invested, exercisable for a two year period at 125% of the closing average
offer price for the previous ten trading days.
The effective interest rate assigned to the convertible debentures was 12%.
During February 2003, the Company's 8% and 7.5% convertible debentures with a
principal amount of $3,390 and (euro)663 were re-negotiated by their retirement
against the issue of new 6% debentures of $297 to February 15, 2004, (euro)188
to February 15, 2004 and $3,805 to February 15, 2005. The notes totaling $300
issued in April 2002 were not re-negotiated. The reissued convertible debentures
did not carry any right to warrants for the investors. All other terms of the
convertible debentures remained unchanged. This modification represented a
settlement, and the difference between the fair value of the liability element
in the new convertible debentures, assuming an effective interest rate of 12%,
and the carrying amount of the original ones was accounted for as an expense of
$127, which was posted to interest expense in the statement of income.
19
The Company has the right but not the obligation, to convert any or all of the
amounts of principal and any unpaid interest, into shares of common stock. The
conversion price shall be the greater of (i) 75% of the average closing offer
price of a share of the Company's common stock for the 10 days immediately prior
to conversion and (ii) the price per share as of the closing date.
The equity element can be summarized as follows:
2003 2002
Principal amount of debentures at issuance 4,300 4,000
Less present value of future interest payments at issuance (559) (520)
Less finders' fee (177) (177)
---------- -----------
$ 3,564 $ 3,303
9.2 Conversion of credit facility
In February 2001, the Company entered into an agreement to convert part of the
balance due on the credit facility agreement (amounting to $500) with Epsom
Investment Services N.V. (Note 7) into common stock of the Company on the basis
of one share for each US$0.125 of note. This resulted in the issue of 4,000,000
common shares.
In February 2002, Epsom Investment Services N.V. agreed to convert an additional
$450 of the balance due on the credit facility agreement into common stock of
the Company on the basis of one share for each $0.32 of note. This conversion
resulted in the issue of common stock of 1,424,050 common shares effected on
July 15, 2002.
In February 2003, Epsom Investment Services N.V. agreed to convert a further
$600 of the balance due on the credit facility agreement into common stock of
the Company on the basis of one share for each $0.24 of note. This conversion
resulted in the issue of 2,531,645 common shares.
20
9.3 Private placement
During February 2002, the Company announced a private placement of mixed
securities to raise US$ 2,000 by way of 7.5% convertible debentures in the sum
of $300, with the same terms and conditions as previous issues, and by the issue
of common stock in the sum of $1,700 at a discount of 10% to the market average
price, with the issue for each share taken down of a twelve month warrant for
one additional share at a premium of 20% to the strike price. The placing, which
was completed after the end of the financial year and was approved by the TSX
Venture Exchange in July 2003, consisted of 4,933,091 common shares, priced at
CDN $0.55 with a twelve month warrant to purchase an additional common share for
each share taken down at CDN $0.66, and US$300 7.5% convertible debentures.
9.4 Stock option plan
Under the provision of the TSX Venture Exchange, a maximum total of 10% of
issued shares may be granted to directors, officers and employees of the Company
in the form of stock options. The options generally expire five years from the
date of the grant.
Stock option activity was as follows:
Number of
Shares Exercise price per share
--------- ------------------------
Balance at February 28, 1999 2,185,000 Cdn $0.80 to 1.50
Options lapsed (1,175,000) Cdn $0.29 to 1.50
Options granted 500,000 Cdn $0.30
Balance at February 29, 2000 1,510,000 Cdn $0.29 to 0.30
Options lapsed (350,000) Cdn $0.29
Options granted -
Balance at February 28, 2001 1,160,000 Cdn $0.29 to 0.30
Options lapsed -
Options granted -
Balance at February 28, 2002 1,160,000 Cdn $0.29 to 0.30
Options exercised (620,000) Cdn $0.29
Options lapsed (40,000) Cdn $0.29
Options granted -
----------- -----------------
Balance at February 28, 2003 500,000 Cdn 0.30
All options that were outstanding as at December 8, 1999, originally priced at
Cdn $0.80 to 1.50 have had their exercise price amended to Cdn $0.29.
21
The following table summarizes information with respect to stock options as of
February 28, 2003:
Number of Status Number of Weighted average
Exercise options options remaining contractual
Price outstanding exercisable life (years)
Cdn $0.30 500,000 Exercisable 500,000 2.25
__________ _________
500,000 500,000
9.5 Other information
The Company is committed to issue 100,000 common shares for services in
connection with the preparation and filing of a registration statement under the
Securities Exchange Act (US) and listing on the National Associations of
Securities Dealers Automated Quotation System (NASDAQ), in the event that the
Company elects to obtain a NASDAQ listing.
The Company has never paid or distributed dividends.
10. MINORITY interest
During the year ended February 28, 2001, the Company contributed 51% of the
share capital of CalciTech Odda A-S ("Odda") (a Norwegian company) through a
wholly-owned subsidiary, CalciTech Holdings ApS (a Danish company, formed on
October 31, 2000). Minority interest represents the interest in the company
owned by a third party. No receivable was accounted for in respect of the third
party partner in the negative net worth of CalciTech Odda A/S. The Company does
not expect any adverse impact of the insolvency of this partner which was
declared in March 2003.
11. Income taxes
Under the current Bermuda law, the Company is not required to pay any income
taxes in Bermuda. The Company has received an undertaking from the Minister of
Finance of Bermuda that in the event of any such taxes being imposed, the
Company will be exempted from such taxation until March 28, 2016.
22
Loss before income taxes and minority interest consists of the following:
2003 2002 2001
restated restated
Bermuda $ (1,910) (2,021)$ (2,335)
Rest of world (278) (215) (189)
--------- --------- ----------
Loss before income taxes and minority interest $ (2,188)$ (2,236)$ (2,524)
There are no significant deferred taxes reflecting the net tax effects of
temporary differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
There are no significant operating loss carry-forwards, which would have an
impact on income tax as of February 28, 2003.
12. PROVISIONS AND CONTINGENCIES
In October 2001, our French subsidiary, CalciTech Group Services SARL, received
a tax assessment relating to fiscal years 1998 through 2000. The total amount of
tax assessed including penalties and interest, approximates to $419, including
$384 ((euro)357) for corporate income tax and $35 ((euro)33) for penalties and
interest. The major component of the assessment relates to the tax treatment of
an internal restructuring. The Company believes that significant aspects of the
assessment are without justification and intends to vigorously contest them. A
provision has been recorded in fiscal year 2002 and updated in fiscal year 2003
for foreign exchange differences.
The Company had received a claim from one of its former customers. Based upon
the information provided by this customer, the Company offered and accrued $200
to settle the dispute. During October 2001, the Company reached a settlement
with this customer in the sum of $601. Payment was effected by making
installment payments. The payment of the first two installments resulted in a
full cessation of claims from the former customer. At the end of the financial
year, a balance of $50 remained to be paid.
The Company is subject to legal proceeding, claims, and litigation arising in
the ordinary course of business. The Company and its subsidiaries are
occasionally challenged by local tax authorities. The Company records a
provision for these tax risks based on its most available information on the tax
claim in each tax jurisdiction. The Company's management does not expect that
the ultimate cost to resolve these matters will have a material adverse effect
on the Company's consolidated financial position, results of operations, or cash
flows.
13. RELATED PARTY TRANSACTIONS
The amount paid to shareholders, directors and officers of the Company and their
related companies for consulting and other services totaled $205, $196 and $240
for the years ended February 28, 2003, February 28, 2002 and February 28, 2001,
respectively.
23
In the financial year ended February 28, 2003, this amount included $180 paid to
EuroHelvetia TrustCo S.A. ($175 in the year ended February 28, 2002), who were
contracted by CalciTech to act as the Company's exclusive financial advisors.
EuroHelvetia charge their fees for work related to advice on private placements,
fund raising and project finance. Roger A. Leopard, Chief Executive Officer and
President of the Company, is also a director of EuroHelvetia TrustCo S.A..
EuroHelvetia also provide administration of Epsom Investment Services N.V..
Roger A. Leopard charged the remaining $25 ($21 in the year ended February 28,
2002) to CalciTech Group Services in providing strategic and industrial
counseling services.
14. FINANCIAL INFORMATION BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
The Company operates in one business segment. The following table presents
information by geographical area:
2003 2002 2001
restated restated
Operating loss
Bermuda $ (2,011)$ (1,882)$ (1,972)
Rest of world (316) (153) (189)
--------- --------- ----------
Total $ (2,327)$ (2,035)$ (2,161)
Identifiable assets
Bermuda $ 43 $ 67
Rest of world 354 218
--------- ---------
Total $ 397 $ 285
15. DIFFERENCES BETWEEN INTERNATIONAL FINANCIAL REPORTING STANDARDS, US
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The Company's consolidated financial statements are prepared in accordance with
International Financial Reporting Standards (IFRS), which differ from generally
accepted accounting principles in the United States (US GAAP) and generally
accepted accounting principles in Canada (Canadian GAAP).
Under US GAAP, the beneficial conversion feature embedded in the credit facility
should be recognized and measured by allocating a portion of the proceeds equal
to the intrinsic value of that feature to additional paid-in capital. The
Company has restated its net loss in accordance with US GAAP to reflect this
accounting policy. The effect was the additional charge to net loss as
represented by "Beneficial conversion feature on credit facility". There was no
effect on Shareholders' deficiency from this change. Share option expense was
restated to account for the reclassification of certain options as fixed that
were previously accounted for as variable.
24
The principal differences between IFRS and US GAAP are presented below together
with explanations of certain adjustments that affect consolidated net income and
total shareholders' equity:
Cumulative total
2003 2002 2001 since inception
restated restated restated
Net loss in accordance with IFRS $ (2,188)$ (2,518)$ (2,533)$ (35,808)
Interest, finders fee and currency
translation on convertible debentures (288) (275) (52) (615)
Beneficial conversion feature on credit facility (590) (543) (240) (2,602)
Share options accounting 47 (123) - (167)
------------ ------------ ------------ ------------------
Net loss in accordance with US GAAP $ (3,019)$ (3,459)$ (2,825)$ (39,191)
Basic net loss per share under US GAAP $ (0.061)$ (0.079)$ (0.071)$
Diluted net loss per share under US GAAP $ (0.061)$ (0.079)$ (0.071)$
2003 2002
restated
Shareholders' deficiency in accordance with IFRS $ (2,574)$ (3,600)
Convertible debentures (4,182) (3,633)
------------ ------------
Shareholders' deficiency in accordance with US GAAP $ (6,756)$ (7,233)
Under US GAAP, the beneficial conversion feature embedded in the credit facility
should be recognized and measured by allocating a portion of the proceeds equal
to the intrinsic value of that feature to additional paid-in capital.
Under US GAAP, convertible debentures should not be included within
shareholders' deficiency. Accordingly, interest and the foreign currency
translation adjustment on the principal element, and finders' fee would be
charged to income under US GAAP.
The Company's share option plan is treated as a compensatory plan under US GAAP.
For the purpose of this reconciliation, the Company has adopted Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB
25) and related interpretations in accounting for its share options which were
granted to employees and non-employee directors elected by shareholders.
Under APB 25, compensation expense is recognized when exercise prices are below
the fair market value of the underlying shares. The repricing of options on
December 8, 1999 required the Company to follow variable plan accounting, under
which compensation cost is remeasured each period. Due to the rise in market
value, a compensation expense of $214 was recorded for the first time in the
financial year ended February 28, 2002. This was partly reversed in the
financial year ended February 28, 2003, due to the fall in market value.
Under US GAAP, additional disclosures would include, but not necessarily be
limited to the following:
25
Consideration received for shares of stock, warrants, rights and other equity
securities
Number Amount
As at February 28, 1987 8,167,825 $ 10,560
Performance shares for patent rights 10,000,000 -
Issue of shares for cash 766,667 838
---------- -----------
As at February 29, 1988 18,934,492 11,398
Issue of shares for cash 250,000 359
---------- -----------
As at February 28, 1989 and 1990 19,184,492 11,757
Issue of shares for cash 1,000,000 602
---------- -----------
As at February 28, 1991 20,184,492 12,359
Issue of shares for cash 600,000 394
Exercise of stock options 23,000 15
Issue of shares for debt 413,171 271
Reduction of paid up capital - (12,169)
---------- -----------
As at February 29, 1992 21,220,663 870
Exercise of stock options 207,000 140
Exercise of warrants 70,000 56
Performance shares cancelled (10,000,000) -
---------- -----------
As at February 28, 1993 11,497,663 1,066
Exercise of warrants 530,000 483
Exercise of stock options 11,000 18
Acquisition of Kemgas Corporation Inc. 5,187,495 109
---------- -----------
As at February 28, 1994 17,226,158 1,676
Exercise of stock options 75,000 82
Exercise of stock options 75,000 -
---------- -----------
As at February 28, 1995 17,376,158 1,758
Exercise of stock options 200,000 -
Acquisition of 50.1% Kemgas Corporation Inc. 5,187,505 4
---------- -----------
As at February 29, 1996 22,763,663 1,762
Exercise of Kemgas Corporation Inc. stock options 375,000 -
---------- -----------
As at February 28, 1997 23,138,663 1,762
Issue of shares on conversion of credit facility 3,800,000 4
---------- -----------
As at February 28, 1998 26,938,663 1,766
Issue of shares on conversion of credit facility 2,978,723 2
---------- -----------
As at February 28, 1999 29,917,386 1,768
Issue of shares for cash 2,429,150 2
Conversion of convertible debentures 7,202,643 5
Exercise of Kemgas Corporation Inc. stock options 175,000 -
---------- -----------
As at February 29, 2000 39,724,179 1,775
Issue of shares on conversion of credit facility 4,000,000 3
---------- -----------
As at February 28, 2002 and February 28, 2001 43,724,179 1,778
Issue of shares on conversion of credit facility 3,955,695 3
Issue of shares for cash 4,933,091 3
Exercise of warrants 656,200 -
Exercise of stock options 620,000 -
---------- -----------
As at February 28, 2003 53,889,165 1,784
=========== ===========
26
Options Outstanding Option price per share
Cdn.
Balance, February 28, 1990 1,850,000 $ 0.45
Options granted 490,000 0.90
Options cancelled (1,925,000) 0.45 to 0.90
---------- ------------
Balance, February 28, 1991 415,000 0.90
Options granted 100,000 0.90
Options granted 25,000 1.49
Options granted 20,000 1.50
Options exercised (23,000) 0.90
Options cancelled (40,000) 0.90
---------- ------------
Balance, February 29, 1992 497,000 0.90 to 1.50
Options exercised (207,000) 0.90 to 1.50
Options cancelled (115,000) 0.90 to 1.50
Options granted 75,000 1.50
---------- ------------
Balance, February 28, 1993 250,000 0.90 to 1.50
Options granted 131,000 2.25
Options exercised (11,000) 2.25
Options cancelled (100,000) 1.50
---------- ------------
Balance, February 28, 1994 270,000 0.90 to 2.25
Options granted 200,000 2.28
Options exercised (75,000) 1.50
Options exercised (75,000) 0.90
---------- ------------
Balance, February 28, 1995 320,000 2.25 to 2.28
Options exercised (200,000) 2.28
---------- ------------
Balance, February 29, 1996 120,000 2.25
Options lapsed (10,000) 2.25
Options granted 750,000 2.45
Options granted 425,000 US$ 2.50
---------- ------------
Balance, February 28, 1997 1,285,000 2.25 to 2.45 & 2.50
Options lapsed (1,175,000) 2.45 & 2.50
Options granted 1,925,000 1.50
---------- ------------
Balance, February 28, 1998 2,035,000 1.50 to 2,25
Options lapsed (600,000) 1.50 to 2.25
Options granted 750,000 0.80 to 1.50
---------- ------------
Balance, February 28, 1999 2,185,000 0.80 to 1.50
Options lapsed (1,175,000) 0.29 to 1.50
Options granted 500,000 0.30
---------- ------------
Balance, February 29, 2000 1,510,000 0.29 to 0.30
Options lapsed (350,000) 0.29
---------- ------------
Balance, February 28, 2002 and February 28, 2001 1,160,000 0.29 to 0.30
Options exercised (620,000) 0.29
Options lapsed (40,000) 0.29
---------- ------------
Balances, February 28, 2003 500,000 0.30
========== ============
27
Number of Exercise price
Warrants per share
outstanding Cdn.
Balance at February 29, 2000 0
Warrants granted re: debentures 315,000 Cdn 0.333 to 0.435
Warrants exercised 0
-----------
Balance at February 28, 2001 315,000 Cdn$ 0.333 to 0.435
Warrants granted re: debentures 525,000 Cdn $ 0.455 to 0.51
Warrants exercised -
-----------
Balance at February 28, 2002 830,000 Cdn $0.333 to 0.51
Warrants granted re: private place 4,933,091 Cdn $ 0.66
Warrants granted re: debenture 63,000 Cdn $ 0.80 to 0.896
Warrants exercised (656,200) Cdn $ 0.333 to 0.455
Warrants lapsed (183,800) Cdn $ 0.333 to 0.455
-----------
Balance at February 28, 2003 4,996,091 Cdn $0.333 to 0.896
The Company has elected to adopt the disclosure provisions of Statement of
Financial Accounting Standards No 123, "Accounting for Stock-Based
Compensation", and continues to follow Accounting Principles Board Opinion No 25
and related interpretation in accounting for its employee stock options.
Had compensation cost for the plan been determined based on the fair value of
the options using the minimum value method at the grant date for awards in the
three year period ended February 28, 2003 consistent with the provisions of SFAS
No 123, the Company's net loss and loss per share would have been as follows:
2003 2002 2001
restated restated
Net loss per US GAAP:
- - As reported $ (3,019) $ (3,459) $ (2,825)
- - Pro forma $ (3,066) $ (3,336) $ (2,825)
Net loss per share per US GAAP - Proforma:
Basic net loss per share under US GAAP $ (0.062) $ (0.076) $ (0.071)
Diluted net loss per share under US GAAP $ (0.062) $ (0.076) $ (0.071)
49,632,816 43,724,179 39,890,846
The fair value of each option grant was estimated on the date of grant using the
Black & Scholes option pricing model, with the following assumptions for grants
made: dividend yields of 0%; annual risk-free interest rate of 4.5%; expected
volatility of 60%. All grants were made during the financial year 2000.
28
Development Stage Entity
The Company is still in the development stage and under US GAAP falls under the
provisions of FAS No. 7 "Accounting and reporting by development stage
enterprises".
The cumulative amounts are stated in accordance with International Financial
Reporting Standards.
Statement of income
Notes Cumulative
totals since
inception
restated
Revenues $ 2,728
Cost of revenues (1,996)
---------------------
Gross margin 732
Research and development expenses $ 9,356
General and administrative expenses 13,534
Settlement of legal dispute 12 400
Write-down of goodwill 10,649
Other expenses 184
---------------------
Operating loss (33,391)
Interest expense, net (3,587)
---------------------
Loss before income taxes and minority interest (36,978)
Provision for income taxes 12 (374)
---------------------
Loss from ordinary activities (37,352)
Minority interest 10 51
---------------------
Net loss $ (37,301)
=====================
29
Statement of cash flows
Cumulative Cumulative
totals since totals since
inception inception
restated
Cash flows from operating activities
Loss before income taxes and minority interest $ (36,956) (31,992)
Depreciation and amortization 4,830 7,124
Write-down of property, plant and equipment 2,033 2,033
Write-down of inventory 459 459
Write-down of goodwill 10,649 10,649
Interest expense 3,587 2,686
Equity in earnings of affiliates 86 86
-------------- -------------
Operating loss before working capital changes (15,312) (8,955)
Changes in working capital :
Decrease /(increase) in receivables, prepaid expenses and other current assets 60 211
Increase/(decrease) in accounts payable and accrued expenses, and provisions used 331 405
-------------- -------------
Cash used in operations (14,921) (8,339)
Interest paid to financial institutions (427) (427)
Income taxes paid (49) (41)
-------------- -------------
Net cash used in operating activities (15,397) (8,807)
Cash flows from investing activities
Acquisition of property, plant and equipment (736) (841)
Purchase of KCI net of cash acquired 537 537
-------------- -------------
Net cash used in investing activities (199) (304)
Cash flows from financing activities
Payment of bank loans (670) (670)
Proceeds from issuance of common stock 5,912 5,912
Proceeds from issuance of convertible debentures 2,941 441
Proceeds from credit facility 10,308 5,634
Payment of credit facility (3,222) (324)
Finders fee (285) (160)
Increase in bank overdraft 437 437
Cash received from share subscription of partner in Odda 51 51
Interest paid on convertible debentures (210) -
-------------- -------------
Net cash provided by financing activities 15,262 11,321
Effect of exchange rate changes on cash 413 335
-------------- -------------
Net increase / (decrease) in cash and cash equivalents 79 2,545
Cash and cash equivalents, at inception - -
-------------- -------------
Cash and cash equivalents, end of year $ 79 $ 2,545
============== =============
30
New accounting pronouncements under IFRS and US GAAP
Commencing March 1, 2001, new standards have been effective for the Company
under both IFRS and US GAAP with respect to accounting policies of financial
instruments: IAS 39 "Accounting for Financial Instruments " and SFAS No. 133
(SFAS 133) "Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS No. 137 and SFAS No. 138. Adoption of these new standards did
not have any effect on net loss and shareholders' deficiency under International
Financial Reporting Standards and US GAAP at March 1, 2001.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, "Business Combinations", and Statement No. 142, "Goodwill and other
Intangible Assets". The adoption of SFAS 141 and SFAS 142 did not have any
effect on net loss and shareholders' deficiency under US GAAP at March 1, 2002.
In July 2001, the FASB issued FAS No. 143, "Accounting for Asset Retirement
Obligations" ("FAS 143"). FAS 143 prescribes the accounting for retirement
obligations associated with tangible long-lived assets, including the timing of
liability recognition and initial measurement of the liability. FAS 143 is
effective for fiscal years beginning after June 15, 2002 (March 1, 2003 for the
Company). The effect of adopting this standard has not yet been determined.
The Company adopted SFAS N(degree)144, "Accounting for the impairment or
disposal of long-lived assets", was issued by the FASB on October 3, 2001. SFAS
144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of". However, it retains many of the
fundamental provisions of that Statement. SFAS 144 also amends the accounting
and reporting provisions of APB 30, "Reporting the Results of
Operations-Discontinued Events and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", to broaden the definition of what
constitutes a discontinued operation, amends the accounting and presentation for
discontinued operations, and amends ARB 51, "Consolidated Financial Statements
to eliminate the exception to consolidation for a temporarily controlled
subsidiary". SFAS 144 is effective for fiscal years beginning after December 31,
2001 (March 1, 2002 for the Company). The adoption of this standard did not have
any impact on the Company's consolidated net income and total shareholders'
equity under US GAAP.
In April 2002, the FASB issued FAS No. 145, "Revision of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Connections" ("FAS
145"). Among other amendments and rescissions, FAS 145 eliminates the
requirement that gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of the related income
tax effect, unless such gains and losses meet the criteria in paragraph 20 of
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operation
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". FAS
145 is partially effective for transactions occurring after May 15, 2002 and
partially effective for fiscal years beginning after May 15, 2002 (March 1, 2003
for the Company). The Company does not expect the adoption of FAS 145 to have a
material effect on its consolidated financial statements.
31
In June 2002, the FASB issued FAS No. 146 "Accounting for Costs Associated with
Exit or Disposal activities" ("FAS 146"). FAS 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF 94-3 "Liability Recognition for Certain Employee Termination
Benefits and other Costs to Exit an Activity (including Certain Costs Incurred
in a restructuring)". FAS 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The adoption of SFAS 146 did not
have any effect on net loss and shareholders' deficiency under US GAAP at
February 28, 2003.
In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123". FAS 148 amends FAS 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, FAS 148 amends the disclosure requirements
of FAS 123 to require prominent disclosures in the financial statements about
the method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The transition guidance and annual
disclosure provisions of FAS 148 are effective for financial statements issued
for fiscal years ending after December 15, 2002. The Company has elected to
continue accounting for employee stock based compensation in accordance with APB
25 and related interpretations and therefore FAS 148 is not expected to have a
significant impact on the Company's financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires the guarantor
to recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. It also elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. Disclosures required
under FIN 45 are already included in these financial statements, however, the
initial recognition and initial measurement provisions of FIN 45 are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
The adoption of FIN 45 did not have any effect on net loss and shareholders'
deficiency under US GAAP at February 28, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of
Variable Interest Entities" (FIN 46). Under this FIN entities are separated into
two populations: (1) these for which voting interests are used to determine
consolidation (this is the most common situation) and (2) these for which
variable interests are used to determine consolidation. The FIN explains how to
identify Variable Interest Entities (VIE) and how to determine when a business
enterprise should include the assets, liabilities, non controlling interests,
and results of activities of a VIE in its consolidated financial statements. The
FIN is effective as follows: for variable interests in variable interest
entities created after January 31, 2003 the FIN shall apply immediately, for
variable interests in variable interest entities created before that date, the
FIN shall apply for public entities - as of the beginning of the first interim
or annual reporting period beginning after June 15, 2003. The adoption of FIN 46
did not have any effect on net loss and shareholders' deficiency under US GAAP
at February 28, 2003.
In May 2003, the FASB issued FAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". FAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability. FAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company is in the
process of evaluating the effect of adopting FAS 150 in its consolidated
financial statements.
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There is no reconciling difference between net loss and shareholders' deficiency
in accordance with IFRS and Canadian GAAP for the years ended February 28, 2003
and February 28, 2002.
Under Canadian GAAP, additional disclosures would be required as follows:
Analysis of research and development costs and general and administrative
expenditure
2003 2002 2001
restated restated
Research and development
Amortization of patents 24 4 1,193
Small plant construction and running costs 770 690 409
Investment allowances on pilot plant (77) - -
Legal fees 2 2 -
----------- ----------- ------------
$ 719 $ 696 $ 1,602
=========== =========== ============
General and administrative
Audit 77 63 33
Legal 55 197 53
Filing and annual charges 28 23 52
Board expenses 4 3 3
Insurance 27 22 19
Office 18 11 34
Rent and rates 69 39 26
Leasing 32 18 -
Salaries and benefits 267 175 126
Shareholder communication 65 53 58
Telephone 21 17 12
Travel 88 64 56
Bank charges 16 9 2
Consulting 145 175 -
Depreciation 64 15 12
General expenses 28 55 57
----------- ----------- ------------
$ 1,004 $ 939 $ 543
=========== =========== ============
New accounting pronouncements under Canadian GAAP
In November 2001, the CICA issued Accounting Guideline 13 ("AcG 13") "Hedging
Relationships," which will be effective for years beginning on or after July 1,
2003. AcG 13 addresses the identification, designation, documentation, and
effectiveness of hedging transactions for the purposes of applying hedge
accounting. It also establishes conditions for applying, and deals with the
discontinuance of hedge accounting. In December 2002, the CICA approved, subject
to written ballot, certain amendments to AcG 13. Under the new guideline, the
Company will be required to document its hedging transactions and explicitly
demonstrate the hedges are sufficiently effective in order to apply accrual
accounting for positions hedged with derivatives. The Company does not expect
the adoption of this guideline to have a material effect on the consolidated
financial statements.
33
In December 2002, the CICA approved, subject to written ballot, the draft
guideline relating to guarantees. The draft guideline requires disclosure of key
information about certain types of guarantee contracts that require payments
contingent on specified types of future events. The draft guideline is effective
for periods beginning on or after January 1, 2003. The Company does not expect
the adoption of this guideline to have a material effect on the consolidated
financial statements.
In December 2002, the CICA approved, subject to written ballot, new Handbook
section "Asset Retirement Obligations" to replace the current guidance on future
removal and site restoration costs included in the CICA accounting standard 3061
"Property, Plant and Equipment". The standard is effective for years beginning
on or after January 1, 2004. The standard requires recognition of a liability at
its fair value for the obligation associated with the retirement of a tangible
long-lived asset. A corresponding asset retirement cost would be added to the
carrying amount of the related asset and amortized to expense over the useful
life of the asset. The effect of adopting this standard has not yet been
determined.
16. List of principal consolidated companies
Principal consolidated companies are as follows:
Name of company Countries Holding Proportion Nature of business
held
CalciTech Synthetic Minerals Ltd. Bermuda Ordinary shares 100% PCC business
Kemgas North America Inc. USA Ordinary shares 100% Marketing (dormant)
CalciTech Group Services SARL France Ordinary shares 100% Administration
CalciTech Holdings ApS Denmark Ordinary shares 100% Holding company
CalciTech Odda A-S Norway Ordinary shares 51% Production of PCC
CalciTech Deutschland GmbH Germany Ordinary shares 100% Production of PCC
On February 1, 2003, the Company's intellectual property interests in it's
Synthetic Calcium Carbonate ("SCC") technology were assigned to a new Bermuda
organized wholly owned subsidiary, CalciTech Synthetic Minerals Ltd. All group
subsidiary companies were transferred to CalciTech Synthetic Minerals Ltd. which
now acts as the holding company and will license within the group rights and use
of the technology on a territorial basis.
34
17. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash transactions were as follows:
2003 2002 2001
Issuance of common stock upon conversion of credit facility $ 1,050 - 500
Conversion of options through credit facility 119 - -
Exercise of warrants through credit facility 184 - -
Issuance of common stock upon private placement through credit facility 1,700 - -
Issuance of convertible debentures through credit facility 300 - -
Interest on convertible debentures paid from credit facility (112)
------------ ---------- -----------
Total $ 3,241 $ - $ 500
Upon exercise of options certain directors paid the exercise price directly to
Epsom as an offset to the credit facility. Similarly, the exercise price of
warrants was paid directly by certain holders as an offset to the credit
facility, and the private placement of common stock and convertible debentures
was effected through the credit facility.
18. NUMBER OF EMPLOYEES (UNAUDITED)
Headcount was 9, 9 and 7 as of February 28, 2003, 2002 and 2001, respectively.
19. POST BALANCE SHEET EVENT
In February 2003, the Landesforderinstitut Sachsen-Anhalt ("LFI") in Germany
approved a government grant in the total value of (euro)228 as a 50% cash
contribution towards the cost of building the small-scale production plant in
Leuna. Of this sum, 50% is to be received from the tax authorities in the form
of investment allowances, of which (euro)77 were unconditional at year-end and
recognized in the financial statements (see Note 4). The remainder to be
received from the LFI has conditions attached to them, such that they shall be
recognized as and when received, in accordance with the policy described in Note
3.16. Thereof, (euro)101 was received in August 2003.
35