UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-24913
BioShield Technologies, Inc.
-----------------------------------------
(Name of small business issuer as specified in its charter)
Georgia 58-2181628
----------------- ------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
4405 International Blvd.
Suite B-109
Norcross, Georgia 30093
-------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (770) 925-3653
----------------------
(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
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 60,935,831 shares, as of
May 14, 2002.
BIOSHIELD TECHNOLOGIES, INC.
FORM 10-QSB
QUARTERLY PERIOD ENDED MARCH 31, 2002
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2002 (unaudited) 3
Consolidated Statements of Operations for the Three and
Nine Months ended March 31, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months
ended March 31, 2002 and 2001 (unaudited) 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis or Plan of Operation 12-13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14-15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
2
BIOSHIELD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 2002
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash ........................................................ $ 9,181
Accounts receivable, net of allowance for
doubtful accounts of $200,000 ............................ 1,644,781
Inventories ................................................. 40,074
Other current assets ........................................ 115,160
------------
TOTAL CURRENT ASSETS ..................................... 1,809,196
PROPERTY AND EQUIPMENT, net ..................................... 244,635
INVESTMENT IN EQUITY-METHOD INVESTEE ............................ 6,000
------------
TOTAL ASSETS ............................................. $ 2,059,831
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable ............................................... $ 2,032,516
Note payable - related party ................................ 99,000
Accounts payable ............................................ 1,248,157
Accrued expenses ............................................ 1,718,301
------------
TOTAL CURRENT LIABILITIES ................................ 5,097,974
------------
STOCKHOLDERS' DEFICIT:
Convertible preferred stock - Series B,
no par value; 500 shares authorized;
451 shares issued and outstanding
total liquidation of outstanding - $7,900,000 ............ 8,276,840
Convertible preferred stock - Series C, no par value;
500 shares authorized; 205 shares issued and outstanding
total liquidation of outstanding - $4,100,000 ............ 4,100,460
Common stock, no par value; 100,000,000 shares authorized;
51,588,914 issued and outstanding ....................... 36,689,237
Additional paid-in capital .................................. 5,889,810
Accumulated deficit ......................................... (55,074,523)
Less 35,000 shares of common stock in treasury - at cost .... (536,900)
Deferred compensation ....................................... (2,383,067)
------------
TOTAL STOCKHOLDERS' DEFICIT .............................. (3,038,143)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT .............. $ 2,059,831
============
See notes to consolidated financial statements.
3
BIOSHIELD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, Nine Months Ended March 31,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET SALES ....................................... $ 841,054 $ 415,471 $ 1,955,201 $ 965,551
COST OF SALES ................................... 73,186 238,305 271,000 550,371
------------ ------------ ------------ ------------
GROSS PROFIT .................................... 767,868 177,166 1,684,201 415,180
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Marketing and selling ....................... 1,354 710,650 141,439 1,107,780
General and administrative .................. 1,414,174 240,810 3,659,807 3,639,925
Loss on investment .......................... - - - 1,500,000
Research and development .................... 770 19,547 3,954 377,287
------------ ------------ ------------ ------------
1,416,298 971,007 3,805,200 6,624,992
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ............................ (648,430) (793,841) (2,120,999) (6,209,812)
OTHER INCOME (EXPENSE):
Other income ................................ - 58,070 - 58,070
Loss on equity-method investee .............. (35,000) - (79,000) -
Interest expense ............................ (234,723) - (902,753) -
------------ ------------ ------------ ------------
Total other income (expense) ............. (269,723) 58,070 (981,753) 58,070
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS ................. (918,153) (735,771) (3,102,752) (6,151,742)
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations ........... - (1,769,003) (214,701) (7,639,731)
Gain on spin-off of majority-owned subsidiary - - 240,361 -
------------ ------------ ------------ ------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS ...... - (1,769,003) 25,660 (7,639,731)
------------ ------------ ------------ ------------
NET LOSS ........................................ (918,153) (2,504,774) (3,077,092) (13,791,473)
PREFERRED STOCK STOCK DIVIDENDS ................. (165,000) - (510,250) -
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ...... $ (1,083,153) $ (2,504,774) $ (3,587,342) $(13,791,473)
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Continuing operations .................... $ (0.02) $ (0.07) $ (0.09) $ (0.46)
Discontinued operations .................. - (0.16) 0.00 (0.57)
------------ ------------ ------------ ------------
Net loss to common stockholders .......... $ (0.02) $ (0.23) $ (0.09) $ (1.03)
============ ============ ============ ============
NUMBER OF SHARES USED IN CALCULATING BASIC
AND DILUTED NET LOSS PER SHARE .............. 48,477,161 10,898,135 42,128,595 13,415,962
============ ============ ============ ============
See notes to consolidated financial statements.
4
BIOSHIELD TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
March 31,
-----------------------------
2002 2001
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations ......................... $(3,077,092) $ (6,151,742)
Adjustments to reconcile loss from continuing operations
to net cash used in operating activities:
Gain (loss) from discontinued operations .......... - (7,639,731)
Minority interest in loss of subsidiary ........... (740) (267,116)
Depreciation and amortization ..................... 55,475 80,754
Issuance of stock, stock options and stock warrants
for services rendered .......................... 2,209,566 -
Deferred financing costs and interest ............. 734,732 -
Loss on equity-method investee .................... 79,000 -
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable ............................... (1,195,227) (187,369)
Inventories ....................................... (40,074) 89,968
Other current assets .............................. (115,160) 45,615
Deposits and other assets ......................... 11,721 -
Net assets from discontinued operations ........... - 2,228,395
Increase (decrease) in:
Accounts payable .................................. 158,470 586,366
Accrued expenses .................................. (11,111) (794,419)
Other liability ................................... (25,000) -
----------- ------------
NET CASH USED IN OPERATING ACTIVITIES ....................... (1,215,440) (12,009,279)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Accumulated other income/ (loss) ........................ - 105,000
Investment in equity-method investee .................... (85,000) -
Capital expenditures .................................... (85,000) (87,088)
----------- ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ......... (170,000) 17,912
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock warrants exercised .................. - 125,000
Proceeds from stock options exercised ................... - 542,380
Proceeds from common stock issuances, net ............... - 5,259,750
Proceeds from debt ...................................... 1,383,016 -
Repayment of debt ....................................... (373,000) -
----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................... 1,010,016 5,927,130
----------- ------------
NET DECREASE IN CASH ........................................ (375,424) (6,064,237)
CASH - BEGINNING OF PERIOD .................................. 384,605 6,172,914
----------- ------------
CASH - END OF PERIOD ........................................ $ 9,181 $ 108,677
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and taxes ...... $ - $ -
=========== ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for debt ............................ $ 841,961 $ -
=========== ============
Preferred stock converted to common stock ............... $ 1,577,660 $ -
=========== ============
Dividends accrued ....................................... $ 510,250 $ -
=========== ============
See notes to consolidated financial statements.
5
BioShield Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). The accompanying consolidated
financial statements for the interim periods are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the periods presented. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements for the year ended June 30, 2001 and notes thereto
contained in the Report on Form 10-KSB of BioShield Technologies, Inc. and
Subsidiary (the "Company") as filed with the Securities and Exchange Commission.
The results of operations for the nine months ended March 31, 2002 are not
necessarily indicative of the results for the full fiscal year ending June 30,
2002.
Through November 2001, the Company owned 52% of Healthcare Network Solutions,
Inc ("HNS"). During December 2001, 3,646,579 of HNS shares owned by the Company
(approximating 24.6% of all currently issued and outstanding shares of HNS) were
spun-off to the Company's shareholders on a one for ten basis with the Company
retaining 4,453,421 shares (approximately 28.7% of all then issued and
outstanding shares of HNS)(See note 2).
The consolidated statements include the accounts of BioShield Technologies, Inc.
and its wholly owned subsidiary ("BSTI"). All significant inter-company balances
and transactions have been eliminated.
NOTE 2 - INVESTMENT IN EQUITY-METHOD INVESTEE
The Company holds an investment accounted for under the equity method. The
Company accounts for an investment under the equity method if the investment
gives the Company the ability to exercise significant influence, but not
control, over an investee. Significant influence is generally deemed to exist if
the Company has an ownership interest in the voting stock of the investee of
between 20% and 50%, although other factors, such as representation on the
investee's Board of Directors and the impact of commercial arrangements, are
considered in determining whether the equity method of accounting is
appropriate. As of March 31, 2002, the Company owned 4,453,421 shares of common
stock of Healthcare Network Solutions, Inc., which was received for various
management and other services provided to HNS at the inception of that company.
These shares are restricted under Rule 144 of the Securities and Exchange
Commission.
HNS is in the business of providing consolidated non-medical services to
physicians, particularly those physicians in small (five and under)practice
groups. These services include, billing and scheduling, supply ordering,
personnel staffing, marketing and dispensing. Also, consulting services are
offered to healthcare companies that include developing business strategies,
alliance and partnering programs, research projects and functional product
assessments. HNS is a public company traded under the symbol HNWS. As of March
31, 2002, HNS had minimal revenues and has incurred losses since its inception.
Tim Moses, who is an officer and director of the Company, is also a director of
HNS and owns approximately 9.9% of the common shares of HNS.
The Company's common share holdings represent approximately 24.6% of the total
of 18,099,252 shares of common stock of HNS currently outstanding at March 31,
2002. The Company has the ability to exercise significant influence, but not
control HNS. Accordingly, under the equity method of accounting, the Company's
share of the investee's earnings or loss is included in the consolidated
statements of operations. The Company records its investments in equity-method
investee on the consolidated balance sheet as "Investment in equity-method
investee" and its share of the investee's earnings or losses in "Equity in
losses of equity-method investee."
In the statement of operations for the nine months ended March 31, 2002, the
Company recorded equity in losses of investee of $79,000. Management believes
the loss was other than temporary due to the continued losses and a net capital
deficiency of the investee.
6
BioShield Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 3 - NOTES PAYABLE
(a) On December 15, 2000, the Company conducted a private placement which was
comprised of the sale of units consisting of shares of common stock and a
promissory note equal to the dollar amount of the investment; with the latter
being due 12 months from the date of issuance. The unit holder at his option can
convert such note at a 25% discount based on the average closing cost of the
common stock for the twenty business days prior to conversion. Cash totaling
$487,500 was received under this placement but the stock was not issued until
July 18, 2001. Accordingly this amount which bears interest at 6% per annum is
showed in the financial statements as notes payable. In addition, the beneficial
feature on the note amounting to $162,500 was recorded and is being amortized
over the life of the note. Furthermore the stock that was issued in July 2001,
having a fair market value of $835,960 on the date that the funds were received,
was recorded as common stock and as deferred financing costs. The deferred
financing costs were being amortized over the life of the respective note. As of
March 31, 2002, the Company owes $487,500 related to this note and is in
default. For the nine months ended March 31, 2002, amortization of deferred
financing costs amounted to $626,561 and is included in interest expense.
(b) On June 19, 2001, the Company borrowed $500,000 from Jackson LLC. The loan
bears interest at 8% per annum and is payable on demand.
(c) The Company borrowed funds from a third party under a revolving line of
credit. The line of credit aggregates $1,000,000 and bears interest at a rate
equal to two and one-half (2.5%) per month, on a basis of a 360-day year and
actual number of days elapsed. To the extent that there are amounts due under
the line of credit (including unpaid principal and interest), the Company shall
pay to the lender an amount equal to 100% of the Company's collected
receivables, on a monthly basis. The line of credit is payable on demand and is
collateralized by substantially all of the Company's assets. As of March 31,
2002, the Company borrowed $1,000,016 under this line of credit.
(d) On June 19, 2001, the Company borrowed $45,000 from two individuals. These
loans are non-interest bearing and are payable on demand.
NOTE 4 - NOTE PAYABLE - RELATED PARTY
During the quarter ended March 31, 2002, the Company borrowed $99,000 from an
officer of the Company. The loans are non-interest bearing and payable on
demand.
NOTE 5 - STOCKHOLDERS' DEFICIT
Common Stock
During the three months ended March 31, 2002, the Company issued 1,460,752 share
of common stock in connection with a prior securities purchase agreement which
allows the holder of EMD (the Company's inactive subsidiary) common stock to
exchange their shares for BSTI common stock at a predetermined exchange rate.
Accordingly, the Company reduced the remaining liabilities accrued in connection
with this conversion by $106,000.
In January 2002, the Company issued 2,000,000 shares of common stock in
connection with the conversion of its Series B convertible preferred stock.
During January 2002, the Company granted and immediately exercised stock options
for 1,850,000 shares of common stock to employees and directors for services
rendered and to be rendered in the future. Since the Company did not receive any
cash for the exercise of these options, the Company valued these common shares
at the fair market value on the date of issuance of $469,000, which will be
amortized over the service period. At March 31, 2002, deferred compensation
relating to these shares amounted to $141,667.
During January 2002, the Company granted and immediately exercised stock options
for 2,850,000 shares of common stock to consultants for services rendered and to
be rendered in the future. Since the Company did not receive any cash for the
exercise of these options, the Company valued these common shares at the fair
market value on the date of issuance or on the contract date of $597,500, which
will be amortized over the service period. At March 31, 2002, deferred
compensation relating to these shares amounted to $509,933.
During January 2002, the Company granted and immediately exercised stock options
for 396,882 shares of common stock to an attorney for services rendered. The
Company valued these common shares at the fair market value on the date of
issuance of $183,972 and included in professional fees.
7
BioShield Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 5 - STOCKHOLDERS' DEFICIT (Continued)
In January 2002, the Company issued 250,000 shares of common stock to a third
party as a sales commission. In connection with this issuance, the Company
recorded non-cash compensation expense of $86,250 based on the fair market value
of the shares issued.
During February 2002, the Company granted and immediately exercised stock
options for 3,000,000 shares of common stock to an officer of the Company or his
assignees for debt of $143,750, for services rendered during the three months
ended March 31, 2002 of $93,750, and for services to be rendered in the future
of $542,500. The Company valued these common shares at the fair market value on
the date of issuance. The fair market value of common shares issued for future
services of $542,500 will be amortized over the service period and is included
in deferred compensation at March 31, 2002.
During February 2002, the Company granted and immediately exercised stock
options for 175,000 shares of common stock to consultants for services rendered.
The Company valued these common shares at the fair market value on the date of
issuance or on the contract date and recorded consulting expense of $48,625.
During February 2002, the Company granted and immediately exercised stock
options for 300,000 shares of common stock to an attorney for services rendered.
The Company valued these common shares at the fair market value on the date of
issuance of $54,000, which is included in professional fees.
On February 1, 2002, the Company granted 110,000 stock options and immediately
exercised the options, issuing 110,000 shares of common stock as settlement for
a matter involving the former COO of the Company ("plaintiff") who has brought
action against the Company alleging breach of the plaintiff's employment
agreement by the Company and claims that he is entitled to severance. In
connection with this issuance, the Company recorded a settlement expense of
$34,100 based on the fair market value of the shares issued.
Stock Options and Warrants
Pursuant to October 16, 2001 Board of Directors approval and subsequent
stockholder approval, the Company adopted it's 2002 Non-Statutory Stock Option
Plan ("Plan") whereby it reserved for issuance up to 7,000,000 shares of its
common stock. The Company has filed a Registration Statement on Form S-8 to
register those 7,000,000 shares of common stock underlying the aforesaid
options. On March 6, 2002, the Company filed a new Form S-8 Registration
Statement to register an additional 7,000,000 shares of the Company's common
stock, which increased the number of options available for issuance from
7,000,000 to 14,000,000. In all other respects the Plan and Prospectus are
substantially identical to those previously filed on December 28, 2001. This
Plan is intended as an employment incentive, to aid in attracting and retaining
in the employ or service of the Company and any Affiliated Corporations, persons
of experience and ability and whose services are considered valuable, to
encourage the sense of proprietorship in such persons, and to stimulate the
active interest of such persons in the development and success of the Company.
This Plan provides for the issuance of non-statutory stock options ("NSOs" or
"Options") which are not intended to qualify as "incentive stock options" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
On March 1, 2002 (the "Effective Date"), a consulting agreement (the
"Agreement") was entered into between the Company and Mirman Capital Ventures,
Inc. (the "Consultant"). The Agreement terminates on February 28, 2007. During
the term of the agreement, the Consultant will provide the Company with regular
and customary non-exclusive advice, which includes investor and public
relations, acquisitions, corporate financial and equity analysis, and other
corporate matters.
As compensation for services rendered, the Company granted to the Consultant a
warrant to purchase up to 10,000,000 shares in the aggregate of common stock of
the Company. The warrants granted are exercisable for the time period and
exercise price as follows: 1,000,000 warrants to purchase a like number of
shares at $.18 per share through February 28, 2003, 1,000,000 warrants to
purchase a like number of shares at $.28 per share through February 28, 2004,
1,000,000 warrants to purchase a like number of shares at $.38 per share through
February 28, 2005, 1,000,000 warrants to purchase a like number of shares at
$.48 per share through February 28, 2005, 1,000,000 warrants to purchase a like
number of shares at $.58 per share through February 28, 2005, and an additional
5,000,000 warrants to purchase a like number of shares at $1.00 per share
through February 28, 2007. The fair value of each option grant was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions dividend yield of -0- percent; expected
volatility ranging of 129 percent; risk-free interest rate of 5.00 percent and
an expected holding periods of one to five years. The Company valued these
warrants at the fair market value on the contract date of $1,127,000, which will
be amortized over the service period of five years. Accordingly, the Company has
recorded deferred compensation of $1,108,217 and consulting expense of $18,783
as of March 31, 2002 related to these warrants.
8
BioShield Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 6 - PRIVATE EQUITY CREDIT AGREEMENTS
On June 30, 1999, BSTI entered into a Private Equity Credit Agreement, as
amended, with an investor, whereby the Company may issue and sell to the
investor, from time to time, up to $10,000,000 of BSTI's common stock. Pursuant
to the agreement, the Company may exercise a put by giving notice to the
investor of the investment amount that the Company intends to require the
investor to purchase. The number of shares, which the investor will receive, is
determined by dividing the investment amount by the purchase price, determined
as the market price of the common stock on the date that the notice of the put
is delivered to the investor less 20% of the market price. Unless the Company
obtains requisite approval of its shareholders in accordance with the corporate
laws of the State of Georgia and the applicable rules of NASDAQ, no more than
19.99% of the outstanding common stock may be issued and sold under this
agreement. The Company must reserve at all times the maximum number of common
shares to enable the Company to issue a sufficient number of shares having an
aggregate purchase price of the lesser of $10,000,000 or number of shares having
an aggregate purchase price of the lesser of $10,000,000 less the number of
shares actually delivered under the agreement. Additionally, the average market
bid prices for the twenty trading days preceding the Company's notice to put the
shares to the investor must equal or exceed $1.00 per share. As of March 31,
2002, the Company has not exercised any of its rights under this agreement.
NOTE 7 - LITIGATION
On September 7, 2000, AHT Corporation ("AHT") filed suit against the Company and
certain of its officers and directors in the Superior Court of Fulton County,
Georgia (the "Georgia Action") alleging breach of a June 30, 2000 acquisition
agreement and related common laws claims and seeking damages in excess of
$70,000,000. On September 21, 2000, the Company filed its Answer and
Counterclaim. On September 22, 2000, AHT filed, in the U.S. Bankruptcy Court for
the Southern District of New York, a petition for relief under Chapter 11 of the
Federal Bankruptcy Code. Following the filing of its Chapter 11 petition, AHT
filed a motion seeking approval of an asset purchase agreement dated as of
September 22, 2000 (the "APA"), which provided, for the sale of substantially
all of AHT's assets to the Company and AHT Acquisition Corp. for approximately
$15,000,000. Pursuant to a Debtor in Possession ('DIP") Financing, Escrow and
Settlement Agreement dated as of September 22, 2000, which was approved by the
Bankruptcy Court, the Company agreed to provide approximately $1.5 million in
post-petition financing to AHT. That agreement also provided for the dismissal
of the Georgia Action with prejudice, subject to certain conditions contained
therein. At September 30, 2000, AHT had requested and received $378,338 from the
Company under the DIP financing arrangement. Subsequent to September 30, 2000,
AHT had requested and received an additional $1,121,662 under the DIP financing
agreement.
The Bankruptcy Court had initially scheduled a hearing to approve the APA for
November 8, 2000. However, due to the decline in the Company's stock price, in
early November, the Company notified AHT that it would need additional time
beyond November 8, 2000 to obtain sufficient capital to acquire AHT's assets.
The Bankruptcy Court did not approve the APA on November 8, 2000. Rather, on
November 21, 2000, the Bankruptcy Court approved the sale of substantially all
of AHT's assets to Cybear, Inc.
On November 28, 2000, AHT Acquisition Corp. commenced a new lawsuit (in its
Bankruptcy case) against the Company, as well as the other defendants in the
Georgia Action. The prepetition claims asserted and relief sought in that action
are essentially the same as the claims and relief sought in the Georgia Action.
The lawsuit in the bankruptcy case also alleges breach of the APA and seeks
damages related to the APA, and to equitably subordinate the Company's $1.5
million claim against AHT relating to the postpetition advances made by the
Company to AHT under the DIP Financing, Escrow and Settlement Agreement. On
February 9, 2001, the Company filed an answer and counterclaim and intends to
vigorously defend the action. Motions to dismiss the action and/or abstain from
hearing the action have been denied and the parties were engaged in discovery
proceedings under Bankruptcy Order. In April 2002, the Company files a judgment
motion to dismiss this case and is currently awaiting a response.
In the matter entitled Edward U. Miller v. BioShield Technologies, Inc.,
Superior Court of Gwinnett County, Georgia, Civil Action No. 01-A-0096103, a
former COO of the Company ("plaintiff") has brought action against the Company
alleging breach of the plaintiff's employment agreement by the Company and
claims that he is entitled to severance pay in the amount of approximately
$80,000 following his termination on December 5, 2000. On December 21, 2001, the
Company granted 175,000 stock options and immediately exercised the options,
issuing 175,000 shares of common stock as partial settlement of this matter.
Additionally, on February 1, 2002, the Company granted 110,000 stock options and
immediately exercised the options, issuing 110,000 shares of common stock as
final settlement of this matter.
9
BioShield Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
NOTE 7 - LITIGATION (Continued)
In the matter entitled Bioshield, Inc. v. BioShield Technologies, Inc., United
States District Court, Eastern District, Michigan, Civil Action No.
00-CV-10181-BC, a Michigan corporation has brought a trademark violation suit
against the Company, which claims superior right to the use of the "Bioshield"
name and claims damages in an amount not less than $75,000. The Company denies
the claims and has filed a counterclaim for damages for infringement upon the
Company's intellectual property. The Company intends to vigorously defend the
action.
In the matter of Duke Construction Limited Partnership v. Bioshield
Technologies, Inc., American Arbitration Association Arbitration No.
30-110-00023-01, Superior Court of Gwinnett County, Civil Action No.
01-A-7161-5, Duke Construction received its arbitration award in the amount of
$219,000 on June 8, 2001. On July 18, 2001, Duke Construction filed a complaint
in the Superior Court of Gwinnett County seeking confirmation of the award. The
Company is contesting approximately $5,000 of interest, which was included in
the award. Settlement negotiations regarding the payment of this judgment are
ongoing. The Company entered into a settlement agreement and made a down payment
of $25,000 in January 2002 and is obligated to pay $7,500 per month until the
debt is extinguished.
In the matters of Jamestown Management Corp. v. Bioshield Technologies, Inc. and
Mountain National Bank (garnishee) and Summit Marketing Group, Inc. v. Bioshield
Technologies, Inc. and Mountain National Bank (garnishee), Jamestown received
condemned funds as a result of the garnishment it filed in DeKalb County, as
well as the garnishment filed by Summit in Gwinnett County with an approximate
principal amount of $65,000 remained outstanding on this judgment as of March
31, 2002.
Summit was involved in two garnishment actions, one filed in DeKalb County by
Jamestown and the other filed in Gwinnett County by Summit. Summit received a
total of $29,201 under the garnishments and has indicated that $36,000 remained
outstanding on Summit's judgment, including interest as of March 31, 2002.
NOTE 8 - SUBSEQUENT EVENTS
In April 2002, the Company issued 3,000,000 shares of common stock in connection
with the conversion of its Series B convertible preferred stock.
During April and May 2002, the Company granted and immediately exercised stock
options for 3,552,941 shares of common stock to consultants and an attorney for
services rendered.
During May 2002, the Company granted and immediately exercised stock options for
2,793,976 shares of common stock to employees for services rendered.
NOTE 9 - RECENT PRONOUNCEMENTS
In July, 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS
142, Goodwill and Intangible Assets. SFAS 141 is effective for all business
combinations completed after June 30, 2001. SFAS 142 is effective for the year
beginning January 1, 2002; however certain provisions of that Statement apply to
goodwill and other intangible assets acquired between July 1, 2001, and the
effective date of SFAS 142. The Company does not believe the adoption of these
standards will have a material impact on the Company's financial statements.
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset
Retirement Obligations. This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement applies to all
entities. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company does not
believe the adoption of these standards will have a material impact on the
Company's financial statements.
10
BioShield Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Continued)
NOTE 8 - RECENT PRONOUNCEMENTS (Continued)
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. The Company does not believe the
adoption of these standards will have a material impact on the Company's
financial statements.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
BioShield Technologies, Inc. ("BSTI") is a Georgia corporation and was
organized in 1995. The Company historically has engaged in research and
development, patent filings, regulatory issues and related activities geared
towards the sale of its retail, industrial and institutional products. BioShield
is currently selling antimicrobial products via licensing and distribution
contracts. Many of these products provide long-term killing action of
microorganisms responsible for cross contamination and viral contamination,
along with inhibiting and controlling the growth of over 100 viral, bacteria,
fungi and yeast organisms. The Company has continued to successfully build
recognition and market penetration of its recently approved E.P.A. antimicrobial
product line.
BSTI is currently engaged in sale, distribution, and development of
antimicrobial, biostatic, and medical related products for the industrial and
institutional, and Specialty Chemical markets.
Through November 2001, the Company owned 52% of Healthcare Network
Solutions, Inc ("HNS"). During December 2001, 3,646,579 of HNS shares owned by
the Company (approximating 28.7% of all the then issued and outstanding shares
of HNS) were spun-off to the Company's shareholders on a one for ten basis with
the Company retaining 4,453,421 shares (approximately 24.6% of the currently
issued and outstanding shares of HNS)(See note 2).
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Nine Months Ended March 31, 2002 compared to nine months ended March 31, 2001
The Company's revenue increased to $1,955,201 for the nine months ended
March 31, 2002, from $965,551 for the nine months ended March 31, 2001, and
increase of 102%. The increase was attributable to an increase in the
distribution and licensing of the Company's core antimicrobial product line.
Approximately 67% of our revenues were derived from two customers, one of which
is located in the Peoples Republic of China. Gross profit of $1,684,201 for the
nine months ended March 31, 2002 represents 86% of net sales as compared to
$415,180 or 43% of net sales for the nine months ended March 31, 2001. The
increase in gross margin is due to a restructuring of the way in which we sell
our products, changing to a licensing and distribution model and selling to
large multi-national corporations. During the first and third quarters of fiscal
2002, under the Company's restructuring, certain of the Company's customers
began purchasing high levels of the Company's antimicrobial products.
Marketing and selling expenses decreased to $141,439 for the nine
months ended March 31, 2002 from $1,107,780 for the nine months ended March 31,
2001. The decrease was attributable to a change in the way in which we sell our
products, changing to a licensing and distribution model. Currently, we are not
selling our product directly to retail establishments and are selling the
product through distributors.
General and administrative expenses amounted to $3,659,807 for the nine
months ended March 31, 2002 as compared to $3,639,925 for the nine months ended
March 31, 2001. Overall, we had a small increase in costs related primarily to
an increase in non-cash compensation and consulting fees of $1,815,920 as
compared to $1,032,416 for the nine months ended March 31, 2001, an increase of
$783,504, which was attributable to the granted of stock options and the
immediate issuance of common stock to employees, directors and consultants. This
increase was offset by a decrease in personnel and personnel related cost as
part of the Company's restructuring. Accordingly, salaries and payroll taxes
decreased to approximately $559,000 for the nine months ended March 31, 2002
from approximately $697,000 for the three months ended March 31, 2001.
Additionally, the Company experienced decreased personnel related costs such as
employee benefits and 401K expense due to the decrease in staff. Other expenses
such as telephone, rent, and office expenses decreased due to cost-cutting
measures.
The Company's research and development expenses decreased to $3,954 for
the nine months ended March 31, 2002 from $377,287 for the nine months ended
March 31, 2001. The decrease in expenses related primarily to (i) the
restructuring of the Company in December 2000, (ii) to lower formulation
development costs of the Company's antimicrobial products and other products
under development, (iii) a reduction in development cost paid to outside
parties, and (iv) the completion of a majority of the Company's initial EPA
approvals.
Interest expense was $902,753 for the nine months ended March 31, 2002
as compared to $0 for the nine months ended March 31, 2001. Interest expense in
fiscal 2002 is primarily attributable to the amortization of beneficial interest
associated with a loan as well as additional interest costs associated with our
borrowings.
12
For the nine months ended March 31, 2002 we recognized a gain from the
spin-off of our equity-method investee of $25,660 as compared to a loss from
discontinued operations for the nine months ended March 31, 2001 of $7,639,731,
which was attributable to our EMD subsidiary.
As a result of the reasons set forth above, the Company's operations
generated a net loss of $3,077,092 or $(.09) per common share for the nine month
period ending March 31, 2002 compared to a net loss of $13,791,473 or $(1.03)
per common share for the nine month period ended March 31, 2001.
LIQUIDITY
At March 31, 2002, the Company had cash totaling $9,181 compared to
$384,605 at June 30, 2001. The decrease in cash of $375,424 is primarily due to
net losses of $3,077,092 and increases in our accounts receivable balance of
$1,195,227 offset by non-cash compensation of $2,209,566 and amortization of
deferred financing costs of $734,732. Additionally, we borrowed net funds of
$1,010,016 under a line of credit.
The Company's primary source of cash included, but was not limited to
borrowings on the Company's existing equity line and funds raised from a private
placement. The Company has elected not to put additional common stock to its
existing $10,000,000 equity line as not to create any more undo pressure on its
existing share price. Additionally, the Company entered into a credit agreement
to borrow up to $1,000,000 under a line of credit. We cannot assure you that we
will be able to obtain additional capital from this or other investors. Our
inability to successfully renegotiate these agreements could cause the company
to dramatically curtail or cease operations.
The Company's ability to fund its operating requirements and maintain
an adequate level of working capital until it achieves positive cash flow will
depend primarily on its ability to borrow money against its accounts receivable.
The Company's failure to generate substantial growth in sales and/or of its
antimicrobial products; progress in research and development programs; the cost
and timing of seeking regulatory approvals of the Company's products under
development; the Company's ability to manufacture products at an economically
feasible cost; cost in filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights and changes in economic,
regulatory, or competitive conditions or the Company's planned business could
cause the Company to require additional capital, and substantially delay or
reduce the scope of business. In the event the Company must raise additional
capital to fund its working capital needs, it may seek to raise such capital
through loans or issuance of debt securities, issuance of equity securities, or
through private placements. Moreover, there can be no assurance that the Company
will be successful in its efforts to obtain additional capital, and that capital
will be available on terms acceptable to the Company or on terms that will not
significantly dilute the interests of existing shareholders.
FORWARD-LOOKING STATEMENTS
When used in this form 10-KSB, the words or phrases "will likely
result", "are expected to," "will continue," "is anticipated," "estimate,"
"project," or similar expressions are intended to identify "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such Forward- looking statements, which speak only as to
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements. The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
13
PART II
OTHER INFORMATION
Items 1. Legal Proceedings
On September 7, 2000, AHT Corporation ("AHT") filed suit against the
Company and certain of its officers and directors in the Superior Court of
Fulton County, Georgia (the "Georgia Action") alleging breach of a June 30, 2000
acquisition agreement and related common laws claims and seeking damages in
excess of $70,000,000. On September 21, 2000, the Company filed its Answer and
Counterclaim. On September 22, 2000, AHT filed, in the U.S. Bankruptcy Court for
the Southern District of New York, a petition for relief under Chapter 11 of the
Federal Bankruptcy Code. Following the filing of its Chapter 11 petition, AHT
filed a motion seeking approval of an asset purchase agreement dated as of
September 22, 2000 (the "APA"), which provided, for the sale of substantially
all of AHT's assets to the Company and AHT Acquisition Corp. for approximately
$15,000,000. Pursuant to a Debtor in Possession ('DIP") Financing, Escrow and
Settlement Agreement dated as of September 22, 2000, which was approved by the
Bankruptcy Court, the Company agreed to provide approximately $1.5 million in
postpetition financing to AHT. That agreement also provided for the dismissal of
the Georgia Action with prejudice, subject to certain conditions contained
therein. At September 30, 2000, AHT had requested and received $378,338 from the
Company under the DIP financing arrangement. Subsequent to September 30, 2000,
AHT had requested and received an additional $1,121,662 under the DIP financing
agreement.
The Bankruptcy Court had initially scheduled a hearing to approve the
APA for November 8, 2000. However, due to the decline in the Company's stock
price, in early November, the Company notified AHT that it would need additional
time beyond November 8, 2000 to obtain sufficient capital to acquire AHT's
assets. The Bankruptcy Court did not approve the APA on November 8, 2000.
Rather, on November 21, 2000, the Bankruptcy Court approved the sale of
substantially all of AHT's assets to Cybear, Inc.
On November 28, 2000, AHT Acquisition Corp. commenced a new lawsuit (in
its Bankruptcy case) against the Company, as well as the other defendants in the
Georgia Action. The prepetition claims asserted and relief sought in that action
are essentially the same as the claims and relief sought in the Georgia Action.
The lawsuit in the bankruptcy case also alleges breach of the APA and seeks
damages related to the APA, and to equitably subordinate the Company's $1.5
million claim against AHT relating to the postpetition advances made by the
Company to AHT under the DIP Financing, Escrow and Settlement Agreement. On
February 9, 2001, the Company filed an answer and counterclaim and intends to
vigorously defend the action. Motions to dismiss the action and/or abstain from
hearing the action have been denied and the parties were engaged in discovery
proceedings under Bankruptcy Order. In April 2002, the Company files a judgment
motion to dismiss this case and is currently awaiting a response.
In the matter entitled Edward U. Miller v. BioShield Technologies,
Inc., Superior Court of Gwinnett County, Georgia, Civil Action No. 01-A-0096103,
a former COO of the Company ("plaintiff") has brought action against the Company
alleging breach of the plaintiff's employment agreement by the Company and
claims that he is entitled to severance pay in the amount of approximately
$80,000 following his termination on December 5, 2000. On December 21, 2001, the
Company granted 175,000 stock options and immediately exercised the options,
issuing 175,000 shares of common stock as partial settlement of this matter.
Additionally, on February 1, 2002, the Company granted 110,000 stock options and
immediately exercised the options, issuing 110,000 shares of common stock as
final settlement of this matter.
In the matter entitled Douglas Calvert v. BioShield Technologies, Inc.,
Superior Court of Gwinnett County, Georgia, Civil Action No. 01-A-102272-4, a
former employee of the Company ("plaintiff") has brought action against the
Company alleging breach of employment contract. The plaintiff claims that the
Company wrongfully refused to pay him severance pay of $28,558 following his
termination on December 5, 2000. The Company has admitted that severance pay is
due and owing and this amount has been recorded as an accrued expense with a
balance approximating $15,000 being serviced.
In the matter entitled Bioshield, Inc. v. BioShield Technologies, Inc.,
United States District Court, Eastern District, Michigan, Civil Action No.
00-CV-10181-BC, a Michigan corporation has brought a trademark violation suit
against the Company, which claims superior right to the use of the "Bioshield"
name and claims damages in an amount not less than $75,000. The Company denies
the claims and has filed a counterclaim for damages for infringement upon the
Company's intellectual property. The Company intends to vigorously defend the
action.
14
In the matter of Duke Construction Limited Partnership v. Bioshield
Technologies, Inc., American Arbitration Association Arbitration No.
30-110-00023-01, Superior Court of Gwinnett County, Civil Action No.
01-A-7161-5, Duke Construction received its arbitration award in the amount of
$219,000 on June 8, 2001. On July 18, 2001, Duke Construction filed a complaint
in the Superior Court of Gwinnett County seeking confirmation of the award. The
Company is contesting approximately $5,000 of interest, which was included in
the award. Settlement negotiations regarding the payment of this judgment are
ongoing. The Company entered into a settlement agreement and made a down payment
of $25,000 in January 2002 and is obligated to pay $7,500 per month until the
debt is extinguished.
In the matters of Jamestown Management Corp. v. Bioshield Technologies,
Inc., Mountain National Bank (garnishee) and Summit Marketing Group, Inc. v.
Bioshield Technologies, Inc., Mountain National Bank (garnishee), Jamestown
received condemned funds as a result of the garnishment it filed in DeKalb
County, as well as the garnishment filed by Summit in Gwinnett County with a
principal amount of $78,699 remained outstanding on this judgment as of August
15, 200l.
Summit was involved in two garnishment actions, one filed in DeKalb
County by Jamestown and the other filed in Gwinnett County by Summit. Summit
received a total of $29,201 under the garnishments and has indicated that
$36,000 remained outstanding on Summit's judgment, including interest as of
August 15, 2001.
Item 2. Changes in securities and Use of Proceeds
On December 21, 2001, we held our Annual Meeting of Stockholders for
fiscal year ended June 30, 2001. With proxies being received for in excess of
87% of all shares entitled to vote, stockholders elected to adopt the Company's
2002 Stock Option Plan and to increase authorized common shares from 50,000,000
to 100,000,000.
During the three months ended March 31, 2002, we issued 1,460,752 share
of common stock in connection with a prior securities purchase agreement which
allows the holder of EMD (the Company's inactive subsidiary) common stock to
exchange their shares for BSTI common stock at a predetermined exchange rate.
In January 2002, we issued 2,000,000 shares of common stock in
connection with the conversion of its Series B convertible preferred stock.
During January 2002, we granted and immediately exercised stock options
for 1,850,000 shares of common stock to employees and directors for services
rendered and to be rendered in the future.
During January 2002, we granted and immediately exercised stock options
for 2,850,000 shares of common stock to consultants for services rendered and to
be rendered in the future.
During January 2002, we granted and immediately exercised stock options
for 396,882 shares of common stock to an attorney for services rendered.
In January 2002, we issued 250,000 shares of common stock to a third
party as a sales commission.
During February 2002, we granted and immediately exercised stock
options for 3,000,000 shares of common stock to an officer of the Company or his
assignees for debt of $143,750, for services rendered during the three months
ended March 31, 2002 of $93,750, and for services to be rendered in the future
of $542,500.
During February 2002, we granted and immediately exercised stock
options for 175,000 shares of common stock to consultants for services rendered.
During February 2002, we granted and immediately exercised stock
options for 300,000 shares of common stock to an attorney for services rendered.
On February 1, 2002, we granted 110,000 stock options and immediately
exercised the options, issuing 110,000 shares of common stock as settlement for
a matter involving the former COO of the Company ("plaintiff") who has brought
action against the Company alleging breach of the plaintiff's employment
agreement by the Company and claims that he is entitled to severance.
On March 6, 2002, we filed a new Form S-8 Registration Statement to
register an additional 7,000,000 shares of the Company's common stock, which
increased the number of options available for issuance from 7,000,000 to
14,000,000. In all other respects the Plan and Prospectus are substantially
identical to those previously filed on December 28, 2001.
15
On March 1, 2002 (the "Effective Date"), a consulting agreement (the
"Agreement") was entered into between the Company and Mirman Capital Ventures,
Inc. (the "Consultant"). The Agreement terminates on February 28, 2007. During
the term of the agreement, the Consultant will provide the Company with regular
and customary non-exclusive advice, which includes investor and public
relations, acquisitions, corporate financial and equity analysis, and other
corporate matters. As compensation for services rendered, the Company granted to
the Consultant a warrant to purchase up to 10,000,000 shares in the aggregate of
common stock of the Company.
Item 3. Defaults upon Senior Securities
- NONE -
Item 4. Submission of Matters to a Vote of Security Holders
- NONE -
Item 5. Other Information
- NONE -
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - NONE -
(b) Reports on Form 8-K - NONE -
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.
Date: May 15, 2002 /s/ Timothy C. Moses
-------------------------
Name: Timothy C. Moses
Title: President and Chief Executive Officer
16