<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
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FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS UNDER
SECTION 12 (b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
KINeSYS PHARMACEUTICALS, INC.
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(Name of Small Business Issuer in its Charter)
Nevada 98-0210050
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3771 Jacombs Road, Unit 415
Richmond, B.C., Canada V6V 2L9 N/A
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (604) 279-0363
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
N/A N/A
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.00001 par value per share
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(Title of Class)
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KINeSYS PHARMACEUTICAL, INC.
AMENDMENT NO. 1 TO
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FORM 10-SB
TABLE OF CONTENTS
PART I
Item 1. Description of Business
Item 2. Management's Discussion and Analysis
Item 3. Description of Property
Item 4. Security Ownership of Certain Beneficial Owners and Management
Item 5. Directors, Executive Officers, Promoters and Control Persons
Item 6. Executive Compensation
Item 7. Certain Relationships and Related Transactions
Item 8. Description of Securities
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity
and other Shareholder Matters
Item 2. Legal Proceedings
Item 3. Changes in and Disagreements with Accountants
Item 4. Recent Sales of Unregistered Securities
Item 5. Indemnification of Directors and Officers
PART F/S
Financial Statements
PART III
Item 1. Index to Exhibits
Item 2. Description of Exhibits
STATISTICAL INFORMATION RELATING TO THE SKIN CARE INDUSTRY INCLUDED IN
THIS REGISTRATION STATEMENT IS DERIVED BY THE COMPANY FROM RECOGNIZED INDUSTRY
REPORT REGULARLY PUBLISHED BY INDUSTRY ASSOCIATION AND INDEPENDENT CONSULTING
AND DATA COMPILATION ORGANIZATIONS IN THESE INDUSTRIES, INCLUDING A.C. NEILSON
CO.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW OF BUSINESS
(1) Principal products and their markets
KINeSYS Pharmaceuticals, Inc. ("Kinesys," "Company" or "Issuer") is
engaged in the design, development, and marketing of a complete line of body and
skin care products designed specifically for athletes and active individuals.
KINeSYS' products are currently divided into three functional product lines: sun
care, treatment and daily use products. Each product is designed specifically to
meet the requirements of professional athletes and active, health conscious
individuals. KINeSYS contracts the manufacturing of its products to several
pharmaceutical manufacturers located in both British Columbia and Ontario,
Canada. KINeSYS products are distributed for sale to customers in Canada and the
United States.
KINESYS' PRODUCTS
Kinesys' product line includes the following products, organized into
three functional lines: sun care products, treatment products, and daily use
products.
SUN CARE PRODUCT LINE
- - Quick Dry Sprays. KINeSYS' line of sunscreen sprays protect the skin
effectively with hands-free application and without any greasy residue. The
complete line of sunscreen sprays with SPF factors of 8, 15, and 30 are all
PABA-free, alcohol-free, and oil-free, and are water, sweat and sand
resistant. They are designed to protect all skin types from the sun's
damaging UVA and UVB rays.
- - Protective Creams. The KINeSYS SPF 30 cream is recognized by the Canadian
Melanoma Foundation for containing the physical sun block titanium dioxide,
resulting in superior protection for sensitive skin.
- - Sun Stick. The KINeSYS SPF 30 Sun Protection Stick is specially formulated
with titanium dioxide for protection of sensitive lips, nose and ears.
- - Insect Repellent. The KINeSYS SPF 15 with Insect Repellent offers all the
benefits of the quick spray sunscreen products with the added feature of a
safe and effective insect repellent. With its the hands-free application it
is popular with outdoor sporting and recreation enthusiasts.
TREATMENT PRODUCT LINE
- - Muscle Balm Analgesic Stick. This product uses a clean-hands mode of
application to deliver a pain relieving and inflammation reducing balm. The
muscle balm contains a higher concentration of rapidly absorbed active
ingredients compared to the majority of other products of its kind on the
non-prescription market.
- - Athletic Foot Spray. The KINeSYS Foot Spray is a fast drying non-aerosol
spray that prevents and treats minor fungal and bacterial infections while
at the same time controlling foot odor.
- - First Aid Treatment / After-Sun Soothing Spray. This spray contains a local
anesthetic to soothe dry, chapped, wind and sunburned skin and to relieve
the pain and/or itching associated with minor burns, scrapes, and
non-poisonous insect bites. It has a pleasant fragrance and a non-oily aloe
vera base and is
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applied via a non-aerosol pump.
DAILY USE PRODUCT LINE
- - Daily Moisturizer. The KINeSYS Daily Moisturizer is an oil-free moisturizer
that also contains a SPF 6 level sunscreen to provide light protection from
ultra-violet radiation. It absorbs quickly, is non-greasy, non-comedogenic
and is fragrance free.
- - Sport Body Wash. The KINeSYS Sport Body Wash is a non-soap preparation that
controls body odor and prevents infection with the inclusion of Triclosan,
an anti-bacterial ingredient.
- - Shampoos. The KINeSYS Sport Shampoo with conditioner is designed to control
residue build up from swimming pools, salt water, and heavily mineralized
tap water. The shampoo restores moisture lost through exposure to the
elements such as the sun, salt water, chlorine, wind and blow-drying. Its
special 2 in 1 formula with a built in conditioner is pH balanced and is
gentle enough to use every day without losing its effectiveness. It also
prevents hair discoloration that is commonly associated with chlorine and
exposure to the elements.
The KINeSYS Vigor Shampoo acts as a natural medicated shampoo that is
perfect for the active individual who suffers from a dry itchy scalp and
dandruff. Its active ingredients are eucalyptus, which refreshes,
invigorates, and stimulates the scalp, and tea tree oil, which soothes and
heals an irritated scalp.
RESEARCH AND DEVELOPMENT
Kinesys develops its products through the collaborative efforts of
contract chemists, a Scientific Advisory Board comprised of Kinesys consultants,
and Kinesys' own employees. The Scientific Advisory Board provides critical
guidance and technical expertise in the area of research and development,
resulting in products that are comprised of novel and high quality ingredients
that meet and exceed the demands of athletes and active individuals. Each member
of the Advisory Board contributes a unique area of expertise to Kinesys' product
development, product evaluation, formulation optimization and quality control.
(2) Distribution methods of the products
Retail stores have traditionally been the primary distribution channels
for all Kinesys products. The three main areas of retail distribution include
pharmacies, supermarkets and mass merchandisers. Access to all three of these
distribution systems is through distributors, agents and/or brokers. The Company
generally works with distributors who purchase the product and marketing tools
on a thirty-day term and resell the product to their accounts. In this
relationship, the distributor assumes responsibility for product sales,
promotion, marketing and managing their own receivables, thereby allowing
Kinesys to simplify the administrative workload that accompanies expansion. The
Company is presently working with agents in a focused market area of western
Canada and the western United States. The agent/broker represents Kinesys
products in concert with other products they represent and are paid by the
Company a commission on the wholesale value of the products being distributed.
In 1998, Kinesys products were represented in over 2,000 retail
locations, up from 128 in 1997. Important accounts in Canada in 1998 included
Shoppers Drug Mart, London Drugs, Pharmasave and Pharma Plus. In the United
States, the Company was able to secure distribution with Rite Aid (formerly
Thrifty - Payless Drugs).
The secondary distribution channels for Kinesys products have been
through sporting goods stores, specialty stores, and golf courses. These
distribution channels have proven to be effective in establishing the Kinesys
brand within its target market. The Company has numerous contracts with agents
and distributors in these areas, including AMER Sports Canada Inc. with 27 sales
representatives across Canada representing
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the Kinesys product in golf clubhouses and sporting goods stores. In 1998,
these efforts resulted in Kinesys being distributed in over 400 locations, up
from 200 in 1997.
A third distribution channel for Kinesys products is direct marketing.
The Company has had some success over the past year in marketing its products
directly in specialty markets such as golf tournaments, hotel mini bars, cruise
lines and corporate accounts.
The Company's final distribution channel is direct marketing through
the Company's toll free telephone number from its website. The Company believes
that this is an important and developing distribution channel and will be
increasing its efforts to facilitate more sales through the Internet.
(3) New products
Kinesys intends to pursue the development of proprietary products
specifically for its target market. Kinesys has several additional product
concepts that are in the research stage and that are expected to extend the
Kinesys product family. In particular, Kinesys plans to introduce a children's
line of sun care products in the first calendar quarter of 2000. These products
will be based on existing Kinesys products and will be sold in distinctive
packaging designed exclusively for the children's market. A second area of
development involves the potential use of collagen in sun care products. This
product line is in the research and development stage and will require further
research before products containing collagen will come to market. Critical
research has not yet been done, and there can be no guaranty that economically
viable products will emerge from this process. Additional product concepts will
only be introduced to the Kinesys product line when it is economically feasible
to do so.
(4) Competitive business conditions and the small business issuer's competitive
position in the industry and methods of competition
COMPETITORS
The sun care category is represented by relatively few dominant
multinational companies, balanced by smaller, niche focused companies. The
industry is still developing as the public continues to become more aware of the
dangers of excessive sun.
The specific industry leaders and their percentage of market share are:
<TABLE>
<S> <C>
Schering Plough (Coppertone) 32.3%
Playtex (Banana Boat) 19.0%
Neutrogena 8.7%
Hawaiian Tropic 7.9%
Private Label 7.3%
No-Ad 5.3%
Bain De Soleil 4.7%
Panama Jack 1.3%
Australian Gold 1.2%
All Others combined 12.5%
</TABLE>
SOURCE: AC NEILSON CO.
In the other two Kinesys product categories, treatment products and
daily use products, there are a significant number of industry participants and
niche categories. For example, in the external analgesic market there over 300
separate items on the shelves across North America (Source: Drug Store News:
July 6, 1998). None of the competitors feature a muscle balm stick form of
application combined with the
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concentration of active ingredients that Kinesys has. Specific competitors to
the Kinesys Analgesic Muscle Balm product include Flex-All, Tiger Balm and
Myoflex.
Kinesys will compete with other market participants by publicizing
the unique properties of its products, by building brand loyalty through
creative product positioning, and by establishing marketing alliances that
will ensure focused penetration into target markets.
INTELLECTUAL PROPERTY PROTECTION.
The Company acquired its product formulas on a contract basis from
an independent chemist. The Company owns these formulas and does not pay
royalties to the developer. At the present time the Company and its
predecessors have relied upon the secret and proprietary nature of the
formulas to protect its products from the competition. It may in the future
file, but at this time has not filed, for copyrights in the U.S. and Canada
as well as other countries. The Company has no plans to seek patent
protection for its formulations. The Company believes that any legal
protection cannot prevent competitors from entering the market for skin care
products similar to those developed by Kinesys.
The Company relies on trade secrets and proprietary know-how which
it seeks to protect, in part, through appropriate confidentiality and
proprietary information agreements. These agreements generally provide that
all confidential information developed or made known to the individual by the
Company during the course of the individual's relationship with the Company
is not to be disclosed to third parties, except in specific circumstances,
and that all inventions conceived by the individual in the course of
rendering services to the Company shall be the Company's exclusive property.
There can be no assurance that confidentiality or proprietary information
agreements will not be breached, that remedies for any breach would be
adequate, or that the Company's trade secrets will not otherwise become known
to, or independently developed by, competitors.
(5) Sources and availability of raw materials and the names of principal
suppliers
The Company purchases the raw materials for its products primarily from
a chemical broker, Van Waters & Rogers, which has offices globally. If Van
Waters & Rogers ceased to supply products to the Company, the Company believes
that other suppliers would be readily available. In some instances, the Company
purchases these materials directly, while in other instances, the contract
pharmaceutical manufacturer purchases materials on behalf of the Company. The
Company owns the molds for production of its packaging and contracts the
production of bottles from two companies, Polybottle and Richards Packaging,
Inc. The caps or closures are purchased from either Seaquist Canada, Ltd., or
McKernans. Present active contract pharmaceutical manufacturers include Biotech
and Contract Pharmaceuticals Ltd.
(6) Dependence on one or a few major customers
The Company is not reliant on any particular relationship or avenue of
distribution for its sales. Although the Company typically does business only
with a few distributors at a time, it does not consider these relationships to
be unique or proprietary. The Company made an unusually large sale in 1998 that
was not duplicated in 1999; such sales, though important, are not relied upon
exclusively. The Company has approximately 1,000 customers, certain of whom have
the potential to grow into significant channels for distribution of the
Company's products. No single customer or distribution channel is critical to
the Company's potential success.
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(7) Patents, trademarks, licenses, franchises, concessions, royalty
agreements or labor contracts, including duration.
The Company claims no patents, licenses, franchises, or concessions. It
has no labor contracts. Kinesys Canada has entered into a royalty agreement
dated December 17, 1996, with Douglas E. and Ed Ford covering revenues from
North American operations. This agreement was entered into in connection with
the sale of the Company on December 17, 1996 from Green River Petroleum Inc.
back to its founders, Jeff and Jocelyn Kletter. Royalties will be payable by the
Company under this agreement when its annual gross revenues exceed CDN$1
million. The agreement will expire upon payment of an aggregate royalty of
CDN$1,250,000 (if before October 1, 2001) or CDN$1,500,000 (if thereafter).
Kinesys protects its name through trademark registrations of the
Kinesys name and logo in Canada and the United States, the countries where it
presently does business. In addition, the trademark of "Kinesys" is presently
registered in New Zealand, Australia, the European Union, England, Malaysia,
Singapore, Philippines and Thailand for use with cosmoceutical sports
medicine products. The Company is presently pursuing trademark registration
in Japan.
(8) Need for any government approval of principal products or services
and effect of existing or probable governmental regulations on the business.
Skin care products require governmental approval in most countries
where the Company sells or expects to sell its products. The Kinesys products
that require registration with the Food and Drug Administration (FDA) in the
United States and the Health Protection Branch (HPB) in Canada have been
registered. In addition, Kinesys SPF 15 with Insect Repellant has been
registered with the Canadian Pest Control Management Regulatory Agency.
Necessary registrations are being pursued in Japan.
Although Kinesys believes it has received all regulatory approvals
required to operate its business to date, regulations may change, resulting
in unexpected costs and uncertainty. Kinesys may not be able to comply with
the applicable requirements and necessary approvals may not be granted. We
cannot predict the extent and impact of future governmental regulations. If
we fail to comply with the applicable regulatory requirements, we may be
subject to fines, injunctions, civil penalties, recall or product seizure,
among other penalties.
(9) Estimate of amount spent during each of the last two fiscal
years on research and development activities, and the cost thereof borne
directly by customers.
During the last two years the Company has engaged in limited
research and development activities, focusing its energy instead on sales and
marketing of previously-developed products. The Company estimates that is
spent approximately $25,000 prior to 1998 on its research and development
efforts, and it expects to spend between $50,000 and $100,000 in 1999. These
costs are not expected to be borne directly by customers but rather will be
funded out of the Company's working capital.
(10) Number of total employees and number of full time employees.
The Company currently has 2 full time employees and regularly
employs 3 independent contractors. The Company also employs approximately 8
contractors on a seasonal basis in order to enable it to meet summer
production, sales and marketing demands.
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COMPANY HISTORY
Kinesys was incorporated in Nevada on February 17, 1998 under the name
of Goldsearch Corporation. On May 4, 1999, Goldsearch Corporation merged with
Kinesys Pharmaceutical Inc. ("Kinesys Canada"), a Canadian corporation. In
connection with the merger, 3,052,021 Goldsearch shares were issued to the
former holders of Kinesys Canada stock. Immediately following the merger, the
business of Kinesys Canada became the business of Goldsearch, and the former
Kinesys Canada shareholders controlled approximately 39% of the outstanding
Goldsearch voting equity. Goldsearch filed its Certificate of Amendment of
Articles of Incorporation on March 29, 1999 to change the company's name to
Kinesys Pharmaceuticals, Inc. Kinesys Canada survived the merger as a
wholly-owned subsidiary of the Company.
Kinesys Canada was incorporated in British Columbia, Canada, in
December of 1993 under the name "Motion Pharmaceutical Inc." The Kinesys name
was adopted in early 1994 as the company worked to develop a line of muscle balm
and skin care products for athletes. Kinesys Canada launched its first products
at the XV Commonwealth Games in Victoria, British Columbia in August of 1994.
In April of 1995, Kinesys Canada listed its shares on the Alberta Stock
Exchange after raising CDN$920,000 in a private equity offering. The company was
subsequently returned to private control in September of 1996 when its founders
purchased a majority of the outstanding publicly-held equity. At that time, the
company was burdened with over CDN$350,000 of liabilities and was unable to meet
the demands of its creditors.
On February 19, 1997, the company filed a proposal to its creditors as
an Insolvent Person under the Canadian Bankruptcy and Insolvency Act. Pursuant
to this plan, creditors would receive $0.50 per dollar of outstanding debt. The
proposal was declared by the trustee in bankruptcy to have been fully performed
on December 30, 1998 and the company is no longer subject to bankruptcy
protection.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
Kinesys supplies innovative high-performance skin care products to
professional and recreational athletes. By focusing on its current business
strategy, the Company intends to solidify its market position in Canada and to
expand to other geographical markets in the United States, overseas and via the
company's website on the Internet.
Founded in 1993, the Company spent its early years developing formulas,
establishing markets for its sunscreen and related products and creating brand
awareness. It has traditionally achieved most of its sales in Canada, with
occasional sales and product interest in the United States. It now intends to
focus on the United States market for its next phase of growth. Management
recognizes that directing the Company's efforts to expand into new geographical
markets will have a negative short-term impact on revenue, but believes it is
warranted by the potential long-term opportunity of selling its primary sun care
products in markets which are not as subject to the seasonal variations found in
Canada.
On May 4, 1999, Goldsearch Corporation, a Nevada corporation, merged
(the "Merger") with Kinesys Canada. On May 4, 1999, Goldsearch issued 3,052,021
shares of its Common Stock to the holders of Kinesys Canada's issued and
outstanding shares of common stock in exchange for 100% of the issued and
outstanding common stock of Kinesys Canada. Prior to the Merger, Goldsearch had
focused its operations in the area of mineral exploration and had only nominal
assets and liabilities. After the merger, former Kinesys Canada stockholders
owned approximately 39% of the issued and outstanding Common Stock of the
Company. The merger has been accounted for using the purchase method of
accounting with Kinesys Canada considered to be the predecessor business. This
treatment is appropriate because the preexisting shareholders of Goldsearch
Corporation, after the Merger, retain the power to elect the Board of Directors
and to replace management. Present management is acceptable to the majority of
shareholders but could be
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replaced at the discretion of the Board of Directors at any time. No voting
agreement or other private contractual arrangement constrains the ability of
the majority of shareholders to exercise their right under Nevada law to
control the Company. Currently-outstanding warrants will, when exercised,
result in even more voting power being vested in the hands of the former
Goldsearch shareholders.
Following the Merger, the business conducted by the Company is the
business conducted by Kinesys Canada prior to the Merger with the additional
focus of growth opportunities in the U.S., overseas, and on the Internet. In
conjunction with the Merger, the Company changed its name to "Kinesys
Pharmaceuticals, Inc." The Company's shares continue to be traded on the Over
the Counter Bulletin Board operated by the National Association of Securities
Dealers, Inc. under the symbol "KNES."
In view of the evolving nature of its business and its limited
operating history, the Company has limited experience forecasting its revenues.
Therefore, the Company believes that period-to-period comparisons of financial
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. To date, the Company has incurred substantial
costs to develop its product line, establish brand recognition and secure sales
and distribution channels. The Company will continue to incur costs to develop
new products, develop new customers, build brand awareness and grow the
business. These costs may not correspond with any meaningful increases in
revenues in the near term.
RESULTS OF OPERATIONS
The results of operations compares financial results of Kinesys Canada,
the predecessor as the historical operations of the Registrant have been
discontinued. Previously, the Registrant was engaged in the mineral exploration
and development business and had incurred expenditures in this regard of
$147,265 for the period from incorporation (February 7, 1998) to January 31,
1999. No revenues were recognized from this business activity.
Quarter Ended September 30, 1999 Compared To Quarter Ended September 30, 1998
The results set forth below compare the September 30, 1999 operating
results of the combined acquisition corporation and Kinesys Canada with that of
the September 30, 1998 operating results of the predecessor company.
Sales for the quarter-ended September 30, 1999 of $47,875 compare to
sales of $949 for the quarter ended September 30, 1998. In this quarter in 1998,
the predecessor company was coming out of bankruptcy protection and focusing on
developing its long-term business objectives. It was not focusing on sales and
did not have the resources to do so at this stage of its development. The
September 30, 1999 results include an approximate $25,000 sale of consulting
services which result in the gross margin showing a higher than usual ratio to
sales.
Advertising and promotion expenses increased substantially by $110,125
over September 30, 1998 to $129,037 in September 30, 1999. This was a result of
the company increasing its marketing efforts in conjunction with its expanded
sales and marketing plans. For the same reasons, trade shows expenses increased
by $21,028 from September 1998 levels to $33,785.
Amortization of goodwill of $36,586 is a new expense in September 30,
1999 reflecting the amortization of the goodwill arising on the acquisition of
the predecessor over a 5 year period. Depreciation of fixed assets has decreased
because of the declining balance method of depreciation used and the fact that
there has not been significant new purchases of capital assets in the past year.
Bank charges and interest totaled $1,167 in the quarter-ended September
30, 1999 down by $12,132 from the September 1998 quarter. The company has been
able to manage its cash flow requirements effectively this quarter which has
minimized interest costs.
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Consulting fees and salaries combined were $62,710 in September 1999
versus $44,187 in September 1998. The increase represents additional staff and
contract staff in place in September 1999 in order to fulfill management
responsibilities in accordance the demands of the new business plans.
Professional fees expenses increased substantially from $2,664 in
September 1998 to $23,047 in September 1999. This increase was caused primarily
by the Company's efforts to prepare for the filing of this registration
statement.
Six Months Ended June 30, 1999 Compared To Six Months Ended June 30, 1998
Revenue
Sales of $127,649 and $621,735 for the six months ended June 30, 1999
and 1998 respectively, were derived primarily from the sale of the Company's
sunscreen products. For the six months ended June 30, 1998, approximately 60% of
the Company's revenue was derived from sales in the United States, while 40% was
derived from sales in Canada. Of those sales, 90% was attributable to sun care
products and the balance was attributable to treatment and daily use products.
During the six months ended June 30, 1999, the Company devoted most of
its efforts to consolidation, refining its business plan and refocusing of the
Company's operations. During this period, the Company only actively solicited
sales in British Columbia, the Company's head office location. As a result,
sales declined substantially. Management believes that this decision will have
long term benefits in the form of improved operations, systems and focused
marketing as the company begins to implement its plan to expand its geographic
and demographic markets.
The Company hopes to derive future revenue from increased sales in the
United States, predominantly in the western and southern states as well as an
increasing sales component from the company's website. The Company's business
model is based on building brand recognition through association with sports
teams, high-profile athletes, grassroots athletic events and other more
traditional forms of advertising.
Operating expenses
The Company's operating expenses consist of sales and marketing and
general and administrative expenses. Operating expenses were $237,142 and
$505,034 for the six months ended June 30, 1999 and 1998, respectively.
Advertising and promotion expense for the six months ended June 30,
1999 of $67,931 decreased $127,503 or 65% from the comparable period in 1998.
Sales commissions for the six months ended June 30, 1999 of $3,431 decreased
$70,379 or 95%. Interest expense for the six months ended June 30, 1999 of
$2,144 decreased $25,707 or 92%. Professional fees paid to the Company's
accountants, attorneys and computer consultants for the six months ended June
30, 1999 of $28,860 increased $18,071 or 268% from the comparable period in
1998. Salaries and benefits for these periods were $25,534 and $56,214,
respectively. Expenses for participation in trade shows were $6,367 for the six
months ended June 30, 1999 and $21,551 for the comparable period in 1998.
Finally, travel expenses for the 6 months ended June 30 1999 were $10,887 while
the comparable period in 1998 was $18,457.
The trend toward decreased expenses is accounted for by decreased
expenditures for sales commissions and related advertising and promotional
giveaways. The sales and marketing expenses incurred in 1999 consist primarily
of salaries related to developing business arrangements with prospective
partners, establishing a more dynamic Internet presence, creating awareness of
existing and new services and costs of communicating to the industry and
potential consumers.
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Most of the decline in general and administrative expense is attributable to
a decrease in costs associated with sales, such as decreased fees and travel
costs for participation in trade shows. The company incurred increased
professional fees during 1999 as it prepared to become a reporting company
under the Securities Exchange Act of 1934.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenue
Sales of $622,930 and $167,170 for the years ended December 31, 1998
and 1997 respectively, were derived primarily from the sale of the Company's
sunscreen products. During 1997, the Company's attentions were primarily
focussed on its creditor protection proceedings, with this process carrying over
into 1998. During 1997 the Company was unable to focus its full attention on
sales or marketing and sales accordingly suffered. As the Company emerged from
creditor protection in 1998, it was able to begin to refocus its efforts on its
business plan and sales improved substantially. However, as pointed out in the
discussion of Revenue above the Company still lacked the proper systems and
operations to properly manage the increased sales. Management expects sales to
continue to improve in 1999 and 2000 as the Company continues on its present
course of focused sales with proper operational systems.
During 1998, the Company was successful in soliciting sales in the
United States. One such sale in particular accounted for 59% of the Company's
1998 sales. Management intends to pursue similar types of transactions with U.S.
customers in the latter half of 1999 and beyond, but cannot guarantee that its
efforts will be successful. Any failure to secure sizeable sales accounts in the
U.S. will constrain the Company's ability to meet its goals.
Future revenue will be derived increasingly from sales in the United
States, predominantly in the western and southern states, overseas and via the
company's website. The Company's business model is based on building brand
recognition through association with sports teams, high-profile athletes,
grassroots athletic events and through other traditional forms of advertising.
Included among approximately 40 such associations are the Company's involvement
with the Canadian National Alpine Ski Team, the Canadian National Men's Field
Hockey Team, triathlete Scott Tinley, Olympian Charmaine Crooks, professional
golfer Richard Zokol, the Vancouver Grizzlies NBA Tip-Off and Grizzlies
Foundation, the Whistler Tennis Open, and the Mountain Express Run for Leukemia.
Operating expenses
The Company's operating expenses consist of sales and marketing and
general and administrative expenses. Operating expenses were $988,616 and
$505,279 for the years ended December 31, 1998 and 1997, respectively.
Advertising and promotion expense for the year ended December 31, 1998
of $237,431 increased $99,452 or 72% from the comparable period in 1997. Sales
commissions for the year ended December 31, 1998 of $73,398 increased $54,806 or
395% as compared with the previous year. Interest expense for the year ended
December 31, 1998 of $28,380 increased from nil in the comparable period of
1997. Professional fees paid to the Company's accountants, attorneys and
computer consultants for the year ended December 31, 1998 of $38,668 increased
$9,083 or 31% from the comparable period in 1997. Salaries and benefits for
these periods were $107,194 and $118,298, respectively. Expenses for
participation in trade shows were $33,938 for the year ended December 31, 1998
and $18,970 for the comparable period in 1997. Finally, travel expenses for the
year ended December 31, 1998 were $38,609 while the comparable figure for 1997
was $25,966.
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The marked increase in these numbers (particularly advertising,
promotion and commissions) for the year ended December 31, 1998 represents the
increased cost of promotional giveaways and an increase in commissions paid on
the large sale into the U.S. discussed above.
A large expense in 1998 was attributable to the recognition of an employee
benefit relating to the grant of stock options to employees and directors in
1998 totaling $257,269.
Extraordinary Item
The Company reported a gain on debt restructuring of $59,203 and
$179,816 for the years ended December 31, 1998 and 1997, respectively. These
amounts were accounted for in connection with the Company's settlement with
unsecured creditors and are not expected to occur again in the future.
As the Company expands its business in 1999 and beyond, its research
and development, sales and marketing, website development and general and
administrative expenses will increase. Research and development expenses will
increase as the Company adds products to its line. Sales and marketing expenses
will increase as the Company participates in trade shows and similar events in
order to build business relationships, sell product and build brand awareness.
Internet costs will increase as the Company continues to develop its website and
advertise it on the Internet and related media. In addition, advertising and
public relations expenses will increase as the Company invests to grow its
business. General and administrative expenses will increase as the Company
continues to build its management infrastructure, including additional personnel
as needed, office space and internal information systems.
INTERNAL AND EXTERNAL SOURCES OF LIQUIDITY
The Company's primary source of liquidity is its potential to raise
additional cash through operations and the exercise of stock options held by
certain investors. The Company raised approximately $400,000 upon exercise of
options to purchase 533,333 shares of Common Stock on May 30, 1999. The Company
has additional outstanding options to purchase 400,000 Common shares at an
exercise price of $1.00 per share and options to purchase 320,000 Common shares
at an exercise price of $1.25 per share. These options are held by an unrelated
third party and should be distinguished from options granted under our 1999
Stock Option Plan. Holders of these options are not required to exercise them,
and if they do not exercise, there will be no cash proceeds to the Company.
The Company's auditors, BDO Dunwoody LLP, have deemed that continuation
of the Company as a "going concern," as defined by U.S. generally accepted
accounting principles, is dependent upon the Company obtaining additional
working capital. The Company is taking steps to raise additional capital, as its
current cash reserves and proceeds from the additional options when exercised
over the next three months are expected to allow the company to become
self-sufficient at annual sales levels of $2,000,000. The Company intends to
conduct private placement sales of its equity securities if and when its cash
reserves are depleted or sales increase above $2,000,000. There can be no
assurance that any shares of Common Stock of the Company can or will be sold or
that other sources of loans or funds will be available to the Company if and
when needed. The failure of the Company to obtain adequate additional capital
may require the Company to postpone some or all of the expansion of its proposed
business operations and, potentially, to cease its operations. Any additional
equity financings may involve substantial dilution to the Company's
then-existing shareholders.
-12-
<PAGE>
RECENT TRANSACTION
The Company has recently entered into a one-year agreement with Venture
Catalyst.com, a division of Inland Entertainment Corporation ("Venture
Catalyst"). Pursuant to this agreement, Venture Catalyst will provide general
consulting, investor relations, and financial communication services to the
Company. The Company has also agreed to lease office space from Venture Catalyst
in San Diego, California. This arrangement is expected to permit the Company to
more effectively distribute and sell its products in the United States.
INDUSTRY BACKGROUND AND TRENDS.
The primary target market for Kinesys products is the active and health
conscious individual in the 18-45 age category. This demographic represents the
stage during which brand loyalty is being formed. Typically the primary Kinesys
consumer is educated, sophisticated, upper income and living in an urban
environment. The secondary target market is the competitive and professional
athlete who demands a product that will meet the rigors of his or her sport.
Word of mouth referral from the primary market, supported by endorsements of
competitive and professional athletes and highlighted by strategic advertising
results in a large tertiary target market, the general public.
The skin care market in the US is valued excess of $8 billion and is
growing at a rate of 7% per year while in Canada a similar growth rate is
occurring in a market of over $615 million. The skin care product segment is
expected to remain buoyant as consumers desire to look and feel younger, even as
the North American population gets older. By 2010 the United States population
in the 45-64 age bracket will have increased by 70% to represent 27% of the
population, in contrast to the 1990 census numbers. By establishing brand
loyalty now, Kinesys hopes to enjoy the benefit of this segment of the
population utilizing more skin care products in the future. Equally important is
that the 18-45 age brackets, Kinesys' present target market, will continue to
represent approximately 40% of the population, up marginally by 3% over the same
20 year period.
The incidence of sunburn in the general population has increased 9%
over the past ten years and general skin cancer rates are increasing due to
overexposure to sun and burns from as far back as 25 years ago. As a result, the
sun care segment of the skin care market was worth over $467 million in 1997,
and sales are projected to increase at 12% per year to reach $758 million by
2000. In 1997, sales of sun care products primarily occurred in pharmacies
($158.1 million, or 45% of distribution), mass merchandisers ($160 million, or
29% of distribution), and food stores ($99.2 million, or 24% of distribution).
The sport segment represents 8.7% of the total sun care industry and Kinesys is
currently the only sun care company dedicated to the sport sun care segment in
North America.
Kinesys' Muscle Balm Analgesic Stick is positioned in one of the
fastest growing segments of pharmacy sales--external analgesics. In 1998 the
external analgesic market was valued at US$220 million and is projected to
double to US$440 million by the year 2001 in order to serve an aging but
still-active and fitness-oriented consumer. Sales distribution is 53% in
pharmacies, 26% in mass merchandisers and 20% in food chains.
INVESTMENT CONSIDERATIONS
Investment in the shares of our common stock involves a high degree of
risk. Investors should carefully consider the risks described below, together
with all of the other information included in this registration statement,
before making an investment decision. If any of the following risks actually
occurs, our business, financial condition or operating results could be
materially adversely affected. In such case, the trading price of our common
stock could decline, and investors may lose all or part of their investment.
-13-
<PAGE>
NEED FOR ADDITIONAL FINANCING
During the next 12 months, the Company's foreseeable cash requirements
will be met by a combination of existing cash, revenue generated by the
Company's sales, and additional equity financing. The Company is currently
devoting substantial resources to the development of its products and to the
establishment of sales and distribution relationships. Substantial additional
capital may be required in the future to fund product development and product
launch cycles. No assurance can be given that additional financing will be
available or that, if available, such financing will be obtainable on terms
favorable to the Company or its shareholders. If needed capital is unavailable,
the Company's ability to continue in business will be jeopardized. To the extent
the Company raises additional capital by issuing equity or securities
convertible into equity, ownership dilution to the Company's shareholders will
result.
HISTORY OF LOSSES AND NEGATIVE CASH FLOW; ANTICIPATED CONTINUED LOSSES.
Since the Company's inception, it has incurred significant losses and
negative cash flow, and as of September 30, 1999, it had an accumulated deficit
of approximately $670,399. The Company has not achieved profitability and it
expects to continue to incur operating losses for the foreseeable future as it
funds operating and capital expenditures in areas such as establishment and
expansion of markets, advertising, brand promotion, sales and marketing, and
operating infrastructure. The Company cannot assure investors that it will ever
achieve or sustain profitability or that its operating losses will not increase
in the future.
COMPETITION.
The market for sunscreen and other skin care products is highly
competitive. The competition for the Company's products comes largely from
large, well-established multinational companies with longer operating histories,
greater name recognition, larger retail bases and significantly greater
financial, technical, and marketing resources than the Company. Competition from
these sources could materially adversely affect the Company's business,
operating results or financial condition. Competitive factors in the athletic
skin care market include innovative products, product quality, marketing and
distribution resources and price. While the Company believes that it has the
experience and ability to compete within its identified market, there can be no
assurance that the Company will be able to compete successfully against current
or future competitors.
RELIANCE ON KEY INDIVIDUALS; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL.
The Company is dependent upon the active participation of several key
management personnel, including Jonathan Mara, Chief Executive Officer, Jeffrey
Kletter, President, and Jocelyn Kletter, Vice President. Mr. Mara provides
services on a full-time contract basis, and this arrangement will be subject to
periodic renegotiations or renewal. The Company does not currently maintain key
employee insurance policies. Additionally, the Company will likely need to
recruit qualified personnel in order to expand according to its business plan.
Although the Company is committed to offering competitive salaries, stock
options, benefits and an appealing work environment, there can be no assurance
that Kinesys will be able to attract such persons or retain any of its key
personnel. The failure to attract and retain key personnel could have a material
adverse effect on the Company's viability.
-14-
<PAGE>
PRODUCT LIABILITY
The Company's business exposes it to potential product liability claims
which are inherent in the manufacture and sale of skin care products. Although
no such claim has been brought against the Company to date, and to the knowledge
of the Company no such claim is threatened or likely, the Company may face
liability to product users for damages resulting from the faulty design or
manufacture of products. Although the Company maintains product liability
insurance coverage, there can be no assurance that product liability claims will
not exceed coverage limits or that such insurance will continue to be available
at commercially reasonable rates, if at all. Consequently, a product liability
claim or other claim in excess of insured liabilities or with respect to
uninsured liabilities could have a material adverse effect on the Company.
DEPENDENCE ON NEW MARKETS
The Company's future growth, if any, depends in part on its ability to
penetrate new markets. There can be no assurance that Kinesys will be successful
in locating or penetrating any new markets for its products.
HIGH COST OF INVENTORY
Due to the nature of the Company's business, the Company is required to
invest a significant portion of its capital in building and maintaining
inventory. There can be no assurance that inventory held by the Company will not
become unsalable or diminish in value prior to sale. A significant decline in
the value or usability of inventory could have a significant adverse affect on
the Company's financial position.
LIMITED LIQUIDITY AND RESTRICTED TRANSFERABILITY
An investment in the Company involves limited liquidity. There is
currently only a limited public market for the Company's Common Stock, and no
assurance can be given that a broader public market will develop. An investment
in the Company is suitable only for sophisticated investors who have no need to
have ready access to the capital that they commit to the Company. Potential
investors must view an investment in the Company as a long-term commitment.
RISKS OF LOW-PRICED STOCKS; PENNY STOCK REGULATIONS.
The Company's Common Stock is traded over-the-counter on NASD'S
"Electronic Bulletin Board." As such, the Company's Common Stock is subject to
Rule 15g-9 under the Exchange Act, which imposes certain sales practice
requirements on broker-dealers that sell such securities to persons other than
established customers and institutional accredited investors. For transactions
covered by this rule, a broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. Consequently, the rule may affect the
ability of broker-dealers to sell the Company's Common Stock and may affect the
ability of purchasers to sell any of the Common Stock acquired in the secondary
market.
PAST BANKRUPTCY
The Company emerged from creditor protection under the laws of Canada
on December 30, 1998. Although management believes that the financial conditions
that led to the Company's bankruptcy will not recur, there can be no assurance
that the Company will never again seek legal protection from its creditors. The
Company's history with bankruptcy may make merchants or other commercial parties
unwilling to extend credit to the Company. If creditors and investors perceive
the Company to be at risk of insolvency, it would have an adverse impact on the
company's operating performance.
-15-
<PAGE>
SHARE PRICE VOLATILITY.
The trading price of the Common Stock could be subject to wide
fluctuations in response to quarter to quarter variations in operating results,
changes in earnings estimates by analysts, announcements of technological
innovations or new products by the Company or its competitors, general
conditions in the personal products industries and other events or factors. In
addition, in recent years the stock market in general has experienced extreme
price fluctuations. This volatility has had a substantial effect on the market
price of securities issued by many companies for reasons unrelated to the
operating performance of the specific companies. These broad market fluctuations
may adversely affect the market price of the Common Stock. To date, the
Company's Common Stock has not traded in sufficient volumes, or for a sufficient
length of time, to produce any meaningful evidence of correlation between its
price and general market volatility.
PRODUCT RECALLS.
Products subject to governmental regulatory approval, such as the
Company's products, can experience performance problems in the field that
require review and possible corrective action by the manufacturer. The Company
has on at least one occasion been required to recall a substantial amount of one
of its products due to a labeling error. Similar product problems in the future
could result in market withdrawals or recalls of products, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
YEAR 2000 COMPLIANCE
The Company is only moderately dependent on computer software programs
and operating systems in its internal operations, but it relies upon third party
vendors whose operations may be seriously affected by computer failures. The use
of computer programs that rely on two-digit date programs to perform
computations and decision-making functions may cause computer systems to
malfunction in the year 2000 and lead to significant business delays and
disruptions. While the Company believes that the software applications that it
uses or has developed are year 2000 compliant, to the extent that any of these
software applications contain source code that is unable to appropriately
interpret the upcoming calendar year 2000, some level of modification or
possible replacement of such source code or applications will be necessary. The
Company is currently unable to predict the extent to which the year 2000 issue
will affect its customers or strategic partners, or the extent to which it would
be vulnerable to any failure by the customers or strategic partners to remedy
any year 2000 issues on a timely basis. The failure of a customer or strategic
partner subject to the year 2000 issues to convert its systems on a timely basis
or a conversion that is incompatible with the Company's systems could have a
material adverse effect on the Company's business, financial condition and
results of operations.
FORWARD-LOOKING STATEMENTS
Certain items contained in this document, including ITEM 2 and the
prior section, ITEM 1, are "forward looking" in that they discuss the Company's
expectations, beliefs, intentions or strategies regarding future business
operations and projected earnings from its products and services, which are
subject to many risks.
All forward-looking statements included in this document
are based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements. The
Company's actual results may differ materially as a result of certain factors,
including those set forth under the caption "Investment Considerations" and
elsewhere in this Form 10-SB. Potential investors should consider carefully the
previously stated factors, as well as the more detailed information contained
elsewhere in this Form 10-SB, before making a decision to invest in the common
stock of the Company.
-16-
<PAGE>
ITEM 3. DESCRIPTION OF PROPERTY
Principal Property
The Company's headquarters are located in an office/warehouse facility
of approximately 3,000 square feet at Unit 415 - 3771 Jacombs Road, Richmond,
B.C., Canada V6V 2L9. The present facilities lease expired in mid-1998 and the
Company is presently on a month to month contract. The property is leased from
an unaffiliated third party for a monthly rental of CDN$2,310. The Company
maintains tenant fire and casualty insurance on its property located in such
building in an amount deemed adequate by the Company.
The Company has recently agreed to sublease approximately 300 square
feet of office space from Island Entertainment Corporation in San Diego,
California for a one-year period beginning in November of 1999. The address of
this office is 16868 Via Del Campo Court, Suite #200, San Diego, CA 92127. Rent
of US$2,000 is payable monthly. The Company will maintain tenant fire and
casualty insurance on its property located in such building in an amount deemed
adequate by the Company.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security ownership of certain beneficial owners
The following table sets forth information with respect to each person
known by the Company to own beneficially more than 5% of the Company's
outstanding common stock, and the beneficial ownership of each officer and
director, and all directors and executive officers as a group.
<TABLE>
<CAPTION>
- ------------------------------------------- ----------------------------------- -------------------
Name and address of Amount and nature
beneficial owner of beneficial owner Percent of class
<S> <C> <C>
- ------------------------------------------- ----------------------------------- -------------------
Jonathan Mara 615,795 (note 1) 7.3%
- ------------------------------------------- ----------------------------------- -------------------
Jeff Kletter 606,074 (note 2) 7.2%
- ------------------------------------------- ----------------------------------- -------------------
Jocelyn Kletter 602,741 (note 3) 7.2%
- ------------------------------------------- ----------------------------------- -------------------
Roberts & Scott Financial Inc. 440,000 (note 4) 5.3%
- ------------------------------------------- ----------------------------------- -------------------
Bullock & Bryson Financial Inc. 435,000 (note 5) 5.2%
- ------------------------------------------- ----------------------------------- -------------------
Smucker & Ogden Inc. 400,000 (note 6) 4.8%
- ------------------------------------------- ----------------------------------- -------------------
Friedman Capital Ltd. 395,000 (note 7) 4.7%
- ------------------------------------------- ----------------------------------- -------------------
Dr. Doug Clement 16,000 (note 8) 0.2%
- ------------------------------------------- ----------------------------------- -------------------
Dr. Don Rix 47,704 (note 9) 0.6%
- ------------------------------------------- ----------------------------------- -------------------
All directors and executive officers as a
group (5 persons) 1,888,314 22.5%
- ------------------------------------------- ----------------------------------- -------------------
</TABLE>
Note 1. Mr. Mara serves the Company on a contract basis through his wholly-owned
company, Guardian Angel Investments Ltd. and holds his options through this
entity. Guardian Angel Investments Ltd. has also been granted options to
purchase 200,000 shares of common stock over a three-year period with 1/3
vesting per year.
Note 2. Mr. Kletter has been granted options to purchase 200,000 shares of
common stock over a three-year period with 1/3 vesting per year.
-17-
<PAGE>
Note 3. Ms. Kletter has been granted options to purchase 200,000 shares of
common stock over a three-year period with 1/3 vesting per year.
Note 4. Roberts & Scott Financial Inc. is beneficially owned by Derrick Huggins.
Note 5. Bullock & Bryson Financial Inc. is beneficially owned by Andrew Titley.
Note 6. Smucker & Ogden Inc. is beneficially owned by G. Donna Hector.
Note 7. Friedman Capital Ltd. is beneficially owned by Julie Mills.
Note 8. Dr. Clement has been granted options to purchase 30,000 shares of common
stock over a one-year period with vesting based on participation in Board of
Directors and Scientific Advisory Board meetings.
Note 9. Dr. Rix has been granted options to purchase 30,000 shares of common
stock over a one-year period with vesting based on participation in Board of
Directors meetings.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and executive officers of the Company and their respective
ages are as follows:
<TABLE>
<CAPTION>
Name Age Position
- --------------------------------------------------------------------------------
<S> <C> <C>
Jonathan Mara 39 Chief Executive Officer
Jeffrey Kletter 37 President and Director
Jocelyn Kletter 30 Vice President
Dr. Don Rix 68 Chairman and Director
Dr. Douglas B. Clement 65 Director
</TABLE>
All directors hold office until the next annual meeting of
stockholders and/or until their successors have been duly elected and
qualified. There are no agreements with respect to the election of directors.
On June 28, 1999, Dr. Rix was granted options to purchase 3,750 common shares
and Dr. Clement was granted options to purchase 2,500 common shares per board
meeting attended over a twelve-month period, at an exercise price of $1 per
share. Aside from expenses to attend the Board of Directors meetings and the
option grants to Drs. Rix and Clement, the Company has not compensated its
directors for service on the Board of Directors or any committee thereof.
Officers are appointed annually by the Board of Directors and each executive
officer serves at the discretion of the Board of Directors. Jeff Kletter and
Jocelyn Kletter are married; there are no other family relationships between
any of the directors and executive officers. The Company does not have any
standing committees at this time.
Dr. Don Rix, age 68, has been Chairman of the Board of Directors of Kinesys
since 1996. A pathologist, Dr. Rix serves as chairman and director of MDS
Metro Laboratory Services and CanTest Ltd. Dr.Rix brings to the Board a
wealth of information and experience in the management of high growth
companies in the industrial, scientific, and medical areas. Dr. Rix serves as
a director on the boards of Immune Network Research and Chai-Na-Ta Corp.
Dr. Rix is involved as a present Director of the Vancouver Opera, a Member of
the Benefactors Committee and past Board Member of the Vancouver Art Gallery
and the Medical Director for the Air Canada Open.
Dr. Douglas Clement, age 65, has been a director of Kinesys since its
formation in 1993. Dr. Clement has, for the past five years, been co-director
of the Allan McGavin Sports Medicine Centre and a professor of medicine at
the University of British Columbia. He conducts research, teaches, and
practices in the field of sports medicine. Dr. Clement has been a member of
the Canadian Olympic Association Board of Directors from 1985 to 1993 and is
the team physician for the Vancouver Canucks in the National Hockey League.
Dr. Clement has been honored with a number of academic and professional
awards, including: Coach of the Year (Sport BC), Order of Canada Medal,
Fellowship of the American College of Sports Medicine, the Vanier Award, and
the Sports Medicine Council of Canada Lifetime Achievement Award.
Jonathan Mara, age 39, has been Chief Executive Officer of Kinesys since
August 4, 1998, providing full-time service on a contract basis with his
wholly-owned company, Guardian Angel Investments Ltd. From
-18-
<PAGE>
July of 1997 through August of 1998, Mr. Mara was C.E.O. of Guardian Angel
Investments Ltd., through which he provided consulting services to various
businesses. Prior to his consulting position at Guardian, he founded Vantage
Securities Inc., an investment services firm, and was for approximately nine
years its President and C.E.O. Mr. Mara was successful in growing Vantage
Securities to annual sales of $275 million with all of the necessary systems
in place to facilitate electronic ordering, compliance, accounting,
administration, human resources, business development, corporate finance,
sales management and marketing. Mr. Mara's focus at Kinesys is to administer
the Company's finances, manufacturing, and operations in a controlled,
systematized basis to allow the Company to grow profitably at a manageable
high rate of growth. Mr. Mara has a Bachelor of Science degree in Kinesiology
and is active in cycling, basketball, skiing and coaching youth basketball.
Jeff Kletter, age 37, co-founded the company in 1993 and has been its
President and a director since that time. Mr. Kletter has overseen the growth
of the Company, formulated its marketing, philosophy, promotion, brand equity
development and financing activities until the addition of Mr. Mara.
Mr. Kletter now focuses on brand equity and business and product development.
Before founding Kinesys, Mr. Kletter developed an extensive background in
marketing, sales and general management. Mr. Kletter is an active individual
whose favorite sporting activities include skiing, golf, squash and general
fitness.
Jocelyn Kletter, age 30, co-founded the company and has been its Vice
President since that time. Ms. Kletter has overseen the development of
product specifications, product compliance with regulatory requirements,
implementation of financial systems, control mechanisms and sales and
marketing. Ms. Kletter is currently employed by the Company. From January 1,
1999 through October 31, 1999 she served the Company full-time on a contract
basis through her wholly owned company, Brand Equity Ltd. Prior to January 1,
1999, Ms. Kletter was a full-time employee of the Company. She focuses on
brand equity, product distribution, sales and marketing. Prior to Kinesys,
Ms. Kletter operated her own personal fitness training company in conjunction
with teaching physical education at a British Columbia private school.
Ms. Kletter also developed valuable sales and marketing experience as a
Promotional Coordinator for Estee Lauder. Ms. Kletter actively participates
in skiing, running and general fitness.
ITEM 6. EXECUTIVE COMPENSATION
The Summary Compensation Table shows certain compensation information
for the Chief Executive Officer. Compensation data for other executive officers
is not presented in the graphs because aggregate annual compensation for such
officers does not exceed $100,000. This information includes the dollar value of
base salaries, bonus awards, the number of SARs/options granted, and certain
other compensation, if any, whether paid or deferred.
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate compensation paid by
the Company to its Chief Executive Officer for services rendered during the
periods indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
-------------------------------------------------------------------
Awards
Other Annual -------------------------------------- All other
Compensation compensation
Name and Year (1) Salary Restricted Securities Underlying
Principal Stock Awards Options/SARs
Position
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jonathan 1999-T CDN$25,000 $0 0 200,000 Shares 0
Mara, CEO 1998 CDN$19,800 0 0 0 0
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The results reported in the "Summary Compensation Table" for the period
designated "1998-T" are for the six-month period ended June 30, 1999, and
results for the period designated "1998" are for the year ended December 31,
1998.
-19-
<PAGE>
Option Grants In the Last Fiscal Year
The following table summarizes all stock options granted to the
Company's Chief Executive Officer for the transition period from January 31,
1999 to June 30, 1999. There were no grants to the named executive in the
fiscal year ended January 31, 1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Name Number of Percent of total Exercise or base price Expiration date
securities options/SARs granted ($/Sh)
underlying to employees in 1998
Options/SARs
granted(#)(1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jonathan 200,000- 32.13% $1.00 6/28/09
Mara
- ------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) The estimated fair market value of the common stock on June 28, 1999 (grant
date) was $1.00, as determined by the Board of Directors.
Aggregate Option Exercises and Option Values
The following table sets forth information with respect to the named
executive officer concerning option exercises for the fiscal year ended June 30,
1999 and exercisable and unexercisable options held as of June 30, 1999. The
named executive officer did not hold options during the fiscal year ended
January 31, 1999.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options at 6/30/99 Money Options at 6/30/98
# of Shares
- -----------------------------------------------------------------------------------------------------------------
Name Shares Value Exercisable Unexercisable Exercisable Unexercisable
Acquired on Realized
Exercise
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Jonathan Mara -- -- -- 200,000 -- --
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions during the last two years involving any Director or
Executive Officer of the Company:
Jonathan Mara, Chief Executive Officer of the Company, provides full
time services to the Company on a contract basis through Guardian Angel
Investments, Inc., a company controlled by Mr. Mara. Guardian Angel is paid
$5,000 per month for services rendered.
Jocelyn Kletter, Vice President of the Company, provided full-time
consulting services to the Company on a contract basis from January 1, 1999
through October 31, 1999 through her company, Brand Equity Ltd. Brand
Equity Ltd. was paid approximately $60,000 per year for services rendered.
For the four years prior to the implementation of this consulting
relationship and following its termination, Ms. Kletter was and is an
employee of the Company and Kinesys Canada.
-20-
<PAGE>
ITEM 8. DESCRIPTION OF SECURITIES
The Company is authorized to issue two classes of shares, Common
Stock and Preferred Stock. The total number of shares of Common Stock the
Company is authorized to issue is 100,000,000 shares with a par value of
$0.00001 each, of which 8,380,897 shares were issued and outstanding as of
September 30, 1999. The total number of shares of Preferred Stock the Company
is authorized to issue is 100,000,000 shares with a par value of $0.00001
each, of which none are issued and outstanding. Should the Company, in the
future, deem it necessary or appropriate to issue Preferred Stock, the Board
of Directors has the authority, under the Articles of Incorporation, to
establish different series of any class of preferred stock and to determine
the relative rights, preferences, privileges and limitations of each such
series.
The holders of the Common Stock are entitled to one vote per share
of Common Stock in the election of directors and in each other matter coming
before any vote of shareholders. Neither the Company's Articles of
Incorporation nor its Bylaws provide for dividend, voting, or preemption
rights. There are no provisions that would delay, defer, or prevent a change
in control of the Company.
On June 28, 1999, the Company adopted the 1999 Stock Option Plan,
setting aside 900,000 Common Shares for issuance thereunder. As of July 6,
1999, the Company has granted to its employees, directors and consultants
options exercisable for Company Common Stock. The exercise price for all
grants to date is $1 per share; the exercise price of future grants will
depend upon the market price of the Company's Common Stock on the grant date,
among other factors.
There are currently 8,380,897 shares of Company common stock issued
and outstanding, which includes 6,187,635 shares designated as "free trading"
and 2,193,262 shares that are classified as "restricted securities." Of these
"restricted securities," none have satisfied the one-year holding period of
Rule 144.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
(a) Market information.
The Company's common stock is traded over-the-counter on NASD'S Over
the Counter Bulletin Board ("OTCBB") under the symbol "KNES". Quotations
commenced in October of 1998.
The price range of high and low bid for the Company's common stock
for the periods shown is set forth below. The quotations reflect inter-dealer
prices, without retail mark-ups, mark-downs or commissions, and may not
represent actual transactions.
<TABLE>
<CAPTION>
Period (1) High Low
---------- ---- ---
<S> <C> <C>
Q4 - 98 0.26 0.15
Q1 - 99 0.21875 0.15
Q2 - 99* 1.3125 0.8125
Q3 - 99 1.75 0.53125
</TABLE>
(1) Calendar quarters.
*On May 4,1999, the Company changed its trading symbol from GDCT (Goldsearch)
to KNES (Kinesys)
-21-
<PAGE>
(b) Stockholders.
As of June 21, 1999 there were approximately 113 shareholders of
record of Kinesys Common Stock. No shares of preferred stock have been issued.
(c) Dividends.
The Company has never declared a cash dividend. Nevada law limits
the Company's ability to pay dividends on its common stock if any such
dividend would render the Company insolvent.
ITEM 2. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On March 29, 1999, the Company sold 4,525,000 shares of common stock
pursuant to Rule 504 to the following investors for an aggregate purchase
price of $45,250: Aronson & Aaronson, Inc. (440,000 shares); Bright Outlook
Consultants Ltd. (256,250 shares); Bullock & Bryson Financial, Inc. (435,000
shares); Bullock Investments, Inc. (440,000 shares); Carter & Associates
Financial, Ltd. (390,000 shares); Carter Capital Partners, Ltd. (400,000
shares); Dobbins & Dotenhoff, Ltd. (410,000 shares); Friedman Capital, Ltd.
(395,000 shares); Rock Capital Corp. (260,000 shares); Roberts & Scott
Financial, Inc. (440,000 shares); Smucker & Ogden, Inc. (400,000 shares);
Sprott Capital SA (233,750 shares); and Quest Enterprises Ltd. (25,000
shares). This sale of stock is pursuant to an investment by the listed
parties in the Company before its merger with Kinesys Pharmaceutical Inc. The
per share purchase price was fixed by the Board of Directors in its
reasonable discretion.
On May 3, 1999, the Company sold 3,092,021 shares of its common
stock pursuant to an exemption from registration under Section 4(2) of the
Securities Act of 1933, for an aggregate purchase price of $152,601.05.
These shares were issued to all of the former shareholders of Kinesys
Pharmaceutical Inc. Significant purchasers include Jeff Kletter (606,074
shares), Josie Kletter (602,741 shares), Jonathan Mara (through Guardian
Angel Investments Ltd., 614,795 shares), Yong Thai Public Co. Ltd. (325,000
shares, and Catherine Fletcher (in trust, 100,000 shares). Consideration for
this sale of stock consisted entirely of shares of Kinesys Pharmaceutical Inc.
stock at a value per share fixed by agreement between the Company and the
purchasers, and approved by the Company's Board of Directors.
Approximately $400,000 was raised upon exercise of options to
purchase 533,333 shares of Common Stock on May 30,1999.
In August of 1999, 564,000 shares of Common Stock were issued to
three providers of advertising and promotional services in partial
consideration for services rendered. The shares were exempt from registration
under Section 4(2) of the Securities Act of 1933. The Company expects to
enter into similar arrangements in the future.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation and Bylaws authorize the
Company to indemnify its directors and officers. The Company currently does
not maintain any liability insurance for its directors and officers but is
currently seeking quotes for such coverage.
-22-
<PAGE>
Section 78.7502 of the Nevada Revised Statutes ("NRS") authorizes a
Nevada corporation to indemnify any director, officer, employee, or corporate
agent "who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, except an action by or in the
right of the corporation" due to his or her corporate role. Section 78.7502
extends this protection "against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with the action, suit or proceeding if
he acted in good faith and in a manner which he or she reasonably believed to
be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful."
Section 78.7502 of the NRS also authorizes indemnification of the
reasonable defense or settlement expenses of a corporate director, officer,
employee or agent who is sued, or is threatened with a suit, by or in the
right of the corporation. The party must have been acting in good faith and
with the reasonable belief that his or her actions were not opposed to the
corporation's best interests. Unless the court rules that the party is
reasonably entitled to indemnification, the party seeking indemnification
must not have been found liable to the corporation. To the extent that a
corporate director, officer, employee, or agent is successful on the merits
or otherwise in defending any action or proceeding referred to in
Section 78.7502, Section 78.7502(3) of the NRS requires that he be
indemnified "against expenses, including attorneys' fees, actually and
reasonably incurred by him or her in connection with the defense."
Section 78.751(1) of the NRS limits discretionary indemnification
under Section 78.751(1) and 78.751(2) to situations in which either (a) the
stockholders, (b) the majority of a disinterested quorum of directors, or
(c) independent legal counsel determine that indemnification is proper under
the circumstances. Pursuant to Section 78.751(2) of the NRS, the corporation
may advance an officer's or director's expenses incurred in defending any
action or proceeding upon receipt of an undertaking. Section 78.751(3)(a)
provides that the rights to indemnification and advancement of expenses shall
not be deemed exclusive of any other rights under any by-law, agreement,
stockholder vote or vote of disinterested directors. Section 78.751(3)(b)
extends the rights to indemnification and advancement of expenses to former
directors, officers, employees and agents, as well as their heirs, executors
and administrators. Regardless of whether a director, officer, employee or
agent has the right to indemnity, Section 78.752 allows the corporation to
purchase and maintain insurance on his behalf against liability resulting
from his or her corporate role.
-23-
<PAGE>
PART F/S
Financial Statement and Supplementary Data.
The Company is the acquisition corporation and continuing company
while its subsidiary is the predecessor company. The Company has presented
results and balances for both the acquisition corporation (on a consolidated
basis where appropriate) and the predecessor company in the same financial
statements. Distinction is made through the use of a perpendicular thick
black line with the acquisition corporation information generally to the left
of this line and the predecessor company information generally to the right
of this line. Columnar headings also disclose the information related to the
predecessor.
The Company's audited consolidated financial statements for the
five-month period ended June 30, 1999 and the financial statements of the
predecessor company for the period January 1, 1999 to May 4, 1999 and for the
year ended December 31, 1998 have been examined to the extent indicated in
the report by BDO Dunwoody LLP, and have been prepared in accordance with
generally accepted accounting principles of the United States and pursuant to
the Regulation S-B as promulgated by the Securities and Exchange Commission.
Financial statements of the Company for the year ended January 31, 1999 were
audited by Williams & Webster P.S.
Audited financial statements for the predecessor company are not
available for years prior to 1998; financial statements for 1997 are included
in unaudited form only. Financial statements for the predecessor for the
6 month periods ended June 30, 1999 and 1998 are also included in unaudited
form only.
The Company's quarterly financial results and position for the
quarters ended September 30, 1999 and 1998 have been included in audited
form. The September 30, 1998 information represents the results and balances
of the predecessor company.
(a) Audited Financial Statements for Kinesys Pharmaceuticals, Inc.
Auditors' Report.
Comments by Auditors for US Readers on Canada-US Reporting Differences.
Acquisition Corporation and Subsidiary Financial Statements
Balance Sheets.
Statements of Operations.
Statement of Stockholders' Equity.
Statements of Cash Flows.
Summary of Significant Accounting Policies
Notes to Financial Statements.
-24-
<PAGE>
(b) Pro Forma Financial Statements
-25-
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY
FINANCIAL STATEMENTS
JUNE 30, 1999 AND COMPARATIVE PERIODS WITH
QUARTERLY INFORMATION TO SEPTEMBER 30, 1999
(EXPRESSED IN US DOLLARS)
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY
FINANCIAL STATEMENTS
JUNE 30, 1999 AND COMPARATIVE PERIODS WITH
QUARTERLY INFORMATION TO
SEPTEMBER 30, 1999
(EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
CONTENTS
- -------------------------------------------------------------------------------------------------
<S> <C>
AUDITORS' REPORT F-2
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA -
U.S. REPORTING DIFFERENCES F-3
SUCCESSOR COMPANY AND PREDECESSOR COMPANY FINANCIAL STATEMENTS
Balance Sheets F-4
Statements of Operations F-5 - F-6
Statements of Stockholders' Equity - Successor Company F-7 - F-8
Statements of Stockholders' Equity - Predecessor Company F-9
Statements of Cash Flows F-10 - F-11
Summary of Significant Accounting Policies F-12 - F-15
Notes to the Financial Statements F-16 - F-24
</TABLE>
F-1
<PAGE>
AUDITORS' REPORT
TO THE STOCKHOLDERS OF
KINESYS PHARMACEUTICALS, INC.
We have audited the Balance Sheet of KINeSYS Pharmaceuticals, Inc. (successor
company) as at June 30, 1999 and the Statements of Operations, Stockholders'
Equity and Cash Flows for the five-month period then ended. We have also audited
the Balance Sheets of KINeSYS Pharmaceutical Inc. (predecessor company) as at
May 4, 1999 and December 31, 1998 and the Statements of Operations,
Stockholders' Equity and Cash Flows for the period January 1, 1999 to May 4,
1999 and the year ended December 31, 1998. These financial statements are the
responsibility of the successor 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 auditing standards generally accepted
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the successor company as at June 30, 1999
and the results of its operations and its cash flows for the five-month period
then ended and the financial position of the predecessor company as at May 4,
1999 and December 31, 1998 and the results of its operations and its cash flows
for the period January 1, 1999 to May 4, 1999 and the year ended December 31,
1998 in accordance with accounting principles generally accepted in the United
States.
As discussed in Note 2 to the financial statements, the successor company
purchased the shares of the predecessor company on May 4, 1999, in a business
combination accounted for as a purchase. As a result, the consolidated financial
statements of the successor company are presented on a new basis of accounting
from the predecessor company and therefore, are not comparable.
CHARTERED ACCOUNTANTS
Vancouver, Canada
July 23, 1999
F-2
<PAGE>
COMMENTS BY AUDITORS FOR U.S. READERS
ON CANADA-U.S. REPORTING DIFFERENCES
TO THE STOCKHOLDERS OF
KINESYS PHARMACEUTICALS, INC.
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
Note 1 to the financial statements. Our report to the stockholders dated July
23, 1999 is expressed in accordance with Canadian reporting standards which do
not permit a reference to such events and conditions in the auditors' report
when these are adequately disclosed in the financial statements.
CHARTERED ACCOUNTANTS
Vancouver, Canada
July 23, 1999
F-3
<PAGE>
<TABLE>
<CAPTION>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - BALANCE SHEETS
(EXPRESSED IN US DOLLARS)
SEPTEMBER 30 JUNE 30 January 31
1999 1999 1999
(CONSOLIDATED) (CONSOLIDATED)
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT
Cash $ - $ 109,481 $ 69
Accounts receivable, net 39,722 34,640 -
Inventories (Note 3) 109,342 112,061 -
Prepaid expenses 630,556 18,936 536
779,620 275,118 605
FIXED ASSETS (Note 4) 31,337 29,340 -
GOODWILL (Note 5) 670,739 707,324 -
$ 1,481,696 $ 1,011,782 $ 605
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
CURRENT
Accounts payable $ 135,406 $ 91,678 $ 2,098
Accrued liabilities 86,324 82,613 -
Loans payable - - -
221,730 174,291 2,098
STOCKHOLDERS' EQUITY (DEFICIT)
Share capital of PREDECESSOR COMPANY 808,287 797,292
Share capital
Authorized
100,000,000 Preferred shares, par value $0.00001
100,000,000 Common shares, par value $0.00001
Issued
9,082,397 Common shares (June 30, 1999 -
8,380,897 shares; January 31, 1999 -
270,876 post-consolidation common
shares) 701,584 84 68
Additional paid-in capital 449,067 1,195,279 149,046
Stock subscription receivable - - (3,888)
Accumulated deficit (2,207,129) (370,312) (147,265)
Accumulated other comprehensive income -
foreign currency transaction adjustment 1,883,040 12,440 546
826,562 837,491 (1,493)
$ 1,048,292 $ 1,011,782 $ 605
<CAPTION>
May 4 December 31
1999 (a)(b) 1998(b)
<S> <C> <C>
ASSETS
CURRENT
Cash $ 4,851 $ 1,759
Accounts receivable, net 43,835 7,098
Inventories (Note 3) 107,431 126,807
Prepaid expenses 13,481 2,782
169,598 138,446
FIXED ASSETS (Note 4) 31,359 33,164
GOODWILL (Note 5) - -
$ 200,957 $ 171,610
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
CURRENT
Accounts payable $ 236,623 $ 89,725
Accrued liabilities 94,801 126,464
Loans payable - 28,340
331,424 244,529
STOCKHOLDERS' EQUITY (DEFICIT)
Share capital of PREDECESSOR COMPANY
Share capital
Authorized
100,000,000 Preferred shares, par value $0.00001
100,000,000 Common shares, par value $0.00001
Issued
9,082,397 Common shares (June 30, 1999 -
8,380,897 shares; January 31, 1999 -
270,876 post-consolidation common
shares)
Additional paid-in capital 950,730 950,730
Stock subscription receivable
Accumulated deficit (1,907,042) (1,850,326)
Accumulated other comprehensive income -
foreign currency transaction adjustment 17,558 29,385
(130,467) (72,919)
200,957 171,610
</TABLE>
(a) Acquisition date (Note2)
(b) Predecessor company
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
F-4
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - STATEMENTS OF OPERATIONS
(EXPRESSED IN US DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
from
For the three-month periods For the five-month periods February 17,
ended ended 1998
September 30 June 30 (incorporation)
------------ ------- to January 31,
1999 1998(b) 1999 1998 1999
(Consolidated) (Consolidated)
- --------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
SALES $ 47,875 $ 949 $ 52,856 $ - $ -
COST OF SALES 12,002 374 14,819 - -
- --------------------------------------------------------------------------------------------------------------------------------
35,873 575 38,037 - -
- --------------------------------------------------------------------------------------------------------------------------------
Advertising and promotion 129,037 18,912 50,661 - -
Amortization of goodwill 36,586 - 24,391 - -
Depreciation 2,654 18,217 1,476 38 -
Bad debts - 951 4,808 - -
Bank charges and interest 1,167 13,299 4,918 - -
Commissions 4,086 7,170 3,431 - -
Consulting fees 32,983 13,500 13,707 9,000 28,000
Financing arrangement fee (Note 6) - - 45,250 - -
Insurance 720 883 204 - -
Interest - - 18 - -
Investor relations - - - 3,493 20,708
Licenses and dues 4,755 234 912 - -
Office 17,436 6,192 11,687 3,376 7,423
Professional fees 23,047 2,664 65,789 15,542 24,791
Rent 4,928 3,947 3,490 6,000 20,838
Repairs and maintenance - 674 1,354 - -
Research and development - - - - -
Salaries and benefits 29,727 30,687 18,043 - -
Stock option compensation (Note 6) - - - - -
Telephone and utilities 2,618 2,231 1,270 2,208 5,301
Trade shows 33,785 12,757 4,454 - -
Travel 12,431 11,230 5,221 - -
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
January 1
June 30 1999 to
1999 June 30 May 4, December December
(6 Months) 1998(b) 1999 31, 1998 31, 1997
(b)(c) (6 Months) (a)(b) (12 Months) (12 Months)
(b) (b)
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
SALES $ 127,649 $ 621,73 $ 74,793 $ 622,930 $167,170
COST OF SALES 41,721 250,116 26,902 255,578 80,800
- ----------------------------------------------------------------------
85,928 371,619 47,891 367,352 86,370
- ----------------------------------------------------------------------
Advertising and promotion 67,931 195,434 17,270 237,431 137,979
Amortization of goodwill - - - - -
Depreciation 5,129 7,149 3,653 10,631 12,358
Bad debts 4,808 3,149 - 4,588 1,635
Bank charges and interest 5,213 4,213 296 11,589 4,349
Commissions 3,431 73,810 - 73,398 18,592
Consulting fees 45,530 36,477 31,823 66,398 48,743
Financing arrangement fee (Note 6) - - - - -
Insurance 878 1,072 673 3,335 2,309
Interest 2,144 27,851 2,127 28,380 -
Investor relations - - - - -
Licenses and dues 4,643 5,425 3,731 15,586 5,598
Office 11,174 27,355 6,299 28,639 20,957
Professional fees 28,860 10,789 15,169 38,668 29,585
Rent 7,238 9,189 3,748 18,797 18,498
Repairs and maintenance 1,759 495 405 6,502 4,924
Research and development - - - - 25,520
Salaries and benefits 25,534 56,214 7,491 107,194 118,298
Stock option compensation (Note 6) - - - 257,269 -
Telephone and utilities 5,616 6,404 4,346 10,664 10,998
Trade shows 6,367 21,551 1,912 33,938 18,970
Travel 10,887 18,457 5,664 38,609 25,966
- ----------------------------------------------------------------------
335,960 143,548 261,084 38,657 107,061
- -----------------------------------------------------------------------------------------------------------
LOSS BEFORE DISCONTINUED OPERATIONS (300,087) (142,973) (223,047) (38,657) (107,061)
LOSS ON DISCONTINUED OPERATIONS (Note 7) - - - (24,189) (40,204)
- -----------------------------------------------------------------------------------------------------------
LOSS FOR THE PERIOD
BEFORE EXTRAORDINARY ITEM $(300,087) $(142,973) $(223,047) $(62,846) $(147,265)
$(418,909)
- -----------------------------------------------------------------------------------------------------------
LOSS BEFORE DISCONTINUED OPERATIONS 237,142 505,034 104,607 988,616 (505,279)
- -----------------------------------------------------------------
LOSS ON DISCONTINUED OPERATIONS (Note 7) (151,214) (133,415) (56,716) (621,264) (418,909)
LOSS FOR THE PERIOD - - - - -
BEFORE EXTRAORDINARY ITEM $(151,214) $(133,415) $ (56,716) $(621,264)
- -----------------------------------------------------------------
</TABLE>
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
F-5
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - STATEMENTS OF OPERATIONS (CONTINUED)
(EXPRESSED IN US DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
from
For the three-month periods For the five-month periods February 17,
ended ended 1998
September 30 June 30 (incorporation)
------------ ------- to January 31,
1999 1998(b) 1999 1998 1999
(Consolidated) (Consolidated)
- -----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
LOSS BEFORE EXTRAORDINARY ITEM
(BROUGHT FORWARD) $ (300,087) $(142,973) $ (223,047) $ (62,846) $ (147,265)
EXTRAORDINARY ITEM
Gain on debt restructuring (Note 8) - - - - -
-----------------------------------------------------------------------------------------
NET LOSS FOR PERIOD $ (300,087) $(142,973) $ (223,047) $ (62,846) $ (147,265)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER SHARE
Before discontinued operations and
extraordinary item $ (0.03) N/A $ (0.05) $ (0.15) $ (0.40)
Discontinued operations - - - (0.09) (0.16)
- -----------------------------------------------------------------------------------------------------------------------------------
After discontinued operations (0.03) - (0.05) (0.24) (0.56)
Extraordinary item - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share for period $ (0.03) $ - $ (0.05) $ (0.24) $ (0.56)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES 8,907,022 n/a 4,161,818 262,700 265,183
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
January 1
June 30 1999 to
1999 June 30 May 4, December December
(6 Months) 1998 (b) 1999 31, 1998 31, 1997
(b)(c) (6 Months) (a)(b) (12 Months) (12 Months)
(b) (b)
---------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
LOSS BEFORE EXTRAORDINARY ITEM
(BROUGHT FORWARD) $ (151,214) $ (133,415) $ (56,716) $ (621,264) $ (418,909)
EXTRAORDINARY ITEM
Gain on debt restructuring (Note 8) - - - 59,203 179,816
---------------------------------------------------------------------------------------
NET LOSS FOR PERIOD $ (151,214) $ (133,415) $ (56,716) $ (562,061) $ (239,093)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER SHARE
Before discontinued operations and
extraordinary item $ (0.02) $ (0.03) $ (0.01) $ (0.13) $ (0.09)
Discontinued operations - - - - -
---------------------------------------------------------------------------------------
After discontinued operations (0.02) (0.03) (0.01) (0.13) (0.09)
Extraordinary item - - - 0.01 0.04
---------------------------------------------------------------------------------------
Earnings (loss) per share for period $ (0.02) $ - $ (0.01) $ (0.12) $ (0.05)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES 6,754,039 4,432,503 6,506,304 4,847,706 4,432,503
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
F-6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY - STATEMENTS OF STOCKHOLDERS' EQUITY
(EXPRESSED IN US DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STOCK
COMMON SHARES ADDITIONAL SUB-
------------- PAID-IN SCRIPTIONS
NUMBER AMOUNT CAPITAL RECEIVABLE
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock for cash:
- in February 1998 at $0.0001
and $0.00001 per share 6,000,000 $ 60 $ 54 $ -
- in July 1998 through January
1999 at $0.20 per share 718,500 7 143,693 (3,888)
- in January 1999 at $0.10
per share 53,000 1 5,299 -
-------------------------------------------------------------------
6,771,500 68 149,046 (3,888)
Net loss for the year - - - -
Change in unrealized gains - - - -
Total comprehensive loss
-------------------------------------------------------------------
Balance, January 31, 1999 6,771,500 68 149,046 (3,888)
25 for 1 share consolidation (6,500,624) (65) 65 -
Stock subscription receipt - - - 3,888
Issuance of common stock for
cash in April 1999 at $0.01 per
common share 4,525,000 45 45,205 -
Shares issued on May 4, 1999
for acquisition of subsidiary,
valued at $0.197 per
share (Note 2) 3,052,021 31 601,218 -
Shares issued on exercise
of warrants 533,000 5 399,745 -
-------------------------------------------------------------------
8,380,897 84 1,195,279 -
Net loss for the period - - - -
Change in unrealized gains $ - $ - $ - $ -
Total comprehensive loss
-------------------------------------------------------------------
Balance, June 30, 1999 8,380,897 $ 84 $1,195,279 $ -
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FOREIGN TOTAL
ACCUM- CURRENCY STOCKHOLDERS'
ULATED TRANSLATION EQUITY
DEFICIT ADJUSTMENT (DEFICIT)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Issuance of common stock for cash:
- in February 1998 at $0.0001
and $0.00001 per share $ - $ - $ 114
- in July 1998 through January
1999 at $0.20 per share - - 139,812
- in January 1999 at $0.10
per share - - 5,300
-------------------------------------------------
- - 145,226
-------------------------------------------------
Net loss for the year (147,265) - (147,265)
Change in unrealized gains - 546 546
-------------------------------------------------
Total comprehensive loss (147,265) 546 (146,719)
-------------------------------------------------
Balance, January 31, 1999 (147,265) 546 (1,493)
25 for 1 share consolidation - - -
Stock subscription receipt - - 3,888
Issuance of common stock for
cash in April 1999 at $0.01 per
common share - - 45,250
Shares issued on May 4, 1999
for acquisition of subsidiary,
valued at $0.197 per
share (Note 2) - - 601,249
Shares issued on exercise
of warrants - - 399,750
-------------------------------------------------
(147,265) 546 1,048,644
-------------------------------------------------
Net loss for the period (223,047) - (223,047)
Change in unrealized gains $ - 11,894 $ 11,894
-------------------------------------------------
Total comprehensive loss (223,047) 11,894 (211,153)
-------------------------------------------------
Balance, June 30, 1999 (370,312) $ 12,440 $ 837,491
-------------------------------------------------
-------------------------------------------------
</TABLE>
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
F-7
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY - STATEMENTS OF STOCKHOLDERS' EQUITY - CONTINUED
(EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
STOCK
COMMON SHARES ADDITIONAL SUB-
------------- PAID-IN SCRIPTIONS
NUMBER AMOUNT CAPITAL RECEIVABLE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1999 8,380,897 $ 84 $ 449,067 $ 950,730
Issuance of common stock
for services:
-in July 1999 at $1.00
per share 701,500 $ 701,500 $ - $ -
- ----------------------------------------------------------------------------------------------
9,082,397 701,584 449,067 950,730
- ----------------------------------------------------------------------------------------------
Net loss for the period - - - -
Change in unrealized gains - - - -
- ----------------------------------------------------------------------------------------------
Total comprehensive loss
- ----------------------------------------------------------------------------------------------
Balance, September 30, 1999 9,082,397 $ 701,584 $ 449,067 $ 950,730
FOREIGN
ACCUM- CURRENCY TOTAL
ULATED TRANSLATION STOCKHOLDERS' EQUITY
DEFICIT ADJUSTMENT (DEFICIT)
- ----------------------------------------------------------------------------------------------
Balance, June 30, 1999 $(1,907,042) 1,861,978 $ 837,491
Issuance of common stock
for services:
-in July 1999 at $1.00
per share $ - $ - $ - $ -
- ----------------------------------------------------------------------------------------------
950,730 (1,907,042) 1,861,978 837,491
Net loss for the period (300,087) - (300,087)
Change in unrealized gains - 21,062 21,062
Total comprehensive loss (300,087) 21,062 (279,025)
Balance, September 30, 1999 950,730 $(2,207,129) 1,883,040 $ 1,777,292
- ----------------------------------------------------------------------------------------------
</TABLE>
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
F-8
<PAGE>
KINESYS PHARMACEUTICALS, INC.
PREDECESSOR COMPANY - STATEMENTS OF STOCKHOLDERS' DEFICIT
(EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
COMMON SHARES PREFERRED SHARES
---------------------- ---------------------
NUMBER AMOUNT NUMBER AMOUNT
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997
(unaudited) 4,432,503 $ 154,041 - $ -
Shares issued for cash - - 1,570,000 365,269
Net loss - - - -
- ---------------------------------------------------------------------------------------
Balance, January 1, 1998 4,432,503 154,041 1,570,000 365,269
Shares issued for cash 217,009 35,323 291,978 83,798
Shares issued on
conversion of debt 990,126 158,861 - -
Forgiveness of
stockholders' loans
(Note {N#}) - - - -
Grant of options to employees
and directors (Note 6) - - - -
- ---------------------------------------------------------------------------------------
5,639,638 348,225 1,861,978 449,067
- ---------------------------------------------------------------------------------------
Net loss - - - -
Change in unrealized gains - - - -
- ---------------------------------------------------------------------------------------
Total comprehensive loss
- ---------------------------------------------------------------------------------------
Balance, December 31, 1998 5,639,638 348,225 1,861,978 449,067
Shares issued on
exercise of stock options 1,653,333 10,995 - -
- ---------------------------------------------------------------------------------------
7,292,971 359,220 1,861,978 449,067
- ---------------------------------------------------------------------------------------
Net loss - - - -
Change in unrealized gains - - - -
- ---------------------------------------------------------------------------------------
Total comprehensive loss
- ---------------------------------------------------------------------------------------
Balance, May 4, 1999 (a) 7,292,971 $ 359,220 1,861,978 $ 449,067
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL FOREIGN CURRENCY TOTAL
PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
CAPITAL DEFICIT ADJUSTMENT DEFICIT
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997
(unaudited) $ - $(1,049,172) $ - $ (895,131)
Shares issued for cash - - - 365,269
Net loss - (239,093) - (239,093)
- ----------------------------------------------------------------------------------------------
Balance, January 1, 1998 - (1,288,265) - (768,955)
Shares issued for cash - - - 119,121
Shares issued on
conversion of debt - - - 158,861
Forgiveness of
stockholders' loans
(Note {N#}) 950,730 - - 950,730
Grant of options to employees
and directors (Note 6) - - - -
- ----------------------------------------------------------------------------------------------
950,730 (1,288,265) - 459,757
Net loss - (562,061) - (562,061)
Change in unrealized gains - - 29,385 29,385
Total comprehensive loss (562,061) 29,385 (532,676)
- ----------------------------------------------------------------------------------------------
Balance, December 31, 1998 950,730 (1,850,326) 29,385 (72,919)
Shares issued on
exercise of stock options - - - 10,995
- ----------------------------------------------------------------------------------------------
950,730 (1,850,326) 29,385 10,995
Net loss - (56,716) - (56,716)
Change in unrealized gains - - (11,827) (11,827)
Total comprehensive loss (56,716) (11,827) (68,543)
- ----------------------------------------------------------------------------------------------
Balance, May 4, 1999 (a) $ 950,730 $(1,907,042) $ 17,558 $ (130,467)
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
(a) Acquisition date by Successor (Note 2)
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
F-9
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - STATEMENTS OF CASH FLOWS
(EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
For the three-month periods For the five-month periods
ended ended
September 30 June 30
--------------- ---------
1999 1998(b) 1999 1998
(Consolidated) (Consolidated)
- ----------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss for the period from
continuing operations $ (300,087) $ (142,973) $ (223,047) $ (38,657)
Items not involving cash
Depreciation of fixed assets 2,654 18,217 1,476 38
Amortization of goodwill 36,586 - 24,391 -
Stock compensation benefit - - - -
Gain on debt restructuring - - - -
(Increase)/decrease in assets
Accounts receivable (5,082) 96,263 8,323 -
Inventories 2,719 78,739 (6,467) -
Prepaid expenses (20,737) 2,097 (5,096) (658)
Increase/(decrease) in liabilities
Accounts payable and accrued
liabilities 47,439 (79,006) (151,478) 5,175
Customer deposits - - - -
- ----------------------------------------------------------------------------------------------------------------
(495,565) (359,474) (431,898) (34,102)
Loss on discontinued operations - - - (29,189)
- ----------------------------------------------------------------------------------------------------------------
(495,565) (359,474) (431,898) (63,291)
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash acquired on
purchase of subsidiary - (14,155) 4,851 -
Purchase of capital assets (4,652) - - -
- ----------------------------------------------------------------------------------------------------------------
4,652 14,155 4,851 -
- ----------------------------------------------------------------------------------------------------------------
TOTAL OPERATING AND INVESTING ACTIVITIES $ (500,217) $ (373,629) $ (427,047) $ (63,291)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the period
from
February 17, January 1
1998 1999 to
incorporation) May 4, 1999 December 31 December 31
to January 31, 1998(b) 1997(b)
1999 (a) (b) (12 Months) (12 Months
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss for the period from
continuing operations $ (107,061) $ (56,716) $ (562,061) $ (239,093)
Items not involving cash
Depreciation of fixed assets - 3,653 10,631 12,358
Amortization of goodwill - - - -
Stock compensation benefit - - 257,269 -
Gain on debt restructuring - - (59,203) (179,816)
(Increase)/decrease in assets
Accounts receivable - (34,989) 25,181 (25,208)
Inventories - 25,991 11,159 (103,988)
Prepaid expenses (536) (10,150) 925 (1,313)
Increase/(decrease) in liabilities
Accounts payable and accrued
liabilities 2,098 98,561 266,210 54,540
Customer deposits - - (44,304) 47,461
- ----------------------------------------------------------------------------------------------------------------
(105,499) 26,350 (94,193) (435,059)
Loss on discontinued operations (40,204) - - -
- ----------------------------------------------------------------------------------------------------------------
(145,703) 26,350 (94,193) (435,059)
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash acquired on
purchase of subsidiary - - - -
Purchase of capital assets - (1,848) (11,262) (18,162)
- ----------------------------------------------------------------------------------------------------------------
- (1,848) (11,262) (18,162)
- ----------------------------------------------------------------------------------------------------------------
TOTAL OPERATING AND INVESTING ACTIVITIES $ (145,703) $ 24,502 $ (105,455) $ (453,221)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
F-10
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - STATEMENTS OF CASH FLOWS (CONTINUED)
CONTINUED
(EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
For the three-month periods For the five-month periods
ended ended
September 30 June 30
------------------ --------------------
1999 1998(b) 1999 1998
(Consolidated) (Consolidated)
- ------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
TOTAL OPERATING AND INVESTING ACTIVITIES
BROUGHT FORWARD $(500,217) $(373,629) $(427,047) $ (63,291)
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of common stock -- 83,665 445,000 113,614
Stock subscriptions receivable -- -- 3,888 (26,287)
Repayment of loans payable -- (75,190) -- --
Payment of creditor protection amounts -- -- -- --
Issuance of common shares -- -- -- --
Issuance of preferred shares -- -- -- --
Loans payable -- -- -- --
Bank indebtedness -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
-- 53,659 448,888 87,327
- ------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE ON CASH 21,062 (2,325) 7,571 --
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 109,401 109,412 109,412 24,036
Cash, beginning of period 109,481 24,036 69 --
- ------------------------------------------------------------------------------------------------------------------
Cash, end of period $ -- $ 1,216 $ 109,481 $ 24,036
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION:
Interest paid $ 1,167 $ 13,299 $ 687 $ --
Non cash investing and financing activities
- Acquisition of subsidiary for common
stock, less cash acquired (Note 2) $ -- $ -- $ 596,398 $ --
- Conversion of debt to common shares $ -- $ -- $ -- $ --
- Forgiveness of shareholder loans -- $ -- -- --
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
For the period
from
February 17, 1998) December 31 December 31
(incorporation) January 1, 1999
to January 31, to May 4, 1999 1998(b) 1997(b)
1999 (a)(b) (12 Months) (12 Months
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING AND INVESTING ACTIVITIES
BROUGHT FORWARD $(145,703) $ 24,502 $(105,455) $(453,221)
- -------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of common stock 149,114 -- -- --
Stock subscriptions receivable (3,888) -- -- --
Repayment of loans payable -- -- -- --
Payment of creditor protection amounts -- -- (34,586) --
Issuance of common shares -- 10,995 35,323 --
Issuance of preferred shares -- -- 83,798 365,269
Loans payable -- (28,340) 28,340 81,132
Bank indebtedness -- -- (6,847) 6,820
- -------------------------------------------------------------------------
145,226 (17,345) 106,028 453,221
- -------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE ON CASH 546 (4,065) 1,186 --
INCREASE (DECREASE) IN CASH 69 3,092 1,759 --
CASH, beginning of period -- 1,759 -- --
- -------------------------------------------------------------------------
CASH, end of period $ 69 $ 4,851 $ 1,759 $ --
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION:
Interest paid $ -- $ -- $ -- $ --
Non cash investing and financing activities
- Acquisition of subsidiary for common
stock, less cash acquired (Note 2) $ -- $ -- $ -- $ --
- Conversion of debt to common shares $ -- $ -- $ 158,861 $ --
- Forgiveness of shareholder loans -- -- $ 693,461 $ --
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Acquisition Date (Note 2)
(b) Predecessor company
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
F-11
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(EXPRESSED IN US DOLLARS)
INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 AND THE
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
BASIS OF PRESENTATION The previous fiscal year end of the
Company was January 31, 1999 and the Company has
changed its year end to June 30, effective in 1999.
On May 4, 1999 the Company completed a major
transaction acquiring all of the issued and
outstanding common and preferred shares of KINeSYS
Pharmaceutical Inc., a Canadian company engaged in
the manufacture and distribution of cosmoceutical
products (Note 2). As a result of the acquisition,
the Company is no longer considered to be in the
development stage. Subsequent to the acquisition,
the Company changed its name from "Goldsearch
Corporation" to "KINeSYS Pharmaceuticals, Inc."
PRINCIPLES OF
CONSOLIDATION These financial statements are expressed in US
dollars and are prepared in accordance with
accounting principles generally accepted in the
United States. Consolidated figures include the
accounts of the Company and its wholly-owned
subsidiary. All significant intercompany accounts
and transactions have been eliminated on
consolidation.
UNAUDITED INTERIM
FINANCIAL STATEMENTS In the opinion of the Company's
management, the Statements of Operations and Cash
Flows for the five-month period ended June 30, 1998
and three-month periods ended September 30, 1999
and 1998 contain all adjustments (consisting of
only normal recurring adjustments) necessary to
present fairly the information set forth therein.
The September 30, 1998 amounts represent the
account of the Predecessor company only.
REVENUE RECOGNITION Sales are recorded upon shipment to third parties
net of returned product.
INVENTORIES Inventories are stated at the lower of cost and net
realizable value. Cost is generally determined on a
weighted average basis. Management reviews
realizable values of inventory on a regular basis.
Obsolete or impaired inventory is written-off at
such time that it is identified as such.
FIXED ASSETS Fixed assets are recorded at cost.
Depreciation is computed based on the estimated
useful lives of the assets as follows:
Computers - 30% declining-balance basis
Furniture and fixtures, equipment
and molds and dies - 20% declining-balance basis
Leasehold improvements are amortized over their
estimated useful lives or the lives of the related
leases, whichever is shorter.
F-12
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
(EXPRESSED IN US DOLLARS)
INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 AND THE
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
GOODWILL Goodwill arising on the purchase of KINeSYS
Pharmaceutical Inc. is being amortized on a
straight-line basis over five years. Goodwill is
evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of
Goodwill may not be recoverable through the
estimated undiscounted future cash flows resulting
from the use of goodwill. When any such impairment
exists, the goodwill will be written down to fair
value in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets".
FINANCIAL INSTRUMENTS The Company's financial instruments
consist of cash, accounts receivable, and accounts
payable and accrued liabilities. Unless otherwise
noted, it is management's opinion that the Company
is not exposed to significant interest, currency or
credit risks arising from these financial
instruments. The fair values of these financial
instruments approximate their carrying values,
unless otherwise noted, since they are short term
in nature or they are receivable or payable on
demand.
INCOME TAXES The Company follows the provisions of SFAS No.
109, "Accounting for Income Taxes", which requires
the Company to recognize deferred tax liabilities
and assets for the expected future tax
consequences of events that have been recognized
in the Company's financial statements or tax
returns using the liability method. Under this
method, deferred tax liabilities and assets are
determined based on the temporary differences
between the financial statement carrying amounts
and tax bases of assets and liabilities using
enacted rates in effect in the years in which the
differences are expected to reverse.
FOREIGN CURRENCY
TRANSLATION The Company conducts its business primarily from
its offices in Richmond, British Columbia, Canada
and, therefore, a substantial portion of its
business is conducted in Canadian currency. The
financial position and results of operations of
the Company's subsidiary are determined using the
Canadian Dollar as the functional currency. Assets
and liabilities of the subsidiary are translated
at the exchange rate at the period end. Income
statement accounts are translated at the average
rate of exchange prevailing during the periods.
Translation adjustments arising from the use of
differing exchange rates from period to period are
included in the Accumulated Foreign Currency
Translation Adjustment account in Stockholders'
Equity.
F-13
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
(EXPRESSED IN US DOLLARS)
INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 AND THE
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
LOSS PER SHARE Loss per share is computed in accordance with SFAS
No. 128, "Earnings per Share". Basic loss per
share is calculated by dividing the net loss
available to common stockholders by the weighted
average number of common shares outstanding for
the period. Diluted earnings per share reflects
the potential dilution of securities that could
share in earnings of an entity, similar to fully
diluted earnings per share. In loss periods,
dilutive common equivalent shares are excluded as
the effect would be anti-dilutive. Basic and
diluted earnings per share are the same for all
periods presented.
For the three month period ended September 30, 1999
and the five month periods ended June 30, 1999 and
1998 and for the period from February 17, 1998
(incorporation) to January 31, 1999, stock options
and warrants totalling 1,472,500, 1,472,500, Nil
and Nil were not included in the computation of
diluted earnings per share because their effect was
anti-dilutive. The predecessor company was a
private company and loss per share information is
not presented in regard to predecessor information.
STOCK BASED
COMPENSATION The Company applies Accounting Principles Board
Opinion ("APB") 25, "Accounting for Stock Issued to
Employees", and related Interpretations in
accounting for stock option plans. Under APB 25,
compensation cost is recognized for stock options
granted at prices below the market price of the
underlying common stock on the date of grant.
SFAS No. 123, "Accounting for Stock-Based
Compensation", requires the Company to provide
pro-forma information regarding net income as if
compensation cost for the Company's stock option
plan had been determined in accordance with the
fair value based method prescribed in SFAS No. 123.
USE OF ESTIMATES The preparation of financial statements in
accordance with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts
of assets and liabilities and disclosure of
contingent assets and liabilities at the date of
the financial statements, and the reported amounts
of revenues and expenses during the reporting
period. Actual results could differ from
management's best estimates as additional
information becomes available in the future.
F-14
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
(EXPRESSED IN US DOLLARS)
INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 AND THE
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
NEW ACCOUNTING
PRONOUNCEMENTS In June 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was
issued. SFAS No. 133 requires companies to
recognize all derivatives contracts as either
assets or liabilities on the balance sheet and to
measure them at fair value. If certain conditions
are met, a derivative may be specifically
designated as a hedge, the objective of which is
to match the timing of gain or loss recognition on
the hedging derivative with the recognition of (i)
the changes in the fair value of the hedged asset
or liability that are attributable to the hedged
risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or
loss is recognized in income in the period of
change. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15,
2000.
Historically, the Company has not entered into
derivatives contracts either to hedge existing
risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new
standards on July 1, 2000 to affect its financial
statements.
In April 1998, the American Institute of Certified
Public Accountants issued Statement of Position
98-5 "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5") which provides guidance on
the financial reporting of start-up costs and
organization costs. It requires costs of start-up
activities and organization costs to be expensed as
incurred. SOP 98-5 was effective for fiscal years
beginning after December 15, 1998 with initial
adoption reported as the cumulative effect of a
change in accounting principle. Adoption of this
standard did not have a material affect on the
financial statements.
F-15
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 AND THE
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
1. NATURE OF BUSINESS AND CONTINUED OPERATIONS
The Company was incorporated in the state of Nevada on February 17, 1998.
Until the acquisition of KINeSYS Pharmaceuticals Inc. on May 4, 1999 (Note
2), the Company was involved in the acquisition and exploration of mineral
properties. The Company is now focusing on selling cosmoceutical products
for active individuals and athletes to wholesalers, distributors,
retailers and the general public. The three main product lines include:
suncare, treatment, and daily use products. Customers are located in
Canada and the United States.
These accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of
business. As at June 30, 1999 the Company has had no significant
operations and the Company's subsidiary has posted overall operating
losses since its inception. The continuation of the Company is dependent
upon the continuing financial support of creditors and stockholders and
obtaining long-term financing as well as achieving a profitable level of
operations. Management plans to raise equity capital to finance the
operations and capital requirements of the Company. It is management's
intention to raise approximately $1.2 million within the upcoming year.
Amounts raised will be used to develop a U.S. focus for marketing
arrangements, to enhance the Company's e-commerce ability through its
website, to provide financing for the purchase and manufacture of
inventories and for other working capital purposes including operational
systems upgrades. While the Company is expending its best efforts to
achieve the above plans, there is no assurance that any such activity will
generate funds that will be available for operations.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. These financial statements do not include any
adjustments that might arise from this uncertainty.
2. ACQUISITION OF KINESYS PHARMACEUTICAL INC.
On May 4, 1999 the Company acquired all of the issued and outstanding
common and preferred stock of KINeSYS Pharmaceutical Inc. KINeSYS
Pharmaceutical Inc. is a company incorporated in December 1993 in British
Columbia, Canada that is engaged in the manufacture and distribution of
cosmoceutical products for active individuals and athletes.
F-16
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 AND THE
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
2. ACQUISITION OF KINESYS PHARMACEUTICAL INC. - CONTINUED
Consideration for the purchase was the issuance of 3,052,021 shares of
common stock of the Company. The transaction was accounted for as a
purchase. Accordingly, operations of KINeSYS Pharmaceutical Inc. have been
included in the consolidated financial statements from May 4, 1999. The
value of the consideration paid, being the common stock of the Company,
was determined using quoted trading prices close to the date of
substantial agreement to the terms of the acquisition of $0.197 per share.
The value of the consideration paid exceeded the net book value of KINeSYS
Pharmaceutical Inc. at the transaction date by $731,715. The excess
consideration, or "goodwill", is being amortized to income on a
straight-line basis over five years.
The summarized unaudited pro-forma results of operations set forth below
for the period from February 17, 1998 (incorporation) to January 31, 1999
and for the five months ended June 30, 1999 assume that the acquisition
occurred as of February 18, 1998 (the incorporation date).
<TABLE>
<CAPTION>
Period from
February 17,
FIVE MONTHS 1998
ENDED (incorporation)
JUNE 30 to January 31,
1999 1999
<S> <C> <C>
Sales $ 123,474 $ 622,930
Net loss for the period before
discontinued operations and extraordinary item $ (292,583) $ (914,872)
Net loss for the period $ (292,583) $ (855,669)
Basic and diluted loss per share $ (0.05) $ (0.26)
</TABLE>
3. INVENTORIES
<TABLE>
<CAPTION>
September 30 JUNE 30 January 31 May 4 December 31
1999 1999 1999 1999 (b) 1998(b)
<S> <C> <C> <C> <C> <C>
Packaging $ 26,150 $ 24,743 $ - $ 10,652 $ 10,050
Finished goods 83,192 87,318 - 96,779 116,757
$ 109,342 $ 112,061 $ - $ 107,431 $ 126,807
</TABLE>
(b) Predecessor company
F-17
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 AND THE
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
4. FIXED ASSETS
<TABLE>
<CAPTION>
September 30
1999
Accumulated Net Book
Cost Depreciation Value
<S> <C> <C> <C>
Computers $ 25,005 $ 20,548 $ 4,457
Furniture and fixtures 26,105 9,394 16,711
Warehouse equipment 1,788 1,009 779
Leasehold improvements 6,758 6,758 -
Molds and dies 21,888 12,498 9,390
$ 81,544 $ 50,207 $ 31,337
<CAPTION>
June 30 January 31
1999 1999
Accumulated Net Book Net Book
Cost Depreciation Value Value
<S> <C> <C> <C> <C>
Computers $ 25,005 $ 20,186 $ 4,820 $ -
Furniture and fixtures 21,453 7,637 13,816 -
Warehouse equipment 1,788 968 820 -
Leasehold improvements 6,758 6,758 - -
Molds and dies 21,888 12,004 9,884 -
$ 76,892 $ 47,553 $ 29,340 $ -
<CAPTION>
May 4
1999 (b)
Accumulated Net Book
Cost Depreciation Value
<S> <C> <C> <C>
Computers $ 21,730 $ 16,056 $ 5,674
Furniture and fixtures 21,841 7,326 14,515
Warehouse equipment 1,820 945 875
Molds and dies 22,284 11,989 10,295
$ 67,675 $ 36,316 $ 31,359
<CAPTION>
December 31
1998 (b)
Accumulated Net Book
Cost Depreciation Value
<S> <C> <C> <C>
Computers $ 22,008 $ 14,764 $ 7,244
Furniture and fixtures 18,774 4,232 14,542
Warehouse equipment 1,574 673 901
Molds and dies 19,264 8,787 10,477
$ 61,620 $ 28,456 $ 33,164
</TABLE>
(b) Predecessor company
F-18
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 AND THE
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
5. GOODWILL
<TABLE>
<CAPTION>
Accumulated Net Book
Cost Amortization Value
<S> <C> <C> <C>
Goodwill, September 30, 1999 $ 731,715 $ 60,976 $ 670,739
Goodwill, June 30, 1999 $ 731,715 $ 24,391 $ 707,324
</TABLE>
6. SHARE CAPITAL
a) On April 6, 1999 the Company effected a 25 to 1 share consolidation.
References to common shares issued and outstanding in comparative
figures have been adjusted to post-consolidation amounts. As part of
the restructuring, the Company issued 4,525,000 shares of common
stock to certain investors at $0.01.
Proceeds from the issuance of 4,525,000 shares totalling $45,250 were
deposited in escrow to be released pro-rata in specified amounts to
an individual as a financing arrangement fee within the upcoming
year. The financing arrangement fee has been recognized in the
Statement of Operations for the five-month period ended June 30,
1999.
b) On June 28, 1999, the Company's Board of Directors adopted the 1999
Stock Option Plan which provides for the granting of stock options to
purchase up to 900,000 shares of the Company's common stock. The
stock option plan permits the granting of incentive and
non-qualifying stock options to officers, employees and consultants
of the Company and its subsidiary. Under the 1999 Stock Option Plan
exercise prices and terms are determined by the Board of Directors.
For incentive options, the exercise price shall not be less than fair
market value of the Company's common stock on the grant date. Options
granted are not to exceed terms beyond ten years.
On June 30, 1999, the Company granted options to employees, directors
and consultants to purchase 752,500 shares of common stock at $1.00
with a weighted average remaining contractual life of the options of
2.65 years. All the options remained outstanding at June 30, 1999.
There were no options granted during the year ended January 31, 1999.
Outstanding options for the purchase of common shares, granted to
employees, directors and consultants vest over a three-year period.
Stock options exercisable at June 30, 1999 totalled 207,051.
F-19
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 AND THE
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
6. SHARE CAPITAL - CONTINUED
b) Pro-forma information regarding Net Loss and Loss per Share is
required under SFAS No. 123, and has been determined as if the Company
had accounted for its stock options under the fair value method of
SFAS No. 123. The weighted average fair value of options granted in
the five-month period ended June 30, 1999 was $0.87. The fair value of
these options was estimated at the date of the grant using a
Black-Scholes option pricing model with the following assumptions: no
dividends, a risk-free interest rate of 4.95%, volatility factor of
the expected market price of the Company's common stock of 315% and a
weighted average expected life of the options of four years.
Under the accounting provisions of SFAS No. 123, the Company's Net
Loss and Loss per Share on a pro-forma basis would be materially
unchanged from the reported amounts for the five-month period ended
June 30, 1999.
c) During the five-month period ended June 30, 1999, the Company granted
the following warrants to purchase shares of common stock:
<TABLE>
<CAPTION>
Exercise Price Exercise Price Exercise Price
$0.75 $1.00 $1.25
----- ----- ----
<S> <C> <C> <C>
Balance, January 31, 1999 - - -
Granted during the period
- exercisable within 10 business days of acquisition of
the Company's subsidiary 533,000 - -
- exercisable upon 10 business days of the earlier of
approval by the SEC of the Company's registration
statement or September 1, 1999 - 400,000 -
- exercisable by December 31, 1999 - - 320,000
Exercised during the period (533,000) - -
- 400,000 320,000
</TABLE>
There were no warrants granted or exercised during the quarter ended
September 30, 1999. No warrants were granted during the Company's year
ended January 31, 1999.
d) Subsequent to June 30, 1999, the Company issued 564,000 common shares
in advance of future advertising and promotional services. These
shares were issued in the quarter ended September 30, 1999.
e) Common stock held in escrow at September 30, 1999 and June 30, 1999
totalled 2,880,000 (Nil in other comparative periods). Stock is to be
released from escrow based upon the exercise of stock purchase
warrants. Subsequent to June 30, 1999, the Company commenced the
process of filing documentation to release the first 960,000 shares of
common stock from escrow however this was not completed by September
30,1999. The remaining shares held in escrow will be released in
tranches of 960,000 shares of common stock as warrants are exercised.
f) The Company applies Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees" and related interpretations
in accounting for stock options. Under APB 25, the predecessor
company recorded compensation expense in 1998 of $257,269 related to
the grant of the options to employees and directors consisting of
the difference between the exercise price and the market value of
the predecessor's common stock at the grant date.
F-20
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 AND THE
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
7. DISCONTINUED OPERATIONS
On May 4, 1999, upon conclusion of the acquisition of KINeSYS
Pharmaceutical Inc., the Company discontinued its involvement in mineral
exploration activity. Mineral exploration expenses incurred to the
measurement date totalled $Nil (January 31, 1999 - $40,204; June 30, 1998
- $24,189). There was no revenue earned during the five-month periods
ended June 30, 1999 and 1998 or during the year ended January 31, 1999.
There was no gain or loss recognized on discontinuance.
8. EXTRAORDINARY ITEM
In 1996 the predecessor company filed a Notice of Intent to make a
proposal under the Bankruptcy and Insolvency Act. Under the proposal, the
unsecured creditors of the day were paid 50% of amounts owing. This
proposal was accepted by the courts in February 1997 and all repayments
were made by the end of 1998. In 1997 the predecessor company settled all
amounts payable with a waiver by the creditors of an amount of $179,816
which was recognized as an extraordinary item. In 1998, a further $59,203
was waived and also treated as an extraordinary item.
9. RELATED PARTY TRANSACTIONS
Related party transactions not disclosed elsewhere in these financial
statements are as follows:
a) The Company's subsidiary signed a three year contract with an
investment company, which is owned by a stockholder, for the
provision of financial and management services at a monthly fee of
CDN$5,000. The Company paid $6,704 during the five-month period ended
June 30, 1999 (January 31, 1999 - $Nil; June 30, 1998 - $Nil, Period
Jan 1, 1999 to May 4, 1999 - $13,300, Year ended Dec 31, 1998 -
$19,800, Year ended Dec 31, 1998 - $nil). The contract expires in
July, 2002.
b) The Company also paid fees to a consulting company, which is owned
by two shareholders, for a provision of consulting services. During
the five-month period ended June 30, 1999, fees totalled $6,704
(January 31, 1999 - $Nil; June 30, 1998 - $Nil, Period Jan 1, 1999
to May 4, 1999 - $13,300, Year ended Dec 31, 1998 - $nil, Year ended
Dec 31, 1997 - $nil)
Related party transactions are recorded at the exchange amount, being the
amount of consideration established and agreed to by the related parties.
F-21
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 AND THE
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
10. SEGMENTED INFORMATION
For the five-month period ended June 30, 1999, approximately $3,400 of the
Company's sales were made to customers in the United States (January 31,
1999 and June 30, 1998 - $Nil). The remainder of sales were made to
Canadian customers.
For the predecessor company sales to customers in the United States were
approximately as follows (with the remainder to Canadian customers):
<TABLE>
<S> <C>
6 month period ended June 30 1998 $ -
Period January 1, 1999 to May 4, 1999 $ 7,847
Year ended December 31, 1998 $ 380,000
Year ended December 31, 1997 $ -
</TABLE>
11. INCOME TAXES
At June 30, 1999 the Company had deferred tax assets of approximately
$670,000 (January 31, 1999 - $50,000) principally arising from net
operating losses carried forward in the subsidiary in Canada. As
management of the Company cannot determine if it is more likely than not
that the Company will receive the benefit of this asset, a valuation
allowance equal to the deferred tax asset has been established at June 30,
1999, May 4, 1999 (the date of acquisition) and January 31, 1999. The
Company evaluates its valuation allowance requirements based on projected
future operations. When circumstances change and this causes a change in
management's judgement about the recoverability of deferred tax assets,
the impact of the change on the valuation allowance is reflected in
current income.
At June 30, 1999, the Company's subsidiary had losses available for
Canadian income tax purposes of approximately $1,300,000. These losses
will expire as follows:
<TABLE>
<S> <C>
2000 $ 102,000
2001 $ 469,000
2002 $ 38,000
2003 $ 185,000
2004 $ 352,000
2005 $ 57,000
2006 $ 97,000
</TABLE>
The Company has net operating losses carried forward for US tax purposes
of approximately $250,000 which expires in 2018 and 2019.
At September 30, 1999 deferred tax assets totalled approximately $770,000
and the Company has again established a valuation allowance of equal
amount. The increase in losses of approximately $100,000 from June 30,
1999 will expire in 2007.
F-22
<PAGE>
KINESYS PHARMACEUTICALS, INC.
SUCCESSOR COMPANY AND PREDECESSOR COMPANY - NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
INFORMATION RELATED TO THE FIVE-MONTH PERIOD ENDED JUNE 30, 1998 AND THE
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 IS UNAUDITED
12. COMMITMENT
Beginning at such time as the Company's subsidiary achieves annual gross
revenue in North America of CDN$1,000,000, the Company will be subject to
a Royalty Agreement which will require payment of 2.5% of gross North
American revenues of the Company's subsidiary in excess of CDN$1,000,000.
The agreement will expire upon payment of an aggregate royalty of
CDN$1,250,000 before October 1, 2001 or CDN$1,500,000 thereafter.
Management is presently attempting to renegotiate this agreement.
F-23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The Unaudited Pro Forma Consolidated Financial Information reflects financial
information which gives effect to the acquisition of all the outstanding common
shares of KINeSYS Pharmaceutical Inc. in exchange for 3,052,021 shares of common
stock of the Registrant at a deemed value of $0.197 per share.
The Pro Forma Consolidated Statements included herein reflect the use of the
purchase method of accounting for the above transaction. Such financial
information has been prepared from, and should be read in conjunction with, the
historical financial statements and notes thereto included elsewhere in this
10-SB registration statement.
The Pro Forma Consolidated Statement of Operations gives effect to the
transaction as if it had occurred at the beginning of the earliest period
presented, combining the results of the Registrant and KINeSYS Pharmaceutical
Inc. for the five-month period ended June 30, 1999. Sales and income for the
month of January 1999 for KINeSYS Pharmaceutical Inc. are not reflected in the
pro forma consolidated financial information. Sales and the net loss for January
1999 amount to $4,175 and $23,765, respectively.
As well, the Pro Forma Consolidated Statement of Operations combines the
accounts of the Registrant and KINeSYS Pharmaceutical Inc. for the years ended
January 31, 1999 and December 31, 1998, respectively.
The Pro Forma Consolidated Financial Information is unaudited and is not
necessarily indicative of the consolidated results which actually would have
occurred if the above transactions had been consummated at the beginning of the
periods presented; nor does it purport to present the results of operations for
future periods.
F-24
<PAGE>
KINESYS PHARMACEUTICALS, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE FIVE-MONTH PERIOD ENDED JUNE 30, 1999
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
KINeSYS
Pharmaceuticals, Inc. KINeSYS
(formerly Goldsearch Pharmaceutical Pro Forma
Corporation) Inc. Adjustments Balance
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES $ 52,856 $ 70,618 $ 123,474
COST OF SALES 14,819 25,197 40,016
------------------------------------------------------------------
38,037 45,421 83,458
------------------------------------------------------------------
EXPENSES
Advertising and promotion 50,661 13,242 63,903
Amortization of Goodwill 24,391 - 36,585 60,976
Bad Debts 4,808 - 4,808
Bank Charges and Interest 4,918 255 5,173
Commissions 3,431 - 3,431
Consulting Fees 13,707 25,885 39,592
Depreciation 1,476 2,672 4,148
Financing Arrangement fee 45,250 - 45,250
Insurance 204 164 368
Interest 18 974 992
Licenses and dues 912 2,352 3,264
Office 11,687 5,071 16,758
Professional fees 65,789 8,841 74,630
Rent 3,490 2,309 5,799
Repairs and maintenance 1,354 204 1,558
Salaries and benefits 18,043 7,418 25,461
Telephone and utilities 1,270 3,216 4,486
Trade shows 4,454 1,579 6,033
Travel 5,221 4,190 9,411
------------------------------------------------------------------
261,084 78,372 36,585 376,041
------------------------------------------------------------------
NET LOSS FOR THE PERIOD -$ 223,047 -$ 32,951 -$ 36,585 -$ 292,583
------------------------------------------------------------------
------------------------------------------------------------------
BASIC AND DILUTED LOSS PER SHARE -0.05
-----------
-----------
WEIGHTED AVERAGE SHARES OUTSTANDING 6,054,054
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-25
<PAGE>
KINESYS PHARMACEUTICALS, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1999
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
KINeSYS
Pharmaceuticals, Inc. KINeSYS
(formerly Goldsearch Pharmaceutical Pro Forma
Corporation) Inc. Adjustments Balance
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES $ - $ 622,930 $ - $ 622,930
COST OF SALES - 255,578 - 255,578
------------------------------------------------------------------
- 367,352 - 367,352
------------------------------------------------------------------
EXPENSES
Advertising and promotion - 237,431 - 237,431
Amortization of Goodwill - - 146,343 146,343
Bad Debts - 4,588 - 4,588
Bank Charges and Interest - 11,589 - 11,589
Commissions - 73,398 - 73,398
Consulting Fees 28,000 66,398 - 94,398
Depreciation - 10,631 - 10,631
Insurance - 3,335 - 3,335
Interest - 28,380 - 28,380
Investor relations 20,708 - - 20,708
Licenses and dues - 15,586 - 15,586
Office 7,423 28,639 - 36,062
Professional fees 24,791 38,668 - 63,459
Rent 20,838 18,797 - 39,635
Repairs and maintenance - 6,502 - 6,502
Salaries and benefits - 104,194 - 104,194
Stock Compensation Benefit - 257,269 - 257,269
Telephone and utilities 5,301 10,664 - 15,965
Trade shows - 33,938 - 33,938
Travel - 38,609 - 38,609
------------------------------------------------------------------
107,061 988,616 146,343 1,242,020
------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS - 107,061 - 621,264 - 146,343 - 874,668
------------------------------------------------------------------
------------------------------------------------------------------
BASIC AND DILUTED LOSS PER SHARE
From continuing operations -$ 0.26
-----------
-----------
WEIGHTED AVERAGE SHARES OUTSTANDING 3,317,204
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-26
<PAGE>
KINESYS PHARMACEUTICALS, INC.
NOTE TO PRO FORMA STATEMENTS
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
1 To reflect the acquisition of Kinesys Pharmaceutical Inc. on May 4, 1999
in exchange for 3,052,021 shares of common stock at a deemed price of
$0.197 per share totalling $601,249. The carrying value of net assets at
the acquisition date approximated the fair values. The portion of the
purchase price allocated to goodwill would have caused amortization to
increase by $36,585 and $146,343 for the five-month period ended June 30,
1999 and for the year ended January 31, 1999, respectively.
Goodwill of $731,715 is being amortized on a straight-line basis over
five years.
F-27
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
Exhibit No. Exhibit Name
- ----------- ------------
<C> <S>
2.1 Articles of Incorporation of Company, filed February 17, 1998
(filed with Form 10-SB on 10/6/99).
2.2 Articles of Amendment of Articles of Incorporation of Company,
filed March 29, 1999 (filed with Form 10-SB on 10/6/99).
2.3 Bylaws of the Company (filed with Form 10-SB on 10/6/99).
6.1 Royalty Agreement dated 12/17/96 (filed with Form 10-SB on
10/6/99).
6.2 KINeSYS 1999 Stock Option Plan (filed with Form 10-SB on
10/6/99).
27 Financial Data Schedule (filed with Form 10-SB on 10/6/99)
</TABLE>
ITEM 2. DESCRIPTION OF EXHIBITS
See Item 1 above.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
KINeSYS PHARMACEUTICALS, INC.
(Registrant)
Date: November 24, 1999 By: /s/ Jonathan Mara
----------------------
Jonathan Mara, CEO
