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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____ to ____.
Commission file number 000-27571.
KINeSYS PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Nevada 98-0210050
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3771 Jacombs Road, Unit 415
Richmond, B.C., Canada V6V 2L9
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(Address of principal executive offices) (Zip Code)
(604) 279-0363
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. / / Yes / / No
APPLICABLE ONLY TO CORPORATE ISSUERS:
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State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
9,640,747 as of March 31, 2000.
Transitional Small Business Disclosure Format (Check one): / / Yes /X/ No
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PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
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CONTENTS
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CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Balance Sheets 5
Statements of Operations 6
Statements of Cash Flows 7
Notes to the Financial Statements 8-10
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KINeSYS PHARMACEUTICALS, INC.
CONSOLIDATED INTERIM BALANCE SHEETS
MARCH 31 June 30
2000 1999
(UNAUDITED)
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<S> <C> <C>
ASSETS
CURRENT
Cash $ 11,035 $ 109,481
Accounts receivable (net of allowance for doubtful accounts
of $4,200 and $2,200) 233,660 34,640
Inventories 386,759 112,061
Prepaid expenses (Note 3) 325,584 18,936
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957,038 275,118
FIXED ASSETS, net of accumulated depreciation 26,286 29,340
GOODWILL, net of accumulated amortization of $134,149 and $24,391 597,566 707,324
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$ 1,580,890 $ 1,011,782
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT
Accounts payable $ 153,696 $ 91,678
Accrued liabilities 41,184 82,613
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194,880 174,291
LOANS PAYABLE (Note 4) 317,231 -
---------------------------------
512,111 174,291
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STOCKHOLDERS' EQUITY
Share capital
Authorized
100,000,000 Preferred shares, par value $0.00001
100,000,000 Common shares, par value $0.00001
Issued (Note 3)
9,640,747 Common shares (June 30, 1999 - 8,380,897
common shares) 96 84
Additional paid-in capital 2,455,117 1,195,279
Accumulated deficit (1,386,531) (370,312)
Accumulated other comprehensive income -
foreign currency translation adjustment 97 12,440
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1,068,779 837,491
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$ 1,580,890 $ 1,011,782
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</TABLE>
The accompanying notes form an integral part of these consolidated
interim financial statements.
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<TABLE>
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KINeSYS PHARMACEUTICALS, INC.
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(UNAUDITED)
MARCH 31 March 31 MARCH 31 March 31
2000 1999 2000 1999
For the periods ended (3 MONTHS) (3 Months) (9 MONTHS) (9 Months)
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<S> <C> <C> <C> <C>
SALES $ 342,959 $ 36,325 $ 416,337 $ 218,357
COST OF GOODS SOLD 244,608 30,860 288,706 124,948
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98,351 5,465 127,631 93,409
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EXPENSES
Advertising and promotion 233,366 39,508 551,972 84,428
Amortization of goodwill 36,586 - 109,758 -
Bad debts 1,634 (719) 1,634 719
Bank charges and interest 2,317 2,607 4,309 9,983
Commissions 12,986 1,716 15,273 (11,161)
Consulting fees 34,304 17,222 96,908 47,143
Depreciation 2,740 1,383 8,099 4,864
Office and other 25,548 16,532 63,122 35,032
Professional fees 50,987 14,430 112,686 42,309
Rent 8,515 3,619 21,905 13,227
Repairs and maintenance - 880 - 6,887
Salaries and benefits 41,878 12,767 98,826 60,746
Stock option compensation - - - 257,269
Trade shows and travel 24,733 8,626 59,358 41,165
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475,594 118,571 1,143,850 592,611
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LOSS BEFORE EXTRAORDINARY ITEM (377,243) (113,106) (1,016,219) (499,202)
EXTRAORDINARY GAIN ON DEBT
RESTRUCTURING - - - 59,203
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NET LOSS FOR THE PERIOD $ (377,243) $ (113,106) $ (1,016,219) $ (439,999)
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BASIC AND DILUTED LOSS PER SHARE:
Loss per share before
extraordinary item $ (0.04) $ (0.03) $ (0.11) $ (0.15)
Extraordinary item - - - 0.02
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Loss per share for the period $ (0.04) $ (0.03) $ (0.11) $ (0.13)
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WEIGHTED AVERAGE
SHARES OUTSTANDING 9,640,747 3,317,204 9,400,689 3,317,204
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</TABLE>
The accompanying notes form an integral part of these consolidated
interim financial statements.
6
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<TABLE>
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KINeSYS PHARMACEUTICALS, INC.
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine-month periods ended March 31 2000 1999
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<S> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss for the period $ (1,016,219) $ (439,999)
Items not involving cash
Depreciation of fixed assets 8,099 4,864
Amortization of goodwill 109,758 -
Stock option compensation - 257,269
Gain on debt restructuring - (59,203)
Decrease (increase) in assets
Accounts receivable (199,020) 16,694
Inventories (274,698) 39,482
Prepaid expenses 453,202 (1,279)
Increase (decrease) in liabilities
Accounts payable and accrued liabilities 20,589 174,118
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(898,289) (8,054)
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INVESTING ACTIVITIES
Net proceeds on sale of fixed assets - 4,006
Purchase of fixed assets (5,045) -
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(5,045) 4,006
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FINANCING ACTIVITIES
Issuance of common shares 500,000 68,414
Repayment of loans payable - (29,660)
Repayment of advance from stockholders - (26,946)
Proceeds on loans payable 317,231 -
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817,231 11,808
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INCREASE (DECREASE) IN CASH DURING THE PERIOD (86,103) 7,760
Effect of exchange rate on cash (12,343) (4,613)
CASH, beginning of period 109,481 17,514
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CASH, end of period $ 11,035 $ 20,661
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SUPPLEMENTAL INFORMATION
Interest paid $ 5,856 $ 7,905
Non-cash financing activity
Expenses paid with issuance of common shares $ 759,850 $ -
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</TABLE>
The accompanying notes form an integral part of these consolidated
interim financial statements.
7
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KINeSYS PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000 AND 1999
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1. BASIS OF PRESENTATION
The consolidated interim financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that
these consolidated interim financial statements be read in conjunction
with the consolidated financial statements of the Company for the year
ended June 30, 1999 and notes thereto included in the Company's 10-SB
registration statement. The Company follows the same accounting policies
in preparation of interim reports.
Results of operations for the interim periods are not indicative of annual
results.
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. ("KINeSYS Canada"), a Canadian company engaged in the
manufacture and distribution of cosmoceutical products (Note 2). Upon the
acquisition of KINeSYS Canada, the Company abandoned its previous
activities in mineral exploration. Accordingly, KINeSYS Canada is treated
as the predecessor business and the comparative amounts for the period
ended March 31, 1999 are those of KINeSYS Canada. Loss per share for 1999
is calculated on a pro-forma basis.
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 March 31, 2000 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. 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.
8
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KINeSYS PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000 AND 1999
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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 Canada. KINeSYS Canada 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.
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, the operations of KINeSYS Canada 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 Canada 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 nine-month period ended March 31, 1999 assume that the acquisition
occurred as of July 1, 1998 and include expenses for the amortization of
goodwill created on acquisition.
<TABLE>
<CAPTION>
Nine Months
Ended
March 31,
1999
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Sales $ 182,033
Net loss for the period before discontinued operations and
extraordinary item $ (512,798)
Net loss for the period $ (473,697)
Basic and diluted loss per share $ (0.14)
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3. SHARE CAPITAL
(a)During the nine-month period ended March 31, 2000 the Company issued
759,850 shares of common stock in exchange for future advertising and
promotional services. The transactions were valued at $1.00 per share
being the trading value of the Company's shares at the dates of the
transaction which approximates the fair value of the services received.
Such expenses are recorded as prepaid expenses in these financial
statements and are being amortized on a monthly basis.
(b)In October and November 1999, the Company received $500,000 on
the issuance of the 500,000 shares of common stock pursuant to
private placements.
9
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KINeSYS PHARMACEUTICALS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
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MARCH 31, 2000 AND 1999
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4. LOAN PAYABLE
Unsecured, payable on demand with 30 days notice,
interest at 10% per annum $ 249,390
Collateralized by specific account receivable (book value
$138,159), interest rate to be determined 67,841
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$ 317,231
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue," the negative of
such terms, or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. In this regard, the business and operations of the Company are
subject to substantial risks which increase the uncertainty inherent in the
forward-looking statements contained in this Form 10-QSB. In evaluating the
Company's business, you should give careful consideration to the information set
forth below under the caption "Risk Factors That May Affect Future Operating
Results," in addition to the other information set forth herein.
The inclusion of the forward-looking statements should not be regarded as a
representation by the Company, or any other person, that such forward-looking
statements will be achieved. Although we believe the that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance, or achievements. We undertake
no duty to update any of the forward-looking statements, whether as a result of
new information, future events or otherwise. In light of the foregoing, readers
are cautioned not to place undue reliance on the forward-looking statements
contained in this report.
OVERVIEW
Kinesys supplies innovative high-performance skin and body 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 retailers and 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 ("Goldsearch"), a Nevada
corporation, merged (the "Merger") with Kinesys Canada. On May 4, 1999,
Goldsearch issued 3,052,021 shares of its
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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, 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 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 were until December 1, 1999 traded
on the Over the Counter Bulletin Board (the "OTCBB") operated by the National
Association of Securities Dealers, Inc. under the symbol "KNES." The Company is
currently seeking to have its shares re-listed on the OTCBB.
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
THREE MONTHS ENDED March 31, 2000 AND 1999
The results for this period discuss the consolidated operating results
of the Company for the quarters ending March 31, 2000 and March 31, 1999.
Revenue
Sales of $342,959 and $36,325 for the three months ended March 31, 2000
and 1999, respectively, were derived primarily from the sale of the Company's
sunscreen products. During 1999, the Company's attentions were primarily focused
on putting in place effective cost controls and management systems, and
increasing sales and marketing efforts. Sales in the three months ended March
31, 2000 have accordingly increased as a result of last year's stepped-up
efforts.
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Operating expenses
The Company's operating expenses consist of sales and marketing and
general and administrative expenses. Operating expenses were $435,108 and
$118,571 for the quarters ended March 31, 2000 and 1999, respectively, including
$36,586 of goodwill amortization as a result of the acquisition of Kinesys
Canada. No goodwill amortization was recorded during the quarter ended March 31,
1999.
Advertising and promotion expense for the quarter ended March 31, 2000
of $233,366 increased $193,858 or 491% from the comparable period in 1999. Sales
commissions for the quarter ended March 31, 2000 of $12,986 rose $11,270 or 657%
over the commissions paid in the comparable period of 1999. Bank charges and
interest resulted in net income of $1,547 for the quarter ended March 31, 2000
compared with expense of $2,607 in the comparable period of 1999. Professional
fees paid to the Company's accountants, attorneys and computer consultants for
the quarter ended March 31, 2000 of $14,365 decreased $65 or 0.5% from the
comparable period in 1999. Salaries and benefits for these periods were $41,878
and $12,767, respectively. Expense for stock option compensation was nil in both
periods. Expenses for travel and participation in trade shows were $24,733 for
the quarter ended March 31, 2000 and $8,626 for the comparable period in 1999.
A significant portion of the increase in advertising and promotion
expense for the quarter ended March 31, 2000 is attributable to design costs
associated with the creation of new packaging, point of purchase displays, and
collateral material to be utilized in the official launch of the Company's
product line in the United States and its re-launch in Canada in the spring of
2000. The increase in costs associated with the redesign of the KINeSYS brand is
a one-time expense and is not likely to recur in future periods. The Company
will reinvest capital as needed to update the design and look of the brand to
keep it current in the marketplace. The increase in advertising, promotion and
commissions costs also represents the increased cost of promotional giveaways
and an increase in commissions paid on increased sales. The increase in
management salaries and benefits is attributed to the conversion of two
management salary and benefits packages from Canadian to United States Funds.
NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999
Revenue
Sales of $416,337 and $218,357 for the nine months ended March 31, 2000
and 1999, respectively, were derived primarily from the sale of the Company's
sunscreen products. During 1998 and 1999, the Company's attentions were
primarily focused on putting in place effective cost controls and management
systems, and increasing sales and marketing efforts. Sales in 2000 have
accordingly increased as a result of last year's stepped-up efforts. The company
spent the latter half of the 1999 calendar year completely redesigning its
packaging and marketing material to make it available to retailers by March
2000. The sales attained in 1999 consisted of the selling of existing inventory
of the original packaging design as the new packaging design was to be ready for
shipping to retailers in the spring of 2000. .
Operating expenses
The Company's operating expenses consist of sales and marketing and
general and administrative expenses. Operating expenses were $1,103,364 and
$592,611 for the nine months ended March 31, 2000 and 1999, respectively,
including $109,758 of goodwill amortization as a result of the acquisition of
Kinesys Canada. No goodwill amortization was recorded during the nine months
ended March 31, 1999.
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Advertising and promotion expense for the nine months ended March 31,
2000 of $551,972 increased $467,544 or 554% from the comparable period in 1999.
Sales commissions for the nine months ended March 31, 2000 of $15,273 rose over
the comparable period of 1999, during which period commissions were refunded to
the company in a net amount of $11,161. Bank charges and interest for the nine
months ended March 31, 2000 of $445 decreased $9,538 from $9,983 in the
comparable period of 1999. Professional fees paid to the Company's accountants,
attorneys and computer consultants for the nine months ended March 31, 2000 of
$76,064 increased $33,755 or 80% from the comparable period in 1999. Salaries
and benefits for these periods were $98,826 and $60,746, respectively. Expense
for stock option compensation decreased to nil in the nine months ended March
31, 2000 from $257,269 in the comparable period of 1999. Expenses for travel and
participation in trade shows were $59,358 for the nine months ended March 31,
2000 and $41,165 for the comparable period in 1999.
The increase in these numbers (particularly advertising, promotion and
commissions) for the nine months ended March 31, 2000 represents the increased
cost of the design of the new bottle, packaging and promotional collateral
material, promotional giveaways and an increase in commissions paid on increased
sales. A large expense was attributable to the recognition of an employee
benefit relating to the grant of stock options to employees and directors in the
nine months ended March 31, 1999, which was not duplicated in 2000.
LIQUIDITY AND CAPITAL RESOURCES
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, and raised
an additional $400,000 upon exercise of warrants to purchase 400,000 shares of
Common Stock in October, 1999 and $100,000 through sale of Common Stock to a
private purchaser. The Company has additional outstanding options to purchase
320,000 Common shares at an exercise price of $1.25 per share. 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 fulfill all
orders for the remainder of 2000 and begin to plan for the 2001 season. The
Company intends to conduct private placement sales of its equity securities if
and when its cash reserves are depleted. 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.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
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
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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.
NEED FOR ADDITIONAL FINANCING.
During the next 12 months, the Company's foreseeable cash requirements
are expected to 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 December 31, 1999, it had an accumulated deficit
of $1,346,045. 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 CEO AND OTHER QUALIFIED PERSONNEL.
The Company is dependent upon the active participation of several key
management personnel, including Jeffrey Kletter, President, and Jocelyn Kletter,
Vice President. The Company does not currently maintain key employee insurance
policies. Mr. Jonathan Mara, the past CEO, left the Company on February 29, 2000
to pursue other opportunities. The duties of the CEO are being fulfilled by the
President and Vice President. The Company is actively
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seeking to recruit a new CEO with skills more suitable for the Company at its
current stage, but there can be no guarantee that the Company will find a
suitable candidate, or that a suitable candidate can be induced to work for the
Company. The Company will likely need to recruit additional 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.
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. The Company strives to to predict its inventory requirements in an
effort to avoid carrying excess inventory that will decrease in value. However,
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 no public market for the Company's Common Stock, and no assurance can
be given that a 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.
-16-
<PAGE>
RISKS OF LOW-PRICED STOCKS; PENNY STOCK REGULATIONS.
If the Company's Common Stock resumes trading on NASD'S "Over-the
Counter Bulletin Board," it will be 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.
SHARE PRICE VOLATILITY.
If public trading in our Common Stock resumes, 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.
As with all products subject to governmental regulatory approval, 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.
-17-
<PAGE>
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Mr. Jonathan Mara, former Chief Executive Officer of the Company, tendered his
resignation to the Board of Directors on February 29, 2000 as he had an
opportunity to join a company where his past experience was more relevant to the
business operations. Operations are presently being conducted by Jeff Kletter
and Jocelyn Kletter, the Company's founders. The Company is actively engaged in
a search for a new Chief Executive Officer. There can be no guarantee that the
Company will find a person meeting its needs, or will be able to fill this
position for a cost deemed acceptable by the Company.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KINeSYS Pharmaceuticals, Inc.
----------------------------------------------
(Registrant)
May 18, 2000 /s/ Jeff Kletter
- ------------------------- ------------------------------------------------
(Date) President
-18-
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