Glyko Biomedical Ltd.
1997 Annual Report
<PAGE>
Glyko Biomedical Ltd.
Company Profile
Glyko is a leading supplier of carbohydrate technology for
research, medical diagnosis and pharmaceutical development. The
Company's research products are used by pharmaceutical,
biotechnology, food and beverage and industrial scientists to
analyze sugars and sugar chains.
Glyko's medical business includes the development and marketing of
medical diagnostic tests, including tests for a number of
inherited diseases in children and a blood test for the drug
called heparin. The Company also develops pharmaceuticals through
its 41%-owned affiliate, BioMarin Pharmaceutical, Inc. BioMarin is
a development stage pharmaceutical company specializing in the
discovery and development of proprietary, naturally-occurring,
carbohydrate-active enzyme therapeutics as treatments for a number
of human diseases. These include many important acquired and
inherited medical conditions affecting adults and children:
mucopolysaccharidoses (MPS diseases), burn wound healing, fungal
infections and inflammatory conditions.
For more information about Glyko technology and products, visit
our website at http://www.glyko.com.
<PAGE>
Glyko Biomedical Ltd.
To our stockholders, customers and staff:
Thank you for your interest in Glyko. The field of carbohydrate technology
continues to grow as the importance of sugars and sugar chains becomes more
evident to the scientific, industrial, and pharmaceutical communities.
1997, Glyko Expands Markets for Research Products
The Company has expanded our direct sales product line with additional reagents
and chemicals. We negotiated additional distribution and OEM supply agreements
during the year, and we believe that Glyko has the broadest array of
carbohydrate analysis technology worldwide. The Company's research products
business generated a profit for the first time.
With the development of treatments for Hurler disease (MPS I) our Urinary
Carbohydrate Test for the screening of inherited diseases of children will
become more important to the pediatric community. The Company continues to
improve this test under a grant from the U.S. National Institutes of Health.
Under an agreement with Array Medical we anticipate beginning clinical trials of
our test for heparin, a widely prescribed carbohydrate drug.
1997, BioMarin Pharmaceutical, Inc. Begins Pivotal Trial for MPS I
Perhaps the most important development for the Company was the creation and
funding of BioMarin Pharmaceutical, Inc. (BioMarin). After initial seed funding
by Glyko in March 1997, BioMarin successfully completed $11 million of
financings in the Fall and began its pivotal trial in MPS I (Hurler disease) in
December. Preclinical animal trials are also underway for two additional enzyme
therapeutics for burn wounds and anti-fungal infections. The Company believes
that BioMarin's unique products will expand the range of a new class of enzyme
therapies and accelerate their role in medicine.
Thank you for your interest in our carbohydrate technology and in the
development of our businesses. During the rest of 1998 the Company will strive
to expand the utility of its carbohydrate technology in research, testing and in
the management of human disease.
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Glyko Biomedical Ltd.
Financial Results
Contents Page
Management's Discussion and Analysis of
Financial Condition and Results of Operations 3-5
Consolidated Balance Sheets 6
Consolidated Statements of Operations 7
Consolidated Statements of Stockholders' Equity (Deficit) 8
Consolidated Statements of Cash Flows 9
Notes to Consolidated Financial Statements 10-16
Auditors' Report 17
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Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The following discussion and analysis of financial condition and results of
operations contains certain forward looking statements within the meaning of
Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of
the U.S. Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The Company's actual results could differ
materially from the results anticipated in these forward-looking statements.
Risks are identified in "Overview, " "Results of operations," and "Liquidity and
capital resources."
Glyko Biomedical Ltd. is a Canadian holding company that owns all of the capital
stock of Glyko, Inc. and 41% of the capital stock of BioMarin Pharmaceutical,
Inc. at December 31, 1997. In this Statement, unless otherwise indicated, as
reference to "Glyko" or to the "Company" means Glyko and its wholly-owned
subsidiary Glyko, Inc. Glyko, Inc. and BioMarin Pharmaceutical, Inc. (BioMarin)
are operating companies based in California. The following discussion and the
accompanying consolidated financial statements include the accounts of Glyko
Biomedical Ltd. and Glyko, Inc. presented on a consolidated basis plus BioMarin
presented on the equity method of accounting . Numerical references in the
following discussion are rounded to the nearest thousand. Since its inception in
October 1990, the Company has engaged in research and development of new
techniques to analyze and manipulate carbohydrates for research, diagnostic and
pharmaceutical purposes. The Company has developed a line of analytic
instrumentation laboratory products that include an imaging system, analysis
software and chemical analysis kits. The Company is continuing to develop
additional chemical kits for use with the imaging system, and is also developing
a line of carbohydrate diagnostic products. In March 1997, the Company raised
Cdn.$2.0 million (USD$1.4 million) to fund the start-up of BioMarin which was
formed to develop the Company's pharmaceutical products. Glyko, Inc. (the
Company's research products and diagnostics business) has recorded its first
year of annual net operating profit in the amount of $442,000 for 1997, and the
Company's pro rata share of BioMarin's net loss of $2,442,000 offset by the
Company's pro rata share of BioMarin's issuance of common stock in financings in
the fourth quarter of 1997 of $3,978,000 resulted in the Company reporting net
income of $1,990,000 for the year. There is no assurance that sales will
increase in future years and with the continuing research and development
expenses incurred by BioMarin, the Company may report net losses in the future.
For the period from its inception to December 31, 1997, the Company has incurred
cumulative losses of $10,944,000.
In October 1997, BioMarin raised net proceeds of $3,647,000 (including $880,000
of bridge loans received in the third quarter of 1997 which were converted to
common stock) from outside investors in exchange for 4,039,000 shares (including
shares issued to the placement agent for the financing). Concurrently, BioMarin
issued 2,500,000 shares of Common Stock to three executive officers of BioMarin
including John Klock, MD owning 800,000 shares and Christopher Starr, Ph.D.
owning 400,000 shares, both of whom are also executive officers of Glyko
Biomedical Ltd. for an aggregate of $2,500,000 in notes due on July 31, 2000.
Gwynn Williams, who is a major shareholder and director of the Company, is also
a director of BioMarin and owns 20,000 options to purchase BioMarin common stock
at $1.00 per share.
In December 1997, BioMarin raised net proceeds of $5,016,000 from outside
investors in exchange for 5,527,500 shares (including shares issued to the
placement agent for the financing). As a result of such share issuances, Glyko
Biomedical Ltd.'s ownership in BioMarin was reduced to 41% of BioMarin's
outstanding Common Stock. Future fundraising efforts of BioMarin could result in
a further reduction of Glyko Biomedical Ltd.'s ownership percentage.
BioMarin and Glyko Biomedical Ltd. have entered into a License Agreement dated
June 26, 1997, pursuant to which Glyko Biomedical Ltd. granted BioMarin an
exclusive, worldwide, perpetual, irrevocable, royalty-free right and license to
certain worldwide patents, trade secrets, copyrights and other proprietary
rights to all know-how, processes, formulae, concepts, data and other such
intellectual property, whether patented or not, owned or licensed by Glyko
Biomedical Ltd. and its subsidiaries as of the date of
3
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the License Agreement for application in therapeutic uses, including, without
limitation, drug discovery and genomics. Under the same License Agreement,
BioMarin granted Glyko Biomedical Ltd. an exclusive, worldwide, perpetual
irrevocable, royalty-free cross-license to all improvements BioMarin may make
upon the licensed intellectual property. As consideration for this license,
BioMarin issued Glyko Biomedical Ltd. 7,000,000 shares of BioMarin common stock.
Results of Operations
Revenues in 1997 were $2,037,000 and consisted of sales of products and services
of $1,176,000, other revenues representing development, technology and licensing
fees of $704,000 and grant revenues of $157,000. Sales of products and services
consisted of sales of chemical analysis kits, fees for custom analytic services
and sales of imaging systems. Revenues in 1996 were $1,331,000 and consisted of
sales of products and services of $1,272,000 and other revenues (primarily grant
fees and equipment rental revenues) of $59,000. The decline in product revenues
in 1997 was due principally to the relocation of the Company's California
facilities in February which caused approximately eight weeks of delays in
fulfilling orders. The increase in other revenues was due to new or revised
development, technology and licensing agreements negotiated in 1997.
Gross margin on sales of products and services was 59 percent in 1997 and 60
percent in 1996. As the Company is still in the early stages of product sales
and production, management expects that margins will fluctuate for some time and
that current margins are not necessarily indicative of future margins.
Research and development expenses in 1997 were $549,000 compared to $1,015,000
in 1996, a decrease of $466,000. The decrease is due to the shifting of lab
personnel in 1997 to BioMarin's payroll including the reduction of salary
allocated to Glyko, Inc. for Dr. Christopher Starr, Vice President of Research
and Development, whose time allocated to Glyko, Inc. went from 100% in 1996 to
30% in 1997. One other full-time Ph.D. was shifted 100% to BioMarin in 1997.
Also, in October 1996, the Company effected lay-offs in an effort to reduce
expenditures, which included one full-time lab technician.
Selling, general and administrative expense was $563,000 in 1997, a decrease of
$862,000 from 1996 expense of $1,425,000. Marketing and promotional expenses
were lower in 1997 due to the cut-back of two full-time marketing positions in
the October 1996 layoffs. General and administrative expenses were reduced due
to the reduction of rent expense resulting from the Company's relocation to a
smaller facility in 1997 and due to the sublease rental income from BioMarin in
1997. Rent expense in 1996 was offset by a write-off of the deferred rent
balance of $62,538 at December 31, 1996 related to a lease abandonment (see Note
5 of the financial statements). General and administrative expenses were also
reduced due to the cut-back of administrative staff in October 1996 plus the
reduction of salary allocated to Glyko, Inc. for Dr. John Klock, President,
whose time allocated to Glyko, Inc. went from 100% in 1996 to 30% in 1997.
Interest income earned in 1997 and 1996 reflected earnings on cash invested in
short term interest bearing accounts. Interest expense in 1997 and 1996 was
immaterial.
Liquidity and Capital Resources
During the second quarter of 1996, the Company closed a second private equity
placement offering (the Q296 Financing). Investors participating in the Q296
Financing purchased 2.5 million units each consisting of one share of common
stock and one half of a two year warrant. One warrant is required to purchase
one share of common stock. The units were priced at Cdn.$0.60 with an exercise
price on the warrant of Cdn.$0.80. The Q296 Financing raised approximately
$1.077 million. An additional 175,000 units and 250,000 warrants valued together
at approximately $130,000 were distributed to brokers in exchange for services
rendered in connection with the Q296 Financing. The Company utilized the
Black-Scholes model to value all the warrants issued in the Q296 Financing at
approximately $156,000.
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On March 21, 1997, the Company closed a Cdn.$2.0 million (USD$1.4 million)
financing (the Q197 Financing) to fund the start-up of BioMarin Pharmaceutical,
Inc. which was formed to develop the Company's pharmaceutical products. As a
result of this financing, the Company issued 4.0 million units at Cdn.$0.50 per
unit, each unit consisting of one common share and one common share purchase
warrant. Each warrant can be exercised for one share of common stock at
Cdn.$1.00 per share, expiring on March 21, 1999. An additional 280,000 units and
280,000 warrants together valued at approximately $161,000 were distributed to
the brokers in exchange for services rendered in connection with the Q197
Financing. The Company utilized the Black-Scholes model to value all the
warrants issued in the Q197 Financing at approximately $496,000.
In October 1997, BioMarin sold 3,740,000 shares of common stock for net proceeds
of $3,647,000 (including $880,000 of bridge loans received in the third quarter
of 1997 which were converted to common stock). Additionally, BioMarin issued
299,000 common shares and 299,000 warrants to purchase common shares exercisable
at $1.00 per share. Concurrently, BioMarin issued 2,500,000 shares of Common
Stock to three executive officers of BioMarin, two of whom are also executive
officers of Glyko Biomedical Ltd. for an aggregate of $2,500,000 in notes due on
July 31, 2000.
In December 1997, BioMarin raised net proceeds of $5,016,000 from outside
investors in exchange for 5,527,500 shares (including 502,500 shares issued to
the placement agent for the financing). Additionally, BioMarin issued to the
placement agent 502,500 warrants to purchase common shares exercisable at $1.00
per share. As a result of such share issuances, Glyko Biomedical Ltd.'s
ownership in BioMarin was reduced to 41% of BioMarin's outstanding Common Stock.
Future fundraising efforts of BioMarin could result in a further reduction of
Glyko Biomedical Ltd.'s ownership percentage.
The Company's net cash position increased by $317,000 in 1997. Net cash proceeds
from the Q197 Financing of $1,424,000 proceeds from stock option exercises of
$23,000 and net cash provided by operating activities of $441,000 were offset by
the Company's cash investment in BioMarin of $1,500,000 and purchases of
property and equipment of $71,000.
The Company's net cash position decreased by $410,000 in 1996. Net cash proceeds
of $1,054,000 from the Q296 Financing were offset by cash used in operating
activities of $1,389,000. Cash used in operating activities in 1996 reflected
the operating loss of $1,576,000 partially offset by collections of accounts
receivable and deferral of payments for facilities costs.
Since its inception, the Company has incurred cumulative losses of $10,944,000
and expects to continue to incur losses during 1998 due to the ongoing research
and development of pharmaceutical products by BioMarin. Management believes that
Glyko, Inc. has sufficient cash to sustain planned operations through the end of
1998 due to increased revenues and decreased expenditures. Management also
believes that BioMarin has sufficient cash to sustain planned operations through
the end of 1998 due to additional capital raised from outside shareholders at
the end of 1997. To maintain liquidity beyond the end of 1998, BioMarin will
have to raise additional capital, reduce expenses considerably, generate
significant revenues, or realize some combination of the above. To maintain
liquidity beyond the end of 1998, Glyko, Inc. will have to reduce expenses
considerably, increase sales significantly, or realize some combination of the
above. There can be no assurance that BioMarin nor Glyko, Inc. will be
successful in maintaining liquidity. Management may consider selling certain
assets or technology rights to raise additional capital. The Company will
continue to seek additional funding through various means including but not
limited to stock issuances, licensing and marketing agreements and collaborative
research agreements with strategic partners. However, there can be no assurance
that such agreements will be reached and that additional funding will be
obtained.
The Company is currently reviewing its computer systems and products to assess
their year 2000 compliance and to determine if the Company will encounter any
year-2000 related problems or will incur any year-2000 related expenses. The
Company does not currently anticipate that it will incur material expenditures
to complete any such modifications.
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GLYKO BIOMEDICAL LTD.
CONSOLIDATED BALANCE SHEETS
(In U.S. dollars)
December 31, December 31,
1997 1996
------------------------ ----------------------
Assets
Current assets:
Cash $ 528,280 $ 210,992
Trade receivables 141,743 156,176
Inventories 95,210 68,452
Other current assets 15,179 26,025
------------------------ ----------------------
Total current assets 780,412 461,645
Investment in BioMarin
Pharmaceutical, Inc. 3,036,261 --
Property, plant and equipment,
net 118,910 108,045
Other assets 2,206 2,200
------------------------ ----------------------
Total assets $ 3,937,789 $ 571,890
======================== ======================
Liabilities and Stockholders'
Equity (Deficit)
Current liabilities:
Accounts payable $ 38,916 $ 174,732
Accrued liabilities 173,597 204,504
Deferred rent and related
costs 365,880 269,718
Payable to stockholder 219,811 219,811
------------------------ ----------------------
Total current 798,204 868,765
liabilities
------------------------ ----------------------
Total liabilities 798,204 868,765
Stockholders' equity (deficit):
Common stock, no par value, unlimited shares
authorized, 21,573,044 and 17,243,044 shares
issued and outstanding at December 31, 1997 and
December 31, 1996,
respectively 13,154,224 12,203,065
Common stock warrants 929,585 433,897
Accumulated deficit (10,944,224) (12,933,837)
------------------------ ----------------------
Total stockholders' 3,139,585 (296,875)
equity (deficit)
------------------------ ----------------------
Total liabilities and
stockholders' equity
(deficit) $ 3,937,789 $ 571,890
======================== ======================
Approved on behalf of the Board of Directors:
Gwynn R. Williams John C. Klock, M.D.
The accompanying notes are an integral part of these statements.
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GLYKO BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In U.S. dollars)
Year Ended December 31,
---------------------------------------------
1997 1996
-------------------- ----------------------
Revenues:
Sales of products
and services $ 1,175,699 $ 1,271,933
Other revenues 860,935 58,702
-------------------- ----------------------
Total revenues: 2,036,634 1,330,635
Expenses:
Cost of products and services 482,770 509,248
Research and development 549,015 1,014,966
Selling, general and administrative 562,888 1,425,484
-------------------- ----------------------
Total expenses: 1,594,673 2,949,698
-------------------- ----------------------
Income (loss) from operations 441,961 (1,619,063)
Equity in loss of BioMarin
Pharmaceutical, Inc. (2,442,151) -
Gain on dilution of ownership of
BioMarin Pharmaceutical, Inc. 3,978,412 -
Interest income 12,610 18,367
Other income (loss) (1,219) 24,837
-------------------- ----------------------
Net income (loss) $ 1,989,613 $ (1,575,859)
==================== ======================
Net income (loss) per
common share, basic $0.10 $(0.10)
==================== ======================
Net income (loss) per common
share, fully-diluted $0.07 $(0.10)
==================== ======================
Weighted average number of shares
used in computing per share
amounts, basic 20,536,058 16,058,994
==================== ======================
Weighted average number of shares
used in computing per share amounts,
fully-diluted 33,894,382 16,058,994
==================== ======================
The accompanying notes are an integral part of these statements.
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GLYKO BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In U.S. dollars)
<TABLE>
<CAPTION>
Common Stock Common
Stock
-------------------------------------- Accumulated
Shares Amount Warrants Deficit Total
---------------- --------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 14,567,944 $11,304,356 $ 278,085 $(11,357,978) $ 224,463
Net loss for the year - - - (1,575,859) (1,575,859)
Exercise of stock options 100 48 - - 48
Issuance of common stock
and warrants in a private
placement financing, net of
issuance costs of $152,156 2,675,000 898,661 155,812 - 1,054,473
----------------- --------------- -------------- --------------- ----------------
Balance at December 31, 1996 17,243,044 $12,203,065 $ 433,897 $(12,933,837) $ (296,875)
Net income for the year - - - 1,989,613 1,989,613
Exercise of stock option 50,000 22,976 - - 22,976
Issuance of common stock
and warrants in a private
placement financing, net of
issuance costs of $160,881 4,280,000 928,183 495,688 - 1,423,871
----------------- --------------- -------------- --------------- ----------------
Balance at December 31, 1997 21,573,044 $13,154,224 $ 929,585 $(10,944,224) $ 3,139,585
================= =============== ============== =============== ================
</TABLE>
The accompanying notes are an integral part of these statements.
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GLYKO BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. dollars)
Year ended December
-------------------------------------------
1997 1996
-------------------- ------------------
Cash flows from operating activities:
Net income (loss) $ 1,989,613 $ (1,575,859)
Adjustments to reconcile net
income (loss) to net cash provided
by (used in)operating activities:
Depreciation and amortization 58,693 61,139
Equity in the loss of BioMarin
Pharmaceutical, Inc. 2,442,151 -
Gain on dilution of ownership of
BioMarin Pharmaceutical, Inc. (3,978,412) -
Loss on disposal of property
and equipment 1,452 4,046
Gain on lease abandonment - (62,538)
Change in assets and liabilities:
Trade receivables 14,433 200,630
Inventories (26,758) 40,066
Other assets 10,840 (20,854)
Accounts payable (135,816) 52,357
Accrued liabilities (30,907) (16,956)
Deferred revenue - (174,386)
Deferred rent and related costs 96,162 103,183
-------------------- ------------------
Total adjustments (1,548,162) 186,687
-------------------- ------------------
Net cash provided by
(used in) operating activities 441,451 (1,389,172)
Cash flows from investing activities:
Investment in BioMarin
Pharmaceutical, Inc. (1,500,000) -
Purchases of property and equipment (71,010) (61,061)
-------------------- ------------------
Net cash used in investing
activities (1,571,010) (61,061)
Cash flows from financing activities:
Net proceeds from the issuance
of common stock and warrants in
private placement financings 1,423,871 1,054,473
Proceeds from exercise of
stock options 22,976 48
Repayments on capital
lease obligations - (14,016)
-------------------- ------------------
Net cash provided by
financing activities 1,446,847 1,040,505
-------------------- ------------------
Net increase (decrease) in cash 317,288 (409,728)
Cash and cash equivalents, beginning
of period 210,992 620,720
-------------------- ------------------
Cash and cash equivalents,
end of period $ 528,280 $ 210,992
==================== ==================
Supplemental disclosure of noncash financing activities:
Common stock and common stock
warrants issued in exchange
for financing services 840,000 share 512,500 share
equivalents equivalents
The accompanying notes are an integral part of these statements.
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GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Description of the Business
Glyko Biomedical Ltd. (the Company) is a Canadian company which was
established in 1992 to acquire all of the outstanding capital stock of
Glyko, Inc., a Delaware corporation. The Company, through its
wholly-owned subsidiary Glyko, Inc., is developing new techniques to
analyze and manipulate carbohydrates for research, diagnostic and
pharmaceutical purposes. The Company has developed a product line of
laboratory instruments and chemical kits, referred to as analytic
products, which are used in carbohydrate analysis. Shipments of these
products began in December 1992. The Company is also developing certain
carbohydrate diagnostic products. In October, 1996, the Company formed
BioMarin Pharmaceutical, Inc. (BioMarin), a Delaware corporation, to
develop the Company's pharmaceutical products. BioMarin first issued
stock on March 21, 1997 (inception) when it issued 1,500,000 shares of
common stock to the Company for $1.5 million. Beginning in October 1997,
BioMarin raised capital from third parties with the result that at
December 31, 1997, the Company's ownership interest in BioMarin had been
reduced to 41 percent.
Since its inception, the Company has incurred cumulative losses of
$10,944,224 and expects to continue to incur losses during 1998 due to
the ongoing research and development of pharmaceutical products by
BioMarin. Management believes that Glyko, Inc. has sufficient cash to
sustain planned operations through the end of 1998 due to increased
revenues and decreased expenditures. Management also believes that
BioMarin has sufficient cash to sustain planned operations through the
end of 1998 due to additional capital raised from outside shareholders
at the end of 1997. In order to continue operations beyond 1998, Glyko,
Inc. and BioMarin would need to obtain additional funding in the form of
stock issuances, licensing and marketing agreements and/or collaborative
research agreements with strategic partners. If adequate funding is not
obtained, long-term operations may be adversely affected. Glyko, Inc.
and BioMarin will delay or eliminate expenditures in respect of certain
products under development such as additional analytical kits,
diagnostic testing equipment and pharmaceutical products in the event
sufficient funding is unavailable. In December 1992, the Company
successfully completed an initial public offering on the Toronto Stock
Exchange. Since that time, the Company has maintained liquidity by
utilizing the proceeds of that offering, by utilizing the proceeds of
private equity placements in the second quarter of 1995, the second
quarter of 1996, and the first quarter of 1997, and by using cash flow
from operations from Glyko, Inc. BioMarin has maintained liquidity by
utilizing proceeds from three private equity placements during 1997.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements and related footnotes
have been prepared in conformity with Canadian generally accepted
accounting principles using U.S. dollars. At December 31, 1996, the
consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary Glyko, Inc. As of December 31, 1997, the
Company owns 41 percent of BioMarin and, as such, BioMarin's activities
have been reported in the Company's financial statements for the year
ended December 31, 1997, based on the equity method of accounting. To
the extent that the issuance of stock by BioMarin to third parties
results in a decrease in the Company's ownership of the net assets of
BioMarin, the Company reflects this decrease as a gain or loss on
dilution of ownership of BioMarin in the Consolidated Statements of
Operations. All significant intercompany accounts and transactions have
been eliminated. Certain balances in the prior years have been
reclassified to conform with the current year presentation.
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GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates:
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make certain estimates and assumptions that effect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. Significant estimates made by management include allowance
for doubtful accounts receivable, and certain other reserves, including
an accrual for deferred rent (see Footnote 5).
Cash and Cash Equivalents:
Cash and cash equivalents consist of amounts held with banks and
short-term investments with original maturities of 90 days or less.
Inventories:
Inventories consist of raw materials, analytic kits, and instrument-based
systems held for sale. Inventories are stated at the lower of cost
(first-in, first-out method) or estimated market value. The components of
inventories are as follows:
December 31,
1997 1996
----------------- ----------------
Raw materials $90,647 $62,925
Finished products 4,563 5,527
----------------- ----------------
$95,210 $68,452
================= ================
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. The cost and
accumulated depreciation for property, plant and equipment sold, retired,
or otherwise disposed of are relieved from the accounts, and the
resulting gains or losses are reflected in the consolidated statements of
operations. Depreciation is computed using the straight-line method over
the following estimated useful lives:
Office furniture 5 years
Computer equipment 3 years
Lab and production equipment 5 years
Foreign Exchange:
As all of the Company's operations are located in the United States, the
Company has adopted the U.S. dollar as its functional currency. The
Company's Canadian assets, liabilities, stockholder's equity and expenses
have been translated into U.S. dollars using the temporal method. Under
this method, monetary items have been translated at the year-end currency
exchange rate. Non-monetary items have been translated at the historic
rate of exchange. Expenses have been translated at the average rate of
exchange during the year. Foreign exchange gains and losses on monetary
assets and liabilities are included in the determination of earnings.
Transaction gains and losses included in the consolidated statements of
operations are immaterial.
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GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product Sales:
The Company recognizes product revenues and related cost of sales upon
shipment of products. Service revenues are recognized upon completion of
services as evidenced by the transmission of reports to customers. Other
revenues, principally licensing and distribution fees, are recognized
upon completion of applicable contractual obligations.
At times, the Company has received payments in advance for future product
shipments or hardware maintenance and service contracts. Such payments
are classified as deferred revenue on the accompanying consolidated
balance sheets. Upon shipment of products, revenue is recognized and the
corresponding liability (deferred revenue) is reduced. Revenues from
maintenance and service contracts are recognized monthly pro rata over
the period of the contract and the corresponding liability (deferred
revenue) is reduced.
Total revenues of $2,036,634 in 1997 and $1,330,635 in 1996 consisted
entirely of direct product sales, sales to distributors for resale,
analytical service fees, technology and licensing fees, and grant
revenues. In 1997, revenues (including licensing and technology fees)
from three major customers were 29 percent, 14 percent and 8 percent of
total revenues. Grant revenues in 1997 represented eight percent of total
revenues. In 1996, revenues from three major customers were 14 percent,
14 percent and 13 percent of total revenues.
In 1990, the Company entered into an agreement (the "Agreement") giving
one of its stockholders the exclusive right to market and distribute the
Company's analytic products for an initial period of six years from the
time the Company developed a commercially marketable product. During
1993, the Agreement was amended to grant the Company the non-exclusive
right to market and distribute the Company's analytic products in the
United States (direct product sales). In April 1994, the stockholder and
the Company agreed to terminate the Agreement. In exchange for
relinquishing its rights under the Agreement, the stockholder will
receive 500,000 shares of common stock, subject to regulatory approval.
In the third quarter of 1994 the Company recorded a charge to operations
of $219,811 for costs related to the termination of the Agreement. This
amount represents the estimated fair market value of stock to be issued
as a result of the termination of the Agreement. The Toronto Stock
Exchange has not permitted the issuance of the 500,000 shares because the
transaction is not considered arms length. The Toronto Stock Exchange
requires that an independent valuation be performed in order to
reconsider the issuance of these shares. No such valuation has been
performed to date.
Income Taxes:
Income taxes are provided using the deferral method. The Company has
accumulated losses for financial reporting and income tax purposes which
are available to reduce U.S. and Canadian taxable income in future years
and for which no future tax benefit has been recognized in the accounts.
Total U.S. federal and state net tax operating loss carryforwards as of
December 31, 1997 are approximately $11.9 million and $5.9 million,
respectively. Federal operating loss carryforwards expire from 2006 to
2012 and state operating loss carryforwards expire from 1997 to 2001. The
Company also has federal and state research and development credit
carryovers of $593,000 which expire from 2007 to 2011. For Canadian
income tax purposes, the Company has net operating loss carryforwards of
approximately $1.3 million which expire from 1999 to 2003. Under current
U.S. tax law, future changes in ownership of the Company may limit the
utilization of U.S. net operating loss and credit carryforwards.
Net Loss per Share:
Net loss per share is based on the weighted average number of common
shares outstanding during each period. Potentially dilutive securities
include 2,254,597 common stock options and 6.4 million common stock
warrants outstanding at December 31, 1996. These securities were not
considered in the computation of fully-diluted loss per share because
their effect would be anti-dilutive for the year ended December 31, 1996.
12
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Property, Plant and Equipment
Property, plant and equipment at December 31, 1997 and 1996 consisted of
the following:
December 31,
1997 1996
--------------- ----------------
Lab equipment $229,701 $282,468
Computer equipment 94,712 212,330
Production equipment 37,164 42,095
Office furniture 13,510 18,069
Leasehold improvements 68,343 8,554
---------------- ----------------
443,430 563,516
Less accumulated depreciation (324,520) (455,471)
---------------- ---------------
Property, plant and
equipment, net $118,910 $108,045
================ ================
4. Investment in BioMarin Pharmaceutical, Inc. (BioMarin)
The Company accounts for its investment in BioMarin under the equity
method of accounting. As of December 31, 1997, the Company owned 41
percent of BioMarin. During the first nine months of 1997, the Company
owned 100 percent of BioMarin and due to subsequent outside financings by
BioMarin in the fourth quarter of 1997, the Company's ownership
percentage decreased to 41 percent. There is no difference between the
carrying value of the Investment in BioMarin account and the underlying
book value of BioMarin.
Below is a summary of BioMarin's financial condition as of December 31,
1997:
Assets $ 7,662,130
Liabilities 281,664
Stockholders' Equity 7,380,466
Net Loss from March 21, 1997
(inception) to December 31, 1997 (2,744,745)
Shares issued and outstanding 20,566,500
Shares owned by Glyko Biomedical Ltd. 8,500,000
BioMarin first issued stock on March 21, 1997 (inception) when it issued
1,500,000 shares of common stock to the Company for $1.5 million.
BioMarin and the Company have entered into a License Agreement dated June
26, 1997, pursuant to which the Company granted BioMarin an exclusive,
worldwide, perpetual, irrevocable, royalty-free right and license to
certain worldwide patents, trade secrets, copyrights and other
proprietary rights to all know-how, processes, formulae, concepts, data
and other such intellectual property, whether patented or not, owned or
licensed by the Company and its subsidiaries as of the date of the
License Agreement for application in therapeutic uses, including, without
limitation, drug discovery and genomics. Under the same License
Agreement, BioMarin granted the Company an exclusive, worldwide,
perpetual, irrevocable, royalty-free cross-license to all improvements
BioMarin may make upon the licensed intellectual property. As
consideration for this license, BioMarin issued the Company 7,000,000
shares of BioMarin common stock.
In October 1997, BioMarin sold 3,740,000 shares of common stock to
outside investors for net proceeds of $3,647,000 (including $880,000 of
bridge loans received in the third quarter of 1997 which were converted
to common stock). Additionally, BioMarin issued to the placement agent
299,000 common shares and 299,000 warrants to purchase common shares
exercisable at $1.00 per share. Concurrently, BioMarin issued 2,500,000
shares of common stock to three executive officers of BioMarin including
John Klock, MD owning 800,000 shares and Christopher Starr, Ph.D. owning
400,000 shares both of whom are also executive officers of Glyko
Biomedical Ltd. for an aggregate of $2,500,000 in notes due on
13
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2000. Gwynn Williams, who is a major shareholder and director
of the Company, is also a director of BioMarin and owns 20,000 options
to purchase BioMarin stock at $1.00 per share.
In December 1997, BioMarin raised net proceeds of $5,016,000 from outside
investors in exchange for 5,527,500 shares (including 502,500 shares
issued to the placement agent for the financing). Additionally, BioMarin
issued to the placement agent 502,500 warrants to purchase common shares
exercisable at $1.00 per share. As a result of such share issuances,
Glyko Biomedical Ltd.'s ownership in BioMarin was reduced to 41 percent
of BioMarin's outstanding Common Stock. Future fundraising efforts of
BioMarin could result in a further reduction of Glyko Biomedical Ltd.'s
ownership percentage.
As a result of BioMarin's issuance of shares to third parties, the
Company recorded a gain on dilution of ownership of BioMarin of
$3,978,412 on the Consolidated Statements of Operations at December 31,
1997.
5. Commitments and Contingencies
Leases
The Company leases its facilities, and office and other equipment under
agreements that expire at various dates through 2000. The Company leased
its facilities from one of its stockholders through January 1997. The
Company had negotiated payment deferrals for rent payments and related
facility charges under this agreement.
In October 1996, the company notified the lessor that the lease would be
abandoned in January 1997. In 1997, the lessor claimed $365,880 in
deferred rent and related costs for part of 1995 through January 1997.
The lessor also claimed an additional $90,000 of equipment and property
damage resulting from the abandonment of the premises. The Company has a
counter claim for $300,000 representing sales royalties due from the
lessor to the Company plus the cost of building repairs paid by the
Company on behalf of the lessor. While the Company does not believe that
the lessor's claim is valid and does not agree with the amount claimed by
the lessor, the amount of $365,880 has been accrued and is reflected on
the balance sheet at December 31, 1997. While the original lease
agreement extends through December 31, 1998, management does not believe
the Company will be held responsible for continuing lease obligations
and, as such, no additional amounts have been accrued beyond January
1997. The facility has been subsequently leased.
The Company recognized rental expense under the agreement on a
straight-line basis calculated over the full term of the sublease
agreement. The difference between cumulative rental payments under the
original lease agreement and rental expense was classified as a
non-current liability at December 31, 1995. As a result of the
abandonment in 1997, the remaining deferred rent balance at December 31,
1996 of $62,538 was written-off against selling, general and
administrative expenses.
Aggregate minimum annual rental commitments under operating leases
(excluding the abandoned lease) are as follows:
Years ending December 31,
---------------------------------------
1998 $115,692
1999 125,582
2000 34,559
2001 and thereafter --
---------------
$275,833
===============
Rent expense was $57,950 (net of sublease rental income) in 1997 and
$274,284 in 1996.
Product Liability and Lack of Insurance
The Company is subject to the risk of exposure to product liability
claims in the event that the use of its technology results in adverse
effects during testing or commercial sale. The Company currently does not
maintain product liability insurance. There can be no assurance that the
Company will be able to obtain product liability insurance coverage at
economically reasonable rates, or that such insurance will provide
adequate coverage against all possible claims.
14
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Stockholders' Equity
In December 1992, the Company completed an initial public offering of
2,881,601 shares of its common stock on the Toronto Stock Exchange.
During the second quarter of 1996, the Company closed a second private
equity placement offering (the Q296 Financing). Investors participating
in the Q296 Financing purchased 2.5 million units each consisting of one
share of common stock and one half of a two year warrant. One warrant is
required to purchase one share of common stock. The units were priced at
Cdn. $0.60 with an exercise price on the warrant of Cdn. $0.80. The Q296
Financing raised approximately $1.077 million. An additional 175,000
units and 250,000 warrants valued at approximately $130,000 were
distributed to brokers in exchange for services rendered in connection
with the Q296 Financing. The Company utilized the Black-Scholes model to
value the 1,587,500 warrants issued in the Q296 Financing at
approximately $156,000.
On March 21, 1997, the Company closed a Cdn.$2.0 million (USD$1.4
million) financing (the Q197 Financing) to fund the start-up of BioMarin
Pharmaceutical, Inc. which was formed to develop the Company's
pharmaceutical products. As a result of this financing, the Company
issued 4.0 million units at Cdn.$0.50 per unit, each unit consisting of
one common share and one common share purchase warrant. Each warrant can
be exercised for one share of common stock at Cdn.$1.00 per share,
expiring on March 21, 1999. An additional 280,000 units and 280,000
warrants valued at approximately $161,000 were distributed to the brokers
in exchange for services rendered in connection with the Q197 Financing.
The Company utilized the Black-Scholes model to value all the warrants
issued in the Q197 Financing at approximately $496,000. The Company used
the proceeds of the offering and additional cash to purchase 1,500,000
common shares of BioMarin for $1.5 million.
7. Stock Option Plan
The Company has a stock option plan (the Plan) under which options to
purchase common stock may be granted by the Board of Directors to
directors, officers, consultants and key employees at not less than fair
market value, less any permissible discounts, on the date of grant.
Options granted under the Plan may be incentive stock options (as defined
under Section 422 of the U.S. Internal Revenue Code) or non-statutory
stock options. Options are exercisable over a number of years specified
at the time of the grant which cannot exceed ten years. The maximum
aggregate number of shares which may be granted and sold under the Plan
is 3,000,000 shares. In general, the Plan options vest over 48 months and
all options expire after 5 years or 90 days after employee termination.
A summary of the status of the Company stock option plan at December 31,
1997 and 1996 and changes during the years then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
1997 1996
Shares Weighted average Shares Weighted average
exercise price (1) exercise price
<S> <C> <C> <C> <C>
Outstanding beginning
of year 2,254,597 Cdn. $ 1.36 2,204,879 Cdn. $1.39
Granted 528,870 Cdn. $ 0.71 118,000 Cdn. $0.55
Exercised (50,000) Cdn. $ 0.65 (100) Cdn. $0.60
Canceled (309,065) Cdn. $ 1.41 (68,182) Cdn. $0.88
Outstanding at end of
year 2,424,402 Cdn. $1.22 2,254,597 Cdn. $1.36
Exercisable at end of year 2,045,312 1,965,086
<FN>
(1) The US$ equivalent of Canadian $1.00 at December 31, 1997
was approximately $0.7215.
</FN>
</TABLE>
There are 575,598 options available for grant under the Plan at December
31, 1997. The average remaining contractual life of the options
outstanding at December 31, 1997 is 2 years.
15
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Common Stock Warrants
Below is a summary of common stock warrants outstanding as of December
31, 1997 and 1996:
<TABLE>
<CAPTION>
Number Exercise
Date of Issuance of Shares Price Expiry
-------------------------------- ------------------ ------------------ --------------------------
<S> <C> <C> <C> <C>
April 3, 1995 3,396,500 Cdn$0.90 April 3, 2000
April 4, 1995 533,367 Cdn$0.90 April 4, 2000
May 5, 1995 200,000 Cdn$0.90 May 5, 2000
May 30, 1995 656,555 Cdn$0.90 May 30, 2000
June 5, 1996 1,587,500 Cdn$0.80 June 5, 1998
------------------
Subtotal December 31, 1996 6,373,922
March 21, 1997 4,560,000 Cdn$1.00 March 21, 1999
------------------
Subtotal December 31, 1997 10,933,922
</TABLE>
9. Related Party Transactions
The Company has entered into certain transactions with its stockholders
since its inception. These transactions include the purchase of supplies
and equipment and rental of the Company's facilities. Total costs of
these transactions for the years ended December 31, 1997 and 1996 were
approximately $20,060 and $274,284, respectively (see Note 5).
The Company subleases office and lab space, certain administrative and
research and development functions to BioMarin. BioMarin reimburses the
Company for rent, salaries and related benefits and other administrative
costs and the Company reimburses BioMarin for salaries and related
benefits. The Company reimbursed BioMarin $133,000 during the year ended
December 31, 1997 and BioMarin reimbursed the Company $ 373,848 during
the year ended December 31, 1997. The Company also provided analytical
services and products to BioMarin at a 27 percent discount in 1997. Total
receipts to the Company from sales to BioMarin totaled $39,301 during
1997.
16
<PAGE>
Auditors' Report
To the Stockholders of Glyko Biomedical Ltd.:
We have audited the consolidated balance sheets of Glyko Biomedical Ltd. as
of December 31, 1997 and 1996, and the consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the years
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. 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 consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December
31, 1997 and 1996, and the results of its operations and its cash flows for
the years then ended in accordance with generally accepted accounting
principles.
/s/Arthur Andersen & Co.
Toronto, Canada Arthur Andersen & Co.
17
<PAGE>
Glyko Biomedical Ltd.
Corporate Directory
Board of Directors: Corporate Officers:
R. William Anderson John C. Klock, M.D.
Director President, Chief Executive Officer
Vice President, Finance and Chief and Chief Financial Officer
Financial Officer
Fusion Medical Technologies, Inc.
John H. Craig Christopher M. Starr, Ph.D.
Secretary and Director Vice President
Partner, Cassels Brock & Blackwell Research and Development
John S. Glass Auditors:
Director Arthur Andersen & Co., Toronto
Vice President and Chief Financial Officer Canada
Milkhaus Laboratory, Inc. Arthur Andersen LLP
San Francisco, California USA
John C. Klock, M.D. Investor Relations:
Director Copies of the Company's 1997 Annual
President, Chief Executive Officer, Report and other information may be
and Chief Financial Officer obtained
Glyko Biomedical Ltd. by telephone:
415-382-3500 (USA)
Gwynn R. Williams by mail:
Director Glyko, Inc.
Self-employed physicist 11 Pimentel Court
Novato, CA 94949 USA
Mark Young by e-mail:
Assistant Secretary and Director [email protected]
Partner, Cassels Brock & Blackwell via the world wide web:
http://www.glyko.com
Registrar and Transfer Agent:
Montreal Trust Company of Canada
Toronto, Canada
General Counsel:
Cassels Brock & Blackwell
Toronto, Canada
Wilson, Sonsini, Goodrich and Rosati .
Palo Alto, California
