U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-21994
GLYKO BIOMEDICAL, LTD.
(Exact name of small business issuer as specified in its charter)
Canada 68-0230537
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11 Pimentel Court, Novato, California 94949 (address of
principal executive offices)
(415) 382-6653
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes____No____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 24,264,171 common shares
outstanding as of August 6, 1998.
Transitional Small Business Disclosure Format (check one):
Yes___ No X
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GLYKO BIOMEDICAL, LTD.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997..................................2
Consolidated Statements of Operations for the three
and six months Ended June 30, 1998 and 1997............3
Consolidated Statements of Cash Flows for the six months
Ended June 30, 1998 and 1997...........................4
Notes to Consolidated Financial Statements................5
Item 2. Management's Discussion and Analysis.............9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................14
Item 2. Changes in Securities...........................14
Item 3. Defaults upon Senior Securities.................14
Item 4. Submission of Matters to a Vote of
Security Holders..............................14
Item 5. Other Information...............................14
Item 6. Exhibits and Reports on Form 8-K................14
SIGNATURE.........................................................15
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
GLYKO BIOMEDICAL, LTD.
CONSOLIDATED BALANCE SHEETS
(in U.S. dollars)
June 30, December 31,
1998 1997
(unaudited) (audited)
------------------------ ------------------------
Assets
Current assets:
Cash $ 719,980 $ 528,280
Trade receivables 101,514 141,743
Inventories 74,364 95,210
Other current assets 25,681 15,179
------------------------- ------------------------
Total current assets 921,539 780,412
Investment in BioMarin
Pharmaceutical, Inc. 3,024,190 3,025,990
Property, plant and equipment, net 102,157 118,910
Other assets 2,206 2,206
------------------------- ------------------------
Total assets $ 4,050,092 $ 3,927,518
========================= ========================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 43,424 $ 38,916
Accrued liabilities 348,337 173,597
Deferred rent and related costs - 365,880
Payable to stockholder - 219,811
-------------------------- -----------------------
Total current liabilities 391,761 798,204
-------------------------- -----------------------
Total liabilities 391,761 798,204
Stockholders' equity:
Common stock, no par value, unlimited
shares authorized, 23,986,045 and
21,573,044 shares issued and outstanding
at June 30, 1998 and December
31, 1997, respectively 14,731,066 13,154,224
Additional paid in capital 4,408,200 4,068,564
Common stock warrants and options 840,881 929,585
Deferred compensation (33,364) (33,364)
Accumulated deficit (16,288,452) (14,989,695)
-------------------------- ----------------------
Total stockholders' equity 3,658,331 3,129,314
-------------------------- ----------------------
Total liabilities
and stockholders' equity $ 4,050,092 $ 3,927,518
========================== ======================
The accompanying notes are an integral part of these statements.
2
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GLYKO BIOMEDICAL, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in U.S. dollars)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- --------------------------
1998 1997 1998 1997
------------- -------------- --------------- ----------
Revenues:
Sales of products
and services $ 234,593 $ 276,126 $ 541,152 $ 517,280
Other revenues 105,210 378,115 204,345 628,135
-------------- -------------- --------------- ----------
Total revenues: 339,803 654,241 745,497 1,145,415
Expenses:
Cost of products and services 91,377 161,024 179,890 259,175
Research and development 182,692 162,764 346,377 338,844
Selling, general and
administrative 175,364 200,775 359,438 353,092
Other (165,880) - (165,880) -
--------------- -------------- -------------- ----------
Total expenses: 283,553 524,563 719,825 951,111
--------------- -------------- -------------- ----------
Income from operations 56,250 129,678 25,672 194,304
Equity in loss of BioMarin
Pharmaceutical, Inc. (796,900) (375,274) (1,341,438) (1,205,638)
Interest income 11,209 3,651 17,009 5,110
Other income - 7,682 - 14,936
--------------- -------------- -------------- ----------
Net loss $ (729,441) $ (234,263) $(1,298,757) $(991,288)
=============== ============== ============== ==========
Net loss per share,
basic and diluted $ (0.03) $ (0.01) $ (0.06) $ (0.05)
=============== ============== ============== ==========
Weighted average number
of shares used in
computing per share
amounts, basic
and diluted 22,848,127 21,523,044 22,364,091 19,501,933
================ ============= ============= ===========
The accompanying notes are an integral part of these statements.
3
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GLYKO BIOMEDICAL, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in U.S. dollars)
Six months ended June 30,
----------------------------------------
1998 1997
------------------ -------------------
Cash flows from operating activities:
Net loss $ (1,298,757) $ (991,288)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 23,702 29,866
Equity in the loss of BioMarin
Pharmaceutical, Inc. 1,341,438 1,205,638
Gain on settlement of claim (165,880) -
Change in assets and liabilities:
Trade receivables 40,229 3,431
Inventories 20,846 (7,341)
Other assets (10,502) 109,811
Accounts payable 4,508 (93,417)
Accrued liabilities (45,071) 61,007
Deferred rent and related costs (200,000) 34,127
----------------- -----------------
Total adjustments 1,009,270 1,343,122
----------------- -----------------
Net cash provided by (used in)
operating activities (289,487) 351,834
Cash flows from investing activities:
Investment in BioMarin
Pharmaceutical, Inc. (1,000,000) (1,500,000)
Purchases of property and equipment (6,951) (68,301)
------------------ -----------------
Net cash used in investing activities (1,006,951) (1,568,301)
Cash flows from financing activities:
Net proceeds from the issuance of
common stock and warrants in a
private placement financing - 1,423,873
Net proceeds from the issuance of
common stock pursuant to a technology
and license agreement 70,740 -
Proceeds from the exercise of stock
options and common stock warrants 1,417,398 -
------------------- -----------------
Net cash provided by financing activities 1,488,138 1,423,873
------------------- -----------------
Net increase in cash 191,700 207,406
Cash and cash equivalents,
beginning of period 528,280 210,992
------------------- -----------------
Cash and cash equivalents,
end of period $ 719,980 $ 418,398
=================== ===================
Supplemental disclosure of non-cash financing activities:
Common stock and common stock warrants issued
In exchange for financing services - $ 160,881
The accompanying notes are an integral part of these statements.
4
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GLYKO BIOMEDICAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements are unaudited but
have been prepared in conformity with U.S. generally accepted accounting
principles using U.S. dollars and on substantially the same basis as the
audited annual financial statements. In the opinion of management, the
unaudited consolidated financial statements reflect all adjustments
necessary for a fair presentation of the consolidated financial
position, results of operations and cash flows for those periods
presented. The unaudited results for the period ended June 30, 1998 are
not necessarily indicative of results to be expected for the entire
year. The accompanying consolidated financial statements should be read
in conjunction with the consolidated financial statements and related
footnotes for the year ended December 31, 1997 included in the Company's
Form 10-KSB.
2. Company and Description of Business
The consolidated financial statements include the accounts of the Glyko
Biomedical, Ltd.("GBL") and its wholly-owned subsidiary, Glyko, Inc.,
(collectively, the "Company"). In October 1996, GBL formed BioMarin
Pharmaceutical, Inc. (BioMarin), a Delaware corporation, to develop the
Company's pharmaceutical products. BioMarin began business on March 21,
1997 (inception) and subsequently issued 1,500,000 shares of common
stock to GBL for $1.5 million. As consideration for a certain license
agreement dated June 1997, BioMarin issued GBL 7,000,000 shares of
BioMarin common stock. Beginning in October 1997, BioMarin raised
capital from third parties with the result that at December 31, 1997,
GBL's ownership interest in BioMarin had been reduced to 41.3 percent of
BioMarin's outstanding common stock. As of December 31, 1997, the
Company began recording its pro rata share of BioMarin utilizing the
equity method of accounting. On June 30, 1998 BioMarin raised net
proceeds of $3.3 million (598,535 shares) including a $1.0 million
investment from GBL. As of June 30, 1998, GBL owned 40.9 percent of
BioMarin's outstanding common stock. Subsequent to June 30, 1998
BioMarin raised an additional $8.1 million resulting in GBL's ownership
percentage of BioMarin's outstanding common stock being reduced to 38.4
percent.
The consolidated financial statements as of and for the three and six
months ended June 30, 1997 have been retroactively restated to reflect
deconsolidation of BioMarin. 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.
The Company, to the extent of taxable income, has not provided taxes for
Glyko, Inc. as the Company believes that any taxable income will be
offset by net operating loss carryforwards.
Since its inception, the Company has incurred a cumulative deficit of
$16,288,000 and expects to continue to incur losses during 1998 due to
the ongoing research and development of pharmaceutical products by
BioMarin. Management believes that the Company has sufficient cash
coupled with expected results for 1998 to sustain planned operations
through the end of 1998. Management also believes that BioMarin has
sufficient cash to sustain planned operations through the end of 1998.
3. 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 related reports to
customers. Other revenues, principally licensing and distribution fees,
are recognized upon completion of applicable contractual obligations.
4. Net Loss per Share:
Net loss per share is based on the weighted average number of common
shares outstanding during each period, presented in accordance with
Statement of Financial Accounting Standards No. 128 (SFAS No.
128), "Earnings Per Share".
5
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GLYKO BIOMEDICAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Potentially dilutive securities include outstanding options for the
purchase of 2,112,636 and 2,611,042 shares of common stock and
outstanding warrants for the purchase of 8.9 million and 10.9 million
shares of common stock at June 30, 1998 and 1997, respectively. These
securities were not considered in the computation of dilutive loss per
share because their effect would be anti-dilutive for the three and six
months ended June 30, 1998 and 1997.
5. Termination of Millipore Marketing Agreement
In 1990, the Company entered into an agreement (the "Agreement") giving
Millipore the exclusive right to market and distribute the Company's
analytic products for an initial period of six years. In April 1994,
Millipore and the Company agreed to terminate the Agreement. In exchange
for relinquishing its rights under the Agreement, Millipore will receive
500,000 shares of common stock, subject to Toronto Stock Exchange
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. Millipore was a stockholder in the Company from
1990 until April 1998. At June 30, 1998 the liability of $219,811 is
included in accrued liabilities in the accompanying consolidated balance
sheets.
6. Private Placement of Securities
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
which was formed to develop the Company's pharmaceutical products. As a
result of this financing, GBL 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. GBL used the proceeds of the
offering and additional cash to purchase 1,500,000 common shares of
BioMarin 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 GBL 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 and valued under the Black Scholes model
at $48,000. Concurrently, BioMarin issued 2,500,000 shares of common
stock to three executive officers of BioMarin (including 800,000 shares
of common stock to John Klock, MD
6
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GLYKO BIOMEDICAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and 400,000 shares of common stock to Christopher Starr, Ph.D. both of
whom are also executive officers of the Company) for an aggregate
consideration of $2,500,000 (paid with 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 has been granted an option to purchase 20,000
shares of BioMarin's 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 502,500 shares
issued to the placement agent for the financing). Additionally, BioMarin
issued to the placement agent warrants to purchase 502,500 shares of
common stock exercisable at $1.00 per share and valued under the Black
Scholes model at $80,000. As a result of such share issuances, GBL's
ownership in BioMarin was reduced to 41.3 percent of BioMarin's
outstanding common stock.
On June 30, 1998, BioMarin raised net proceeds of $3,328,000 from outside
investors in exchange for 598,535 shares (including 31,368 shares issued
to the placement agent for the financing) as part of an ongoing private
placement totaling $11.5 million or 2,015,335 shares (including a total
of 98,000 shares issued to the placement agents for the financing) which
was completed on August 3, 1998. As a result of such share issuances,
GBL's ownership in BioMarin as of August 3, 1998 was reduced to 38.4
percent of BioMarin's outstanding common stock. The exercise of BioMarin
options or warrants will result in a further reduction of GBL's ownership
percentage and future fundraising efforts of BioMarin may result in a
similar reduction of GBL's ownership percentage (as occurred in
connection with the last round of financings). To the extent that the
issuance of common stock by BioMarin to third parties at a per share
price greater than or less than the per share carrying value of GBL's
investment in BioMarin, the resulting gain or loss is reflected as an
increase or decrease, respectively, in additional paid in capital in the
consolidated balance sheet. During the six months ended June 30, 1998,
the Company reflected an increase to additional paid in capital of
$339,636 as a result of the sale of stock by BioMarin in June 1998.
7. Investment in BioMarin Pharmaceutical, Inc.
Results of the Company's unconsolidated affiliate, BioMarin, is
summarized as follows for the six months ended June 30, 1998 and for the
period from March 21, 1997 (inception) to June 30, 1997:
Period from
March 21, 1997
Six months ended (inception), to
June 30, 1998 June 30, 1997
(unaudited) (unaudited)
------------------- -------------------
OPERATING COSTS AND EXPENSES:
Research and development $ 2,155,558 $ 917,873
General and administrative 1,331,745 290,654
------------------- -------------------
Loss from operations (3,487,303) (1,208,527)
INTEREST INCOME 239,268 2,889
------------------- -------------------
Net loss $ (3,248,035) $ (1,205,638)
=================== ===================
THE COMPANY'S EQUITY IN
LOSS OF BIOMARIN $ (1,341,438) $ (1,205,638)
=================== ===================
7
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GLYKO BIOMEDICAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Contingencies
Facilities Dispute
Subsequent to the quarter ended June 30, 1998 the claim by a previous
lessor relating to a facilities dispute and other matters was settled,
resulting in a gain of $165,880 as the amount of the ultimate settlement
was less than the amount previously provided for by the Company.
Product Liability and Lack of Insurance
The Company is subject to the 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.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 regarding the
development of a line of carbohydrate diagnostic products as discussed in
the "Overview," and statements regarding future fundraising efforts of
Glyko, future fundraising efforts of BioMarin, ongoing liquidity of
Glyko, and ongoing liquidity of BioMarin as discussed in "Liquidity and
Capital Resources." 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," "Liquidity and
Capital Resources," and "Risk Factors."
Overview
The consolidated financial statements include the accounts of the Glyko
Biomedical Ltd. ("GBL") and its wholly-owned subsidiary, Glyko, Inc.,
(collectively, the "Company"). In October 1996, GBL formed BioMarin
Pharmaceutical, Inc. ("BioMarin") to develop the Company's pharmaceutical
products. 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. See "Risk Factors - Diagnostic Products, No Prior Commercial
Manufacturing or Marketing," "- Early Stage of Diagnostic Product Development,"
" -Technology and Competition," "- Patents and Proprietary Technology," and
"Uncertainty of Regulatory Approval."
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. BioMarin issued 7,000,000 shares of BioMarin common stock to the
Company pursuant to a License Agreement between the Company and BioMarin
executed on June 26, 1997. Subsequent private placement financings by BioMarin
have reduced the Company's ownership of BioMarin to 40.9 percent at June 30,
1998 and 38.4 percent as of August 3, 1998 of BioMarin's outstanding common
stock. Included in BioMarin's private placement financings in 1997 was the
issuance of 800,000 shares and 400,000 shares of BioMarin common stock to John
Klock, MD and Christopher Starr, Ph.D., respectively, for notes due on July 31,
2000 secured by the underlying stock. Both Drs. Klock and Starr are executive
officers of the Company and of BioMarin. Gwynn Williams, who is a major
shareholder and director of the Company, is also a director of BioMarin, and has
been granted an option to purchase 20,000 shares of BioMarin's common stock at
$1.00 per share.
The Company recorded a net loss for the six months ended June 30, 1998 in the
amount of $1,299,000 due to its pro rata share of BioMarin's research and
development expenses. There is no assurance that sales will increase in future
years and with the Company's pro rata share of BioMarin's continuing research
and development expenses, the Company anticipates net losses will continue at
least through 1998. For the period from its inception to June 30, 1998, the
Company has a cumulative deficit of $16,288,000.
9
<PAGE>
Results of Operations
The Quarters Ended June 30, 1998 and 1997
Revenues in the second quarter of 1998 were $340,000 and consisted of sales of
products and services of $235,000 and grant revenues of $105,000. Sales of
products and services consisted of sales of chemical analysis kits, fees for
custom analytic services and sales of imaging systems. Revenues for the same
period in 1997 were $654,000 and consisted of sales of products and services of
$276,000 and other revenues representing a technology and licensing fee of
$350,000 and grant revenues of $28,000. The decrease in product revenues in the
second quarter of 1998 compared to the same period of 1997 was due to a decrease
in the sales volume of imaging systems. The decrease in other revenues was due
to the fact that in 1997 the Company received a one-time fee relating to a
revised technology and licensing agreement that did not reoccur in 1998,
partially offset by an increase in grant revenues due to a grant beginning on
June 1, 1997.
Gross margin on sales of products and services was 61 percent in the second
quarter of 1998 and 42 percent in the same period in 1997. The increase in gross
margin in 1998 was due to a combination of decreased overhead expenses and an
increase in product prices that took effect in July, 1997.
Research and development expenses in the second quarter of 1998 were $183,000
compared to $163,000 in the second quarter of 1997, an increase of $20,000. The
increase was mainly due to the increase in purchases of lab supplies devoted to
research and development.
Selling, general and administrative expense was $175,000 in the second quarter
of 1998, a decrease of $25,000 from the second quarter of 1997 expense of
$200,000. This decrease was due to the decrease of costs allocated to Glyko,
Inc. for personnel expenses.
Interest income earned in the second quarters of 1998 and 1997 reflected
earnings on cash invested in short term interest bearing accounts. The increase
in interest income in the second quarter of 1998 resulted from higher cash
balances available for investment compared to the second quarter of 1997.
Interest expense in the second quarters of 1998 and 1997 was immaterial.
Other operating expenses in the second quarter of 1998 of $(165,880) represents
the gain on the settlement of a claim at an amount less than was provided for by
the Company.
The Six Months Ended June 30, 1998 and 1997
Revenues in the six months ended June 30, 1998 were $745,000 and consisted of
sales of products and services of $541,000 and other revenues representing
development, technology and licensing fees of $25,000 and grant revenues of
$179,000. Sales of products and services consisted of sales of chemical analysis
kits, fees for custom analytic services and sales of imaging systems. Revenues
in for the same period in 1997 were $1,145,000 and consisted of sales of
products and services of $517,000 and other revenues representing a technology
and licensing fee of $600,000 and grant revenues of $28,000. The increase in
product revenues in the first six months of 1998 compared to the same period of
1997 was due to increased sales volume. The decrease in other revenues was due
to the fact that in 1997 the Company received a one-time fee relating to a
revised technology and licensing agreements that did not reoccur in 1998,
partially offset by an increase in grant revenues due to a grant beginning on
June 1, 1997.
Gross margin on sales of products and services was 67 percent in the first six
months of 1998 and 50 percent in the same period in 1997. The increase in gross
margin in 1998 was due to a combination of decreased overhead expenses and an
increase in product prices that took effect in July, 1997.
Research and development expenses in the first six months of 1998 were $346,000
compared to $339,000 in the same period in 1997, an increase of $7,000. Selling,
general and administrative expense was $359,000 in the first six months of 1998,
an increase of $6,000 from the same period in 1997 of $353,000.
10
<PAGE>
Interest income earned in the first six months of 1998 and 1997 reflected
earnings on cash invested in short term interest bearing accounts. The increase
in interest income in the first six months of 1998 resulted from higher cash
balances available for investment compared to the same period in 1997. Interest
expense in the first six months of 1998 and 1997 was immaterial.
Other operating expenses in the first six months of 1998 of $(165,880)
represents the gain on the settlement of a claim at an amount less than was
provided for by the Company.
Liquidity and Capital Resources
On June 30, 1998, BioMarin raised net proceeds of $3,328,000 from outside
investors in exchange for 598,535 shares (including 31,368 shares issued to the
placement agent for the financing) as part of an ongoing private placement
totaling $11.5 million or 2,015,335 shares (including a total of 98,000 shares
issued to the placement agent for the financing), which was completed on August
3, 1998. As a result of such share issuances, Glyko Biomedical Ltd.'s ownership
in BioMarin as of August 3, 1998 was reduced to 38.4 percent of BioMarin's
outstanding common stock. The exercise of BioMarin options or warrants will
result in a further reduction of GBL's ownership percentage and future
fundraising efforts of BioMarin may result in a similar reduction of GBL's
ownership percentage (as occurred in connection with the last round of
financings). To the extent that the issuance of common stock by BioMarin to
third parties at a per share price greater than or less than the per share
carrying value of GBL's investment in BioMarin, the resulting gain or loss is
reflected as an increase or decrease, respectively, in additional paid in
capital in the consolidated balance sheet. During the six months ended June 30,
1998, the Company reflected an increase to additional paid in capital of
$339,636 as a result of the sale of stock by BioMarin in June 1998. The Company
is not obligated to make future investments in BioMarin. For a summary of
financings of the Company and BioMarin since January 1, 1997 see footnote 6 of
the financial statements. See "Risk Factors - Future Capital Requirements,
Uncertainty of Future Fundraising."
The Company's net cash position increased by $192,000 in the second quarter of
1998 to $720,000. Net cash proceeds of $1,488,000 from the issuance of common
stock from the exercise of stock options and warrants and a private placement
financing relating to a technology and licensing fee agreement was offset by the
investment in BioMarin of $1,000,000, net cash used in operating activities of
$289,000, and the purchases of property and equipment of $7,000.
Since its inception, the Company has incurred a cumulative deficit of
$16,288,000 and expects to continue to incur losses during 1998 due to the
ongoing research and development of pharmaceutical products by BioMarin.
Management believes that the Company has sufficient cash coupled with expected
results for 1998 to sustain planned operations through the end of 1998.
Management also believes that BioMarin has sufficient cash to sustain planned
operations through the end of 1998. 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, the Company will have to
reduce expenses considerably, increase sales significantly, or realize some
combination of the above. There can be no assurance that BioMarin nor the
Company 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. See "Risk Factors - Future Capital Requirements," "- History
of Operating Losses - Uncertainty of Future Profitability" and "- Technology and
Competition."
RISK FACTORS
Future Capital Requirements - Uncertainty of Future Funding
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. BioMarin has maintained liquidity by
utilizing proceeds from private equity placements during 1997 and 1998.
11
<PAGE>
Management believes that additional capital will be required, especially in the
years after 1998, to continually update and expand the Glyko, Inc.
analytics/reagents product line and to develop and establish the diagnostics
product line. Further, management believes that such additional capital will be
required before current operations can generate the required profits or cash
flow. There can be no assurance that such capital can be raised on acceptable
terms. If capital cannot be obtained, the future prospects of the Glyko, Inc.
business could be adversely affected.
History of Operating Losses - Uncertainty of Future Profitability
The Company commenced its research activities in December 1990 and first
recorded revenues in December 1992. While sales increased in 1997 and 1998, the
Company's pro rata share of BioMarin's net loss resulted in the Company
reporting a net loss for the six months ended June 30, 1998 of $1,299,000. There
is no assurance that sales will increase in future years and with the continuing
research and development expenses incurred by BioMarin, the Company anticipates
net losses may continue.
Diagnostic Products - No Prior Commercial Manufacturing or Marketing
In 1996, the Company began marketing its first diagnostic product, the Urinary
Carbohydrate Analysis Kit. In order to manufacture its diagnostic products in
commercial quantities and to market products effectively, the Company will need
to expand its production and marketing efforts and/or establish arrangements
with third parties having the capacity for such manufacturing or marketing.
Anticipated operating revenues and cash resources will not be sufficient to
expand manufacturing and increase marketing efforts for diagnostic products
currently under development. There can be no assurance that the Company will be
able to successfully market or manufacture its diagnostic products. To the
extent that the Company arranges with third parties to manufacture or market any
diagnostic products, the commercial success of such products may depend upon the
efforts of those third parties.
Early Stage of Diagnostic Product Development
Only one of the Company's diagnostic products has been approved for commercial
sale, the Urinary Carbohydrate Analysis Kit. Potential products currently under
development by the Company will require significant additional development, and
some must undergo several phases of clinical testing and will likely require
significant further investment prior to their final commercialization.
Anticipated operating revenues and cash resources may not be sufficient to
facilitate significant further development of diagnostic products. Funding for
developing these products could be obtained in the form of government grants or
in the form of a strategic alliance with third parties. There can be no
assurance that such funding will be obtained. There can be no assurance that any
of the Company's products under development, either now or in the future, will
be successfully developed, prove to be effective in clinical trials, receive
required regulatory approvals, be capable of being produced in commercial
quantities at reasonable costs, or be successfully marketed.
Technology and Competition
The primary competitive factors in biotechnology are the ability to create and
maintain scientifically advanced technology, to attract and maintain personnel,
and to have available adequate financial resources to maintain the Company
through its research, development and commercialization of technology stages.
The technology on which the Company's business is based uses proven laboratory
methods of electrophoresis and bioseparation. Nevertheless there is a technical
risk associated with reducing-to-practice the basic technology for new
applications. There is no assurance that the Company will be able to develop an
economical or practical way to separate human materials for clinical diagnosis,
or that it will be able to devise specific reagents required to obtain a needed
reaction. Other companies may develop basic carbohydrate technology which
directly competes for the carbohydrate diagnostic market. Furthermore,
conventional diagnostic technology (such as enzyme or radioactive immunoassay)
may accomplish new breakthroughs in analyzing carbohydrates (which so far has
been difficult). Additionally, other newer technologies such as nucleic acid
hybridization may become competitive and erode the Company's potential shares of
diagnostic markets.
12
<PAGE>
Competition in bioinstrumentation is intense. Many companies, universities, and
research organizations are engaged in the research and development of products
in the areas being developed by the Company. Many of these have financial,
technical, manufacturing and marketing resources greater than those of the
Company. Several major research instrument companies have undertaken recently to
establish capabilities in carbohydrate technology and may apply such technology
for essentially the same purpose as the Company. As a result, carbohydrate
technology will become an area of more intense competition. The Company
anticipates that in the future it may have to expand its efforts to develop new
products for research and diagnostic purposes and new uses for its current
products. There can be no assurance that the Company will be able to do so
effectively.
Patents and Proprietary Technology
The Company's success will depend in part on its ability to obtain patents,
protect trade secrets and not infringe the patents of others. The Company has
been issued patents as well as filed applications for U.S. and foreign patents
and has exclusive licenses to patents or patent applications of others. The
Company intends in the future to apply for patents in various jurisdictions for
inventions forming part of its technology. No assurance can be given that patent
applications will result in the issue of patents or that, if issued, patents
obtained by the Company will confer on the Company a preferred position with
respect to the technology or products claimed.
There can be no assurance that others will not independently develop products
similar to the Company's, duplicate the Company's products or design around the
Company's patents. In addition the Company may be required to obtain licenses to
others' patents. No assurance can be given that such licenses can be obtained on
terms acceptable to the Company. These factors could cause the Company to
encounter delays in product market introductions or adversely affect the
Company's development or sale of products requiring licenses from third parties.
The Company's products and technologies could be subject to claims of
infringement by others. Patent conflicts and litigation can be expensive, and
could have a material adverse effect on the Company's results of operations.
Product Liability and Lack of Insurance
The Company is subject to the risk of 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.
Uncertainty of Regulatory Approval
The Company's diagnostics products will require regulatory approval by
government agencies. This includes pre-clinical and clinical testing and
approval processes in the U.S. and other countries. Compliance can take several
years and require substantial expenditures. There can be no assurance that
difficulties or excessive costs will not be encountered by the Company in this
process or that required approvals will be obtained. The Company will not be
able to market its diagnostic products until required approvals have been
obtained.
Year 2000-Related Problems
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.
Dependence on Key Personnel
The Company's success will depend in large part upon its ability to attract and
retain highly qualified scientific and management personnel. The Company faces
competition for such personnel from other companies, academic institutions,
government entities and other organizations. The Company depends on its key
management, including John Klock and Christopher Starr. The departure of its key
management could have a material adverse effect on the Company. Where previously
John Klock and Christopher Starr had agreed to devote 30% of their time to
Glyko, Inc., in the second quarter of 1998, by mutual agreement with Glyko Inc.,
John Klock and Christopher Starr charged less of their time to Glyko, Inc.
13
<PAGE>
than they had in previous periods, while charging more of their time to
BioMarin. Because Glyko, Inc. anticipates that John Klock and Christopher
Starr will devote less of their time to Glyko, Inc. in the future than in
previous periods, on April 1, 1998, the Company hired Brian Brandley, Ph.D.
as Managing Director of Glyko, Inc. Dr. Brandley is expected to handle
certain of thefunctions previously assigned to John Klock and Christopher Starr.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Subsequent to the quarter ended June 30, 1998 the claim by Millipore Corp.
relating to a facilities dispute and other matters was settled. For additional
disclosure regarding this dispute with Millipore, see Part II, Item 1 of Form
10-QSB for the quarter ended March 31, 1998.
Item 2. Changes in Securities. None.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting, held on June 18, 1998, the Company's
shareholders took the following action:
(a) The following directors were elected to serve until the next Annual
Meeting:
Vote
Director Elected For Against Withheld
---------------- --- -------- --------
John C. Klock, M.D. 16,274,754 Nil 335
Raymond W. Anderson 16,274,754 Nil 335
John H. Craig 16,274,754 Nil 335
John S. Glass 16,274,754 Nil 335
Gwynn R. Williams 16,274,754 Nil 335
Mark I. Young 16,274,754 Nil 335
(b) Arthur Andersen LLP was appointed as the Company's auditors, by a
vote of 16,274,789 shares in favor, nil shares against, and 300
shares withheld.
There were 6,014,915 shares which abstained from all matters presented
to the meeting including broker non-votes.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as part of this report
See Exhibit Index attached hereto.
(b) Reports on Form 8K
No reports were filed on Form 8-K during the three months ended June
30, 1998.
14
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GLYKO BIOMEDICAL, LTD.
Dated: August 13, 1998 By: \s\ John C. Klock, M.D.
- ---------------------- ---------------------------------
John C. Klock, M.D.
President, Chief Executive Officer
and Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
Exhibit Description
Number
3.1 Registrant's Articles of Incorporation and Bylaws (filed as
exhibit 3.1 to Form 10-SB Registration Statement No. 0-21994 dated
August 6, 1993 and incorporated herein by reference).
3.2 Restated Certificate of Incorporation of BioMarin Pharmaceutical,
Inc. (filed as exhibit 3.1 to Form 10-QSB dated September 30, 1997
and incorporated herein by reference).
3.3 Bylaws of BioMarin Pharmaceutical, inc. (filed as exhibit 3.2 to
Form 10-QSB dated September 30, 1997, and incorporated herein by
reference).
4.1 Registrant's Articles of Incorporation and Bylaws (filed as
exhibit 3.1 to Form 10-SB Registration Statement No. 0-21994
dated August 6, 1993 and incorporated herein by reference).
Restated Certificate of Incorporation of BioMarin
Pharmaceutical, Inc. (filed as exhibit 3.1 to Form 10-QSB
dated September 30, 1997, and incorporated herein by
reference).
10.1 Registrant's Stock Option Plan (filed as exhibit 10.1 to Form 10-SB
Registration Statement No. 0-21994 dated August 6, 1993 and
incorporated herein by reference).
10.2 Joint Venture Agreement between: Registrant; Millipore Corporation;
Glycomed Incorporated; Gwynn R.Williams; Astroscan, Ltd.; and
Astromed, Ltd. dated December 18, 1990 (filed as exhibit 10.2 to
Form 10-SB Registration Statement No. 0-21994 dated August 6, 1993
and incorporated herein by reference).
10.3 Distribution Agreement between Registrant and Millipore Corporation
dated December 18, 1990 (filed as exhibit 10.3 to Form 10-SB
Registration Statement No. 0-21994 dated August 6, 1993 and
incorporated herein by reference).
10.4 License Agreement between Registrant, and Astroscan, Ltd. and
Astromed, Ltd. (filed as exhibit 10.4 to Form 10-SB Registration
Statement No. 0-21994 dated August 6, 1993 and incorporated
herein by reference).
10.5 License Agreement between Registrant and Glycomed Incorporated
(filed as exhibit 10.5 to Form 10-SB Registration Statement No.
0-21994 dated August 6, 1993 and
incorporated herein by reference).
10.6 Loan Agreement between Registrant, and Millipore Corporation
and Gwynn R. Williams, dated April 9, 1992(filed as exhibit
10.6 to Form 10-SB Registration Statement No. 0-21994 dated
August 6, 1993 and incorporated herein by reference).
10.7 Employment Agreement between Registrant and John C. Klock, M.D.,
dated December 20, 1990 (filed as exhibit 10.7 to Form 10-SB
Registration Statement No. 0-21994 dated August 6, 1993 and
incorporated herein by reference).
10.8 Exchange Agreements between Registrant, and the share and option
holders of Glyko, Inc., dated December 10, 1992 (filed as exhibit
10.8 to Form 10-SB Registration Statement No.0-21994 dated August
6, 1993 and incorporated herein by reference).
10.9 Amendment Number Two to Exclusive Distribution and Supply Agreement
between Registrant and Millipore Corporation dated September 22,
1993 (filed as exhibit 10.4 to Form 10-KSB Statement dated December
31, 1993 and incorporated herein by reference).
10.10 Amendment Number Two to Joint Venture Agreement between: Registrant;
Millipore Corporation; Glycomed Incorporated; Gwynn R. Williams;
Astroscan, Ltd.; and Astromed, Ltd. dated April 28, 1994 (filed as
exhibit 10.1 to Form 10-QSB dated March 31, 1994 and incorporated
herein by reference).
10.11 Employment Agreement between Registrant and John C. Klock, M.D.,
dated January 1, 1994 (filed as exhibit 10.2 to Form 10-QSB dated
March 31, 1994 and incorporated herein by reference).
10.12 Glyko Biomedical Share Option Plan - 1994 (filed as exhibit 10.1 to
Form 10-QSB dated June 30, 1994 and incorporated herein by
reference).
10.13 Development and Supply Agreement between Registrant and Bio-Rad
Laboratories, Inc., dated February 16, 1995 (filed as exhibit 10.1
to Form 10-KSB dated March 31, 1996 and incorporated herein by
reference).
10.14 International Distribution Agreement between Registrant and Toyobo
Co., Ltd. and MC Medical. Inc.dated September 12, 1995 (filed as
exhibit 10.2 to Form 10-KSB dated March 31, 1996 and incorporated
herein by reference).
10.15 Commercial Lease between Registrant and Douglas R. Kaye dated
December 23, 1996 (filed as exhibit 10.1 to Form 10-KSB/A date
December 31, 1996 and incorporated herein by reference.)
<PAGE>
Exhibit
Number Description
10.16 Toyobo Distribution Agreement (confidential portions of exhibit have
been omitted pursuant to a request for confidential treatment and
filed separately with the Commission). Filed as exhibit 10.1 to Form
10-QSB dated March 31, 1997, and incorporated herein by reference.
10.17 First Amendment to Bio-Rad Laboratories, Inc. Agreement (confidential
portions of exhibit have been omitted pursuant to a request for
confidential treatment and filed separately with the Commission).
Filed as exhibit 10.1 to Form 10-QSB dated June 30, 1997, and
incorporated herein by reference.
10.18 Array Medical License and Development Agreement (confidential
portions of exhibit have been omitted pursuant to a request for
confidential treatment and filed separately with the Commission).
Filed as exhibit 10.2 to Form 10-QSB dated June 30, 1997, and
incorporated herein by reference.
10.19 License Agreement between Glyko Biomedical Ltd. and BioMarin
Pharmaceutical, Inc. (filed as exhibit 10 to Form 10-QSB dated
September 30, 1997, and incorporated herein by reference.)
22.1 Notice of Annual Meeting of Shareholders, 1997 Annual Information
Circular, Form of Proxy and Policy 41 Form. Filed as Definitive 14A
documents on May 18, 1998, and incorporated herein by reference.
27.1 Financial Data Schedule (see Financial Data Schedule hereto attached
at page 18)
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