U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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: 22,282,504 common shares
outstanding as of April 30, 1998.
<PAGE>
GLYKO BIOMEDICAL LTD.
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited). Page
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997...........................................2
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997...................................3
Consolidated Statements of Cash Flows for the three months
ended March 31, 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........................................15
Item 2. Changes in Securities....................................15
Item 3. Defaults upon Senior Securities..........................15
Item 4. Submission of Matters to a Vote of Security Holders......15
Item 5. Other Information........................................15
Item 6. Exhibits and Reports on Form 8-K.........................15
SIGNATURE..................................................................16
EXHIBIT INDEX..............................................................17
<PAGE>
Part I. - Financial Information
Item 1. Financial Statements
GLYKO BIOMEDICAL LTD.
CONSOLIDATED BALANCE SHEETS
(in U.S. dollars)
March 31, December 31,
1998 1997
(unaudited) (audited)
-------------------------- --------------------------
Assets
Current assets:
Cash $ 759,126 $ 528,280
Trade receivables 183,650 141,743
Inventories 95,986 95,210
Other current assets 33,741 15,179
-------------------------- --------------------------
Total current assets 1,072,503 780,412
Investment in BioMarin
Pharmaceutical, Inc. 2,481,452 3,025,990
Property, plant and equipment, net 110,497 118,910
Other assets 2,206 2,206
-------------------------- --------------------------
Total assets $ 3,666,658 $ 3,927,518
========================== ==========================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 75,417 $ 38,916
Accrued liabilities 134,434 173,597
Deferred rent and related costs 365,880 365,880
Payable to stockholder 219,811 219,811
-------------------------- --------------------------
Total current liabilities 795,542 798,204
-------------------------- --------------------------
Total liabilities 795,542 798,204
Stockholders' equity:
Common stock, no par value,
unlimited shares authorized, 22,126,366
and 21,573,044 shares issued and
outstanding at March 31, 1998
and December 31, 1997, respectively 13,474,339 13,154,224
Additional Paid In Capital 4,068,564 4,068,564
Common stock warrants and options 920,588 929,585
Deferred compensation (33,364) (33,364)
Accumulated deficit (15,559,011) (14,989,695)
-------------------------- --------------------------
Total stockholders'equity 2,871,116 3,129,314
-------------------------- --------------------------
Total liabilities and
stockholders' equity $ 3,666,658 $ 3,927,518
========================== =========================
2
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GLYKO BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in U.S. dollars)
Three Months Ended March 31,
----------------------------------------------------------
1998 1997
----------------------------- ------------------------
Revenues:
Sales of products
and services $ 306,559 $ 241,154
Other revenues 99,135 250,020
------------------------- ------------------------
Total revenues: 405,694 491,174
Expenses:
Cost of products and services 88,513 98,151
Research and development 163,685 176,080
Selling, general and
administrative 184,074 152,317
-------------------------- ------------------------
Total expenses: 436,272 426,548
-------------------------- ------------------------
Income (loss) from operations (30,578) 64,626
Equity in loss of BioMarin
Pharmaceutical, Inc. (544,538) (830,364)
Interest income 5,800 1,459
Other income - 7,254
-------------------------- ------------------------
Net loss $ (569,316) $ (757,025)
========================== ========================
Net loss per common
share, basic and diluted $(0.03) $(0.04)
========================== ========================
Weighted average number
of shares used in computing
per share amounts 21,880,055 17,480,822
========================== ========================
The accompanying notes are an integral part of these statements.
3
<PAGE>
GLYKO BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in U.S. dollars)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------------------------
1998 1997
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (569,316) $ (757,025)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 12,072 14,685
Equity in the loss of BioMarin Pharmaceutical, Inc. 544,538 830,364
Change in assets and liabilities:
Trade receivables (41,907) 13,028
Inventories (776) (6,225)
Other assets (18,562) 112,948
Accounts payable 36,501 (108,034)
Accrued liabilities (39,163) (39,621)
Deferred rent and related costs -- 96,161
---------------------- ----------------------
Total adjustments 492,703 913,306
---------------------- ----------------------
Net cash provided by (used in) operating activities (76,613) 156,281
Cash flows from investing activities:
Investment in BioMarin Pharmaceutical, Inc. -- (1,500,000)
Purchases of property and equipment (3,659) (63,751)
---------------------- ----------------------
Net cash used in investing activities (3,659) (1,563,751)
Cash flows from financing activities:
Net proceeds from the issuance of common stock
and warrants in a private placement financing -- 1,423,871
Net proceeds from the issuance of common stock
pursuant to a technology and licensing agreement 70,740 --
Proceeds from the exercise of stock options and
common stock warrants 240,378 --
---------------------- ----------------------
Net cash provided by financing activities 311,118 1,423,871
---------------------- ----------------------
Net increase in cash 230,846 16,401
Cash and cash equivalents, beginning of period 528,280 210,992
---------------------- ----------------------
Cash and cash equivalents, end of period $ 759,126 $ 227,393
====================== ======================
Supplemental disclosure of non-cash financing activities:
Common stock and common stock warrants issued
In exchange for financing services $ - $ 160,881
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements and related footnotes
have been prepared in conformity with U.S. generally accepted accounting
principles using U.S. dollars. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary,
Glyko, Inc. 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 of BioMarin's outstanding common stock. As of December 31, 1997,
the Company began recording its pro rata share of its 41 percent owned
affiliate, BioMarin utilizing the equity method of accounting. The
consolidated financial statements as of and for the three months ended
March 31, 1997 have been retroactively restated to reflect
deconsolidation of this subsidiary, which was previously consolidated
with the Company through September 30, 1997 due to the Company's
majority shareholder position through that date. 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 increase or decrease as paid-in capital in the
consolidated balance sheets. 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 consolidated balance sheets as of March 31, 1998 and December 31,
1997 and the related consolidated statements of operations and cash
flows for the periods ended March 31, 1998 and 1997 are unaudited but
have been prepared on substantially the same basis as the annual audited
financial statements. In the opinion of management, the unaudited
consolidated financial statements reflect all adjustments, consisting
only of normal recurring 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 periods
ended March 31, 1998 and 1997 are not necessarily indicative of results
to be expected for the entire year.
Since its inception, the Company has incurred cumulative losses of
$15,559,011 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
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
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 in the event sufficient funding is
unavailable.
The accompanying financial statements should be read in conjunction with
the Company's annual report on form 10-KSB for the fiscal year ended
December 31, 1997.
5
<PAGE>
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.
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".
Potentially dilutive securities include options for the purchase of
2,158,111 and 2,254,597 shares of common stock and warrants for the
purchase of 10.8 million and 10.9 million shares of common stock
outstanding at March 31, 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 quarters ended March 31, 1998
and 1997.
2. Termination of Millipore Marketing Agreement
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.
3. Private Placement of Securities
During the second quarter of 1996, the Company closed a second private
placement of securities (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.
6
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 shares of common stock and a warrant to purchase 299,000 shares
of common stock exercisable at $1.00 per share ( 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 and 400,000 shares of
common stock to Christopher Starr, Ph.D., both of whom are also executive
officers of Glyko Biomedical Ltd.) for 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 an exercise price of $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 of common stock (including
502,500 shares of common stock issued to the placement agent for the
financing). Additionally, BioMarin issued to the placement agent two
warrants to purchase an aggregate of 502,500 shares of common stock
exercisable at $1.00 per share (valued under the Black Scholes model at
$80,000). 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 by BioMarin or the exercise of
outstanding options or warrants by the holders thereof could result in a
further reduction of Glyko Biomedical Ltd.'s ownership percentage. 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 increase or decrease as paid-in capital in the
consolidated balance sheets.
7
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Investment in BioMarin Pharmaceutical, Inc.(BioMarin)
Results of the Company's unconsolidated subsidiary, BioMarin, is
summarized as follows for the three months ended March 31, 1998 and for
the period from March 21, 1997 (inception) to March 31, 1997:
<TABLE>
<CAPTION>
Period from March
Three months 21, 1997
ended March 31, (inception), to
1998 March 31, 1997
------------------- -------------------
<S> <C> <C>
OPERATING COSTS AND EXPENSES:
Research and development $ 1,108,233 $ 668,690
General and administrative expenses 348,550 162,138
------------------- -------------------
Loss from operations (1,456,783) (830,828)
INTEREST INCOME 138,288 464
------------------- -------------------
Net loss $ (1,318,495) $ (830,364)
=================== ===================
NET LOSS PER SHARE, basic and diluted $(0.06) $(0.55)
=================== ===================
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING 20,566,500 1,500,000
=================== ===================
</TABLE>
At March 31, 1998, BioMarin had outstanding options to purchase an
aggregate of 401,440 shares of its commons stock and outstanding warrants
to purchase an aggregate of 801,500 shares of its common stock. These
options and warrants were not considered in the computation of dilutive
loss per share of BioMarin because their effect would be anti-dilutive
for the three months ended March 31, 1998 and for the period from March
21, 1997 (inception) to March 31, 1997. The Company's ownership in
BioMarin was reduced from 100 percent at March 31, 1997 to 41 percent at
December 31, 1997. As such, the quarter ended March 31, 1997 was restated
to deconsolidate BioMarin from the Company's financial statements and to
record the investment under the equity method of accounting. (See Notes 1
and 3.) Because such ownership percentage is calculated based upon the
number of BioMarin shares currently outstanding, the exercise of BioMarin
options and warrants will dilute the Company's current ownership in
BioMarin.
5. Contingencies
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
sheets as of March 31, 1998 and 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.
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.
8
<PAGE>
GLYKO BIOMEDICAL LTD.
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," statements concerning fluctuation of gross margin on sales
of products as discussed in "Results of Operations," and statements
regarding future fundraising efforts of Glyko and BioMarin, and statements
concerning the ongoing liquidity of Glyko and 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
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 March 31, 1998. In this Statement, unless otherwise indicated, 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. See "Risk Factors - Diagnostic
Products - No Prior Commercial Manufacturing or Marketing; " - Early Stage of
Diagnostic Product Development;" "- Technology and Competition;" and "- Patents
and Proprietary Technology." 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 41%
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. for notes
due on July 31, 2000 secured by the underlying stock. Both Drs. Klock and Starr
are executive officers of the Company and BioMarin. The Company recorded a net
loss for the quarter ended March 31, 1998 in the amount of $569,000 primarily
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 continuing
research and development expenses to be incurred by BioMarin, the Company
anticipates net losses may continue at least through 1998. For the period from
its inception to March 31, 1998, the Company has incurred cumulative losses of
$15,559,000.
Results of Operations
Revenues in the first quarter of 1998 were $406,000 and consisted of sales of
products and services of $307,000 and other revenues representing development,
technology and licensing fees of $25,000 and grant revenues of $74,000. 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 $491,000 and consisted of sales of products and services of
$241,000 and other revenues representing a technology and licensing fee of
$250,000. The increase in product revenues in the first quarter of 1998 compared
to the same period of 1997 was due to increased sales volume. The decrease in
other revenues was due to a revised technology and licensing agreement
negotiated in 1997 that did not reoccur in 1998.
9
<PAGE>
Gross margin on sales of products and services was 71 percent in the first
quarter of 1998 and 59 percent in the first quarter of 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. 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. See "Risk Factors - History of
Operating Losses - Uncertainty of Future Profitability;" "- Diagnostic Products
- - No Prior Commercial Manufacturing or Marketing;" and "- Technology and
Competition."
Research and development expenses in the first quarter of 1998 were $164,000
compared to $176,000 in the first quarter of 1997, a decrease of $12,000. The
decrease was mainly due to the decrease of Dr. Christopher Starr's time
allocated to Glyko, Inc., which was reduced from 100% in the first quarter of
1997 to 30% in the second quarter of 1997 and thereafter (70% was allocated to
BioMarin).
Selling, general and administrative expense was $184,000 in the first quarter of
1998, an increase of $32,000 from the first quarter of 1997 expense of $152,000.
General and administrative expenses increased due to hiring of additional
personnel, partially offset by the decrease in Dr. John Klock's time allocated
to Glyko, Inc., which was reduced from 100% in the first quarter of 1997 to 30%
in the second quarter of 1997 and thereafter (70% was allocated to BioMarin).
Dr. Klock purchased 800,000 shares of BioMarin's common stock and Dr. Chris
Starr purchased 400,000 shares of common stock of BioMarin with the payment
therefore made with notes due on July 31, 2000. The notes are secured by the
underlying stock.
The equity in loss of BioMarin Pharmaceutical, Inc. for the quarters ended March
31, 1998 and 1997 was $545,000 and $830,000, respectively. These two quarters
are not comparable since BioMarin's inception date was March 21, 1997, thereby
reflecting only 10 days of activity from BioMarin for the quarter ended March
31, 1997 and due to the Company's change in ownership percentage of BioMarin's
outstanding common stock from 100 percent at March 31, 1997 to 41 percent at
December 31, 1997.
Interest income earned in the first quarters of 1998 and 1997 reflected earnings
on cash invested in short term interest bearing accounts. Interest expense in
the first quarters of 1998 and 1997 was immaterial.
Liquidity and Capital Resources
During the second quarter of 1995, the Company closed a private placement of
securities (the Q295 Financing). Investors participating in the Q295 Financing
purchased approximately 4.786 million units which each consisted of one share of
common stock and one five year warrant to purchase one share of common stock.
The Company issued units in exchange for cash, and also in exchange for the
settlement of certain outstanding liabilities. The units were priced at
Cdn.$0.80 with an exercise price on the warrant of Cdn.$0.90. The Company
established a balance sheet value for the common stock warrants by subtracting
the discounted fair market value for one share of the Company's common stock
from the price of one unit. The common stock warrants expire in 2000. The Q295
Financing raised approximately $2.78 million, consisting of approximately $2.36
million in cash and $420,000 for the settlement of a stockholder/director bridge
loan and certain other liabilities.
During the second quarter of 1996, the Company closed a second private placement
of securities (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.
On March 21, 1997, the Company closed a Cdn.$2.0 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
10
<PAGE>
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 to
a placement agent in connection therewith 299,000 shares of common stock and a
warrant to purchase 299,000 shares of common stock exercisable at $1.00 per
share (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 and 400,000 shares
of common stock to Christopher Starr, Ph.D., both of whom are also executive
officers of Glyko Biomedical Ltd.) for 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 common stock at an
exercise price of $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 and valued under the Black Scholes model at $80,000. 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 or the exercise of outstanding options or warrants could result in a
further reduction of Glyko Biomedical Ltd.'s ownership percentage. See "Risk
Factors - Future Capital Requirements - Uncertainty of Future Fundraising."
The Company's net cash position increased by $231,000 in the first quarter of
1998. Net cash proceeds of $311,000 from the issuance of common stock from the
exercise of stock options and warrants and issuance of common shares relating to
a technology and licensing agreement was offset by net cash used in operating
activities of $77,000 and purchases of property and equipment of $4,000.
The Company's net cash position increased by $16,000 in the first quarter of
1997. Net cash proceeds of $1.424 million from the Q197 Financing and cash
provided by operating activities of $156,000 were offset by cash invested in
BioMarin of $1.5 million and purchases of property and equipment of $63,000.
Since its inception, the Company has incurred cumulative
losses of $15,559,000 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 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 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 raise
additional capital, 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. See "Risk Factors - Future Capital
Requirements;" " - History of Operating Losses - Uncertainty of Future
Profitability;" and " - Technology and Competition."
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.
11
<PAGE>
RISK FACTORS
Future Capital Requirements - Uncertainty of Future Funding
Since its inception, the Company has incurred cumulative losses of $15,559,000
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 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 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. There can be no assurance that such additional funding will
be obtained. If such funding is obtained, it may be on terms dilutive to the
Company and its shareholders. 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 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. See "Management's discussion and analysis of financial condition
and results of operations - liquidity and capital resources".
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 revenues increased in 1997and 1998,
the Company's pro rata share of BioMarin's net loss resulted in the Company
reporting a net loss for the quarter ended March 31, 1998 of $569,000. 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. See "Management's discussion and analysis of financial
condition and results of operations."
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 may be obtained from government grants or through
strategic alliances with third parties, sources of which the Company is
currently exploring. 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.
12
<PAGE>
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.
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 to address this competition 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 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.
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.
13
<PAGE>
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, and the departure of
either person could have a material adverse effect on the Company. Pursuant to
employment contract signed effective July 1, 1997, 30% of Dr. Klock's and Dr.
Starr's time will be committed to Glyko, Inc. and 70% will be committed to
BioMarin. On April 1, 1998, the Company hired Brian Brandley, Ph.D. as General
Manager of Glyko, Inc. Dr. Brandley is expected to handle certain of the
functions previously assigned to Dr. Christopher Starr.
14
<PAGE>
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
In April, 1997, Millipore Corporation filed suit in the Marin County Superior
Court against the Company to recover unpaid rent and related facilities charges
of approximately $366,000 for the Company's former leased facility plus an
additional $90,000 for alleged equipment and property damage resulting from the
abandonment of the premises. Additionally, 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. The
Company's management is currently negotiating a settlement of this legal action.
To the best of the Company's knowledge, there were no other pending legal
proceedings against the Company or its property. 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 March 31, 1998 and 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.
Item 2. Changes in Securities None.
Item 3. Defaults upon Senior Securities None.
Item 4. Submission of Matters to a Vote of Security Holders None.
Item 5. Other Information None.
Item 6. Exhibits and Reports on Form 8-K
(a) 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 March 31, 1998.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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: May 15, 1998 By: \s\ John C. Klock, M.D.
John C. Klock, M.D.
President, Chief Executive Officer
and Chief Financial Officer
16
<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.)
17
<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.)
27.1 Financial Data Schedule (see Financial Data Schedule hereto
attached at page 19)
18
<PAGE>
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