U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 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 98-0195569
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
371 Bel Marin Keys Blvd., #210, Novato, California 94949
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (415) 382-3500
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of Class)
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
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III to the Form 10-KSB or any amendment to
this Form 10-KSB. X
State issuer's revenues for its most recent fiscal year: $1,159,916.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such equity, $59,635,000 as of
February 28, 1999.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 29,564,029 common shares outstanding
as of February 28, 1999.
Transitional small business disclosure format (check one) Yes No X
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GLYKO BIOMEDICAL, LTD.
Part I
Item 1. Description of Business
Glyko Biomedical, Ltd. ("GBL" or the "Company") was incorporated by Certificate
and Articles of Incorporation under the laws of Canada on June 26, 1992. On
December 21, 1992, simultaneously with an initial public offering of the
Company's Common Shares on The Toronto Stock Exchange, the Company acquired, in
a stock for stock exchange, 100 percent of the outstanding shares of Glyko, Inc.
incorporated on October 15, 1990, under the laws of Delaware, upon an exchange
of shares with the stockholders of Glyko, Inc. GBL was incorporated for the sole
purpose of acquiring Glyko, Inc. Both entities were under common control and the
share exchange was accounted for in a manner similar to a pooling. The
registered office of the Company is Scotia Plaza, Suite 2100, 40 King Street
West, Toronto, Canada M5H 3C2.
On October 25, 1996, the Company formed BioMarin Pharmaceutical Inc.
("BioMarin"), a corporation incorporated under the laws of Delaware, to develop
the Company's pharmaceutical products. The principal office of BioMarin is 371
Bel Marin Keys Blvd., #210, Novato, California 94949.
BioMarin first began business on March 21, 1997 and issued 1,500,000 shares of
common stock to GBL for $1.5 million. As consideration for the grant of a
license to certain of Glyko, Inc.'s intellectual property pursuant to a license
agreement dated June 26, 1997, BioMarin issued GBL an additional 7,000,000
shares of BioMarin common stock. At that time GBL held 100% of the outstanding
capital stock of BioMarin. 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% of BioMarin's outstanding capital
stock. As of December 31, 1997, the Company began recording its share of
BioMarin's net loss utilizing the equity method of accounting. On June 30, 1998,
BioMarin raised net proceeds of $3.3 million as consideration for the issuance
of 598,535 shares including a $1.0 million investment from GBL. On August 3,
1998 BioMarin raised an additional net proceeds of $8.1 million as consideration
for the issuance of 1,416,800 shares from third parties. On September 4, 1998,
BioMarin received $8 million from Genzyme Corp. ("Genzyme") upon execution of a
joint venture agreement pursuant to which BioMarin issued 1,333,333 shares of
common stock to Genzyme. As a result of this joint venture agreement, BioMarin
has a 50% interest in the income or loss of the joint venture, BioMarin/Genzyme
LLC.
On October 7, 1998, BioMarin acquired Glyko, Inc., in a transaction valued at
$14,500,500. As consideration for the acquisition of all of the outstanding
shares of Glyko, Inc., BioMarin issued 2,259,039 shares of common stock to the
Company, assumed Glyko, Inc.'s employee stock options exercisable for 255,540
shares of BioMarin common stock, and paid $500 in cash. After this transaction,
the Company's ownership of BioMarin was 41.7 percent at December 31, 1998.
BioMarin's business comprises two segments. BioMarin's Analytic and Diagnostic
Products segment represents the business conducted on a stand-alone basis by
Glyko, Inc. while the Pharmaceutical Products segment represents BioMarin's
pharmaceutical development activities.
Since its inception, the Company has incurred a cumulative deficit of
$19,080,000 and GBL expects to continue to incur losses during 1999 due to its
share of BioMarin's net loss resulting from the ongoing research and development
of BioMarin's pharmaceutical product candidates. As a result of GBL's sale of
Glyko, Inc. on October 7, 1998, GBL has no operating activities or paid
employees and its principal asset is its investment in BioMarin. Accordingly,
without further investment in other companies or technologies, management
believes that GBL has sufficient cash to sustain planned operations. While GBL
is not obligated to provide this capital, in April, 1999, the Company entered
into a convertible note arrangement with BioMarin in the amount of $4,300,000,
as part of a $26,000,000 convertible note financing which was closed on April
13, 1999. BioMarin has an accumulated deficit of $15,076,419 at December 31,
1998 and is expected to incur significant losses during 1999 and beyond.
Management of BioMarin believes that the convertible note financing will be
sufficient to meet its minimum obligations through December 31, 1999. However,
BioMarin will seek additional financing in the near term to fully execute its
business strategies and meet its longer term obligations. Management of GBL does
not believe that at December 31, 1998, there has been any impairment of its
investment in BioMarin.
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Pharmaceutical Products
BioMarin is currently developing pharmaceutical products through its own
internal operations and through research grants with various universities.
BioMarin has completed pivotal trials of its lead enzyme replacement product
("BM101") for Mucopolysaccharidosis (MPS) I, a crippling and fatal disease that
afflicts young children. A Phase I pivotal trial was conducted under a Company
Investigational New Drug (IND) application that encompassed 10 patients with all
levels of severity of MPS I. BioMarin received orphan drug designation for its
enzyme replacement therapy in September 1997, allowing BioMarin to market the
product exclusively for seven years following U.S. Food and Drug Administration
("FDA") approval if it is the first to gain such approval. BioMarin focuses on
the development of products in five therapeutic areas: genetic diseases, burn
and wound care, fungal infections, male pro-fertility and inflammation
(initially psoriasis). This development process will require funding and
BioMarin plans to raise additional cash to fund these projects. BioMarin cannot
assure you that such funds will be available or that this development process
will be successful.
BioMarin's Analytic and Diagnostic Products
Analytic Products
BioMarin manufactures and sells the following products:
- - - A series of kits with chemicals, enzymes, pre-cast gels, and standards for
performing analyses of carbohydrates.
- - - A carbohydrate analytical system based on electrophoresis including
computer controlled imaging system for sample analysis and report
preparation.
- - - Research products including carbohydrate enzymes, standards and related
materials.
- - - Copyrighted, proprietary software for image analysis and data manipulation.
Products are marketed directly and through authorized distributors. Customers
include distributors of research products, university research laboratories,
biotechnology companies and pharmaceutical companies.
Diagnostic Products
BioMarin's FACE(R) diagnostic technology gives clinicians the capability to
detect the presence of specific carbohydrate markers indicating certain disease
states.
In November 1995, Glyko, Inc. received approval from the United States Food and
Drug Administration to market its diagnostic test for Lysosomal Storage
Diseases, the Urinary Carbohydrate Analysis Test Kit.
A second-year SBIR II Grant in the amount of $290,234 was awarded for the period
from June 1, 1998, to May 31, 1999 to develop a second-generation confirmatory
test of Lysosomal Storage diseases
Patents and Trade Secrets
BioMarin and GBL entered into a License Agreement dated June 26, 1997, pursuant
to which GBL granted BioMarin an exclusive, worldwide, perpetual, irrevocable,
royalty-free right and license to certain of Glyko, Inc.'s, GBL's wholly-owned
subsidiary at the time, worldwide patents, trade secrets, copyrights, and other
proprietary rights to all know-how, processes, formulae, concepts, data, and
other such intellectual property, whether patented or not, owned or licensed by
Glyko, Inc. 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 Glyko, Inc. an exclusive,
worldwide, perpetual, irrevocable, royalty-free cross-license to all
improvements BioMarin may make upon the licensed intellectual property.
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Competition
BioMarin's Pharmaceutical segment has many existing and potential competitors,
including large pharmaceutical companies and biotechnology companies. These
competitors have several advantages over BioMarin, including:
- Greater financial resources
- More extensive (and possibly better) research and development programs,
including experience in obtaining regulatory approval
- Greater manufacturing and marketing resources and experience
Another source of competition arises from universities and public and private
research institutions in the biopharmaceutical and human health care field.
While these organizations primarily have educational objectives, they may
develop proprietary technology and acquire patents that BioMarin may need for
the development of our products.
BioMarin believes that competition for its analytic and diagnostic products and
services are established alternative technologies provided by other companies,
and services provided by laboratory and testing services firms. For example, the
FACE Imaging System competes with alternative carbohydrate analytical
technologies, including capillary electrophoresis, high-pressure liquid
chromatography, mass spectrometry and nuclear magnetic resonance spectrometry.
Government Regulation
BioMarin's drug candidates are subject to extensive regulation by the federal
government, principally the FDA, and by state governments. FDA regulations
govern the development, testing, manufacturing, advertising and selling of drug
products. When BioMarin's products are distributed abroad, they are subject to
regulations of foreign governments.
Before BioMarin can commercially sell its products in the United States,
BioMarin must obtain FDA approval for each drug and indication it intends to
commercialize. The FDA approval process is typically lengthy and expensive, and
approval or the timing of approval is never certain. As part of the FDA approval
process, BioMarin must conduct, at its own expense, preclinical studies and
clinical trials on each drug candidate. Even if the FDA grants approval, it may
later withdraw its approval if BioMarin fails to comply with their regulations
or if subsequent problems with BioMarin's drug candidates occur. FDA approval
may also limit the uses or indications for which BioMarin's drug candidates may
be promoted and sold.
In addition, manufacture of BioMarin's drug products must comply with the FDA's
current Good Manufacturing Practice ("cGMP") regulations. The cGMP regulations
govern quality control and documentation policies and procedures. BioMarin's
manufacturing facilities are continuously subject to inspection by the FDA and
the State of California, before and after product approval. BioMarin is
currently in the process of developing the manufacturing site and process for
commercial manufacture of its first drug candidate. BioMarin's facility has not
been inspected by any governmental entity. Before commercial manufacturing may
commence, BioMarin must obtain regulatory approval of its manufacturing facility
and process. BioMarin cannot guarantee that it, or any potential manufacturer of
our drug products, will be able to comply with cGMP regulations. Material
changes to the manufacturing processes after approval are also subject to FDA
review and approval.
The manufacture and sale of BioMarin's analytic products do not require
government approval in the United States or Canada. The manufacture and sale of
medical diagnostic products in the United States are controlled by the FDA, and
the manufacture and sale of analytic products in Canada are controlled by the
Health Protection Branch ("HPB"). The laws of each country require the licensing
of manufacturing facilities located in its jurisdiction, carefully controlled
clinical trials in humans and extensive testing of products. The manufacturer
must establish the safety and efficacy of its products, good manufacturing
practices and control over marketing activities before it will be allowed to
market and sell its products. The safety and efficacy of a new diagnostic
product must be demonstrated through clinical trials carried out under
procedures acceptable to the FDA or the HPB, as the case may be. In order to be
able to market and sell its diagnostic products, Glyko, Inc. must successfully
complete clinical trials. The sales program is initiated by applying to the FDA
or the HPB, as the case may be, for permission to manufacture and market
products. Glyko, Inc. must submit specific information on the results of
carefully controlled clinical trials using blood or other specimens obtained
from humans. In addition, manufacturing methods and standards, and the stability
of the product components must be presented to enable the regulatory agency to
conclude that the product that may eventually be sold to the public has the same
composition and performance as that determined to be effective in clinical
trials. The controls on a new diagnostic product do not cease once it is on the
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market and continued reporting of its performance must be submitted by the
manufacturer to the FDA or the HPB, as the case may be. This is required to keep
the product on the market. Glyko, Inc. is unable to predict whether future
regulatory developments will affect Glyko, Inc.'s products under development.
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RISK FACTORS
Dependence on Investment in BioMarin
Since the October 7, 1998 sale of Glyko, Inc. to BioMarin, GBL's principal asset
has been its ownership of 41.7% of BioMarin's outstanding capital stock. GBL's
success is dependent on the successful operations of BioMarin including, but not
limited to, BioMarin's ability to receive FDA approval of existing and future
pharmaceutical product candidates, BioMarin's ability to retain key personnel,
BioMarin's ability to manufacture and market products effectively and
successfully and BioMarin's ability to raise additional cash to fund future
operations. BioMarin is a development stage company, with its only revenues
currently being earned from the sale of its analytic and diagnostic products.
History of Operating Losses - Uncertainty of Future Profitability; Need for
Additional Financing
The Company's net loss for 1998 was $4,090,000. The primary components of this
loss were the Company's share of the net loss of BioMarin accounted for under
the equity method of accounting and the loss of Glyko, Inc. for the period from
January 1, 1998 to October 7, 1998 (date of acquisition of Glyko, Inc. by
BioMarin). The losses of Glyko, Inc. from October 8, 1998 to December 31, 1998
have been consolidated into BioMarin's loss for that period. GBL expects to
continue to incur losses during 1999 due to its share of BioMarin's net loss
resulting from BioMarin's ongoing research and development of pharmaceutical
product candidates. The BioMarin losses do not have an impact on the cash
position of GBL. As a result of GBL's sale of Glyko, Inc., as of October 7,
1998, GBL has no operating activities and its principal asset is its investment
in BioMarin. Accordingly, without further investments in other companies or
technologies, management believes that GBL has sufficient cash to sustain
planned operations. While GBL is not obligated to provide this capital, in
April, 1999, the Company entered into a convertible note arrangement with
BioMarin in the amount of $4,300,000, as part of a $26,000,000 convertible note
financing which was closed on April 13, 1999. BioMarin has an accumulated
deficit of $15,076,419 at December 31, 1998 and is expected to incur significant
losses during 1999 and beyond. Management of BioMarin believes that the
convertible note financing will be sufficient to meet its minimum obligations
through December 31, 1999. However, BioMarin will seek additional financing in
the near term to fully execute its business strategies and meet its longer term
obligations. Management of GBL does not believe that at December 31, 1998, there
has been any impairment of its investment in BioMarin.
Early Stage Company; Continuing Operating Losses; Uncertainty of Future
Profitability; Need for Additional Financing
BioMarin began operations in March 1997. Since then, BioMarin has engaged
primarily in research and development. BioMarin is in the developmental stage
and currently has not generated any revenues from any of its drug candidates.
BioMarin has incurred net operating losses since inception, and, at December 31,
1998, had an accumulated deficit of approximately $15.1 million. BioMarin's
losses mainly arise from expenses related to research and development, including
clinical trials for drug candidates, and administrative costs associated with
operations. BioMarin expects to spend substantial amounts in the future for
additional research and development activities, preclinical studies, clinical
trials, regulatory review and manufacturing process development and scale up.
Profits from the analytic and diagnostic products and services are expected to
be insufficient to offset the expenses associated with the pharmaceutical
business. As a result, BioMarin expects that operating losses will continue and
increase in 1999 and beyond.
Whether BioMarin will become profitable in the future will depend in part on
regulatory approval of its drug candidates and BioMarin's ability to
successfully manufacture and market any approved drugs, either by itself or
jointly with others. The extent of BioMarin's future losses and the timing of
profitability are highly uncertain and cannot be accurately predicted. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
No Currently Marketable Drug Products
None of BioMarin's drug candidates have received regulatory approval to be
commercially marketed and sold. BioMarin has several drug candidates in various
stages of preclinical and clinical development. BioMarin's first drug candidate
is an enzyme replacement therapy for MPS-I that is not expected to be
commercially available in the United States until early in 2000. BioMarin's
other drug candidates are not expected to be commercially available for at least
several years.
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Prior to being commercially sold, all of BioMarin's drug candidates require
significant research and development, laboratory testing and extensive
preclinical and clinical testing, manufacturing process development and
regulatory approval. Even if any of BioMarin's drug candidates receive
regulatory approval, BioMarin cannot be certain it will be able to manufacture
any products at an acceptable cost, or that it will be successful in marketing
any products.
Risks Related to Clinical Trials; Uncertainties Regarding Drug Development
BioMarin must show that its drug candidates are safe and effective for use in
the targeted indication to receive regulatory approval for commercial sale.
Typically, if a drug candidate is intended to treat a chronic disease, such as
MPS-I, the data must be gathered over an extended period of time. In addition,
clinical trials are typically conducted in three phases. The FDA generally
requires two pivotal clinical trials which demonstrate substantial evidence of
safety and efficacy and appropriate dosing in a broad patient population and at
multiple sites to support an application for regulatory approval. BioMarin's
strategy for the development of therapeutics for certain genetic disorders is to
conduct only one pivotal trial on a small number of patients. For example, at
the end of October 1998, BioMarin completed what it believes is a pivotal
clinical trial on its first drug candidate BM101. Because of the small numbers
of patients treated or because of the clinical results, BioMarin may
successfully obtain the data necessary to support regulatory approval of BM101
or any future drug candidate. The FDA may request additional studies to be
conducted.
BioMarin is currently conducting a single clinical trial on one product, BM101,
for the treatment of MPS-I. BioMarin has conducted a clinical trial on BM101
using the endpoints of reduction in liver or spleen size and a reduction in
levels of certain complex carbohydrates in urine. BioMarin needs to validate
these endpoints by showing a clinical benefit associated with these endpoints.
In addition, the FDA has requested BioMarin to conduct Phase IV studies to show
clinical results in additional patients with the most severe form of MPS-I.
These studies are not required for approval of the BLA but must be completed
subsequently if the FDA approves the BLA for BM101. If no clinical benefit can
be shown that is associated with the endpoints, then the FDA can take action to
rapidly revoke approval and prevent further marketing of BM101. If BioMarin's
clinical trial fails to establish that BM101 is safe and effective, BioMarin may
decide to conduct further clinical trials, which would significantly increase
expenses and delay product launch. If BioMarin were required to undertake
additional clinical trials or expand its existing trial to include additional
patients, regulatory approval would be delayed. Furthermore, if new adverse
effects are identified after marketing, FDA approval may be revoked and the drug
no longer marketed.
BioMarin must conduct preclinical studies in animals and clinical trials in
humans for each of its drug candidates before BioMarin can seek FDA approval to
commercially sell the drug candidate. The number of preclinical studies and
clinical trials required is expected to vary depending on the drug candidates
and the regulatory pathway for the particular drug candidate. BioMarin may need
to perform preclinical studies on multiple animal models using various doses and
formulations before it can begin clinical trials, which could result in a longer
time to commercialization of any drug candidates. For example, in one early
preclinical study, use of a low concentration of an enzyme therapy on a
particular animal model did not show successful results while in a subsequent
preclinical study, use of a higher concentration of the same enzyme therapy on a
different animal model showed more promising results. Furthermore, even if
BioMarin obtains favorable results in preclinical studies on animals, the
results in humans may be different.
There are many clinical trial risks. The results of initial preclinical studies
and clinical trials can differ from the results that may be obtained from
subsequent or more extensive testing or long-term clinical trials. If final
clinical results are adverse or inconclusive, BioMarin would not file for
regulatory approval.
Similar issues could arise with future drug candidates that reach the clinical
testing phase. BioMarin may also decide to abandon further work on a drug
candidate. As a result, BioMarin cannot be certain that its research and
development, including preclinical and clinical testing, will be successfully
completed. BioMarin cannot guarantee that its drug candidates will obtain the
necessary regulatory approvals.
Finally, delay or termination of BioMarin's clinical trials may occur. Many
factors can cause delay or termination, including:
- Slower patient enrollment than planned
- Lack of sufficient clinical supplies of the drug candidate
- Adverse medical events or side effects in treated patients
- Lack of efficacy of the drug candidate being tested
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Initial Drug Candidates Target Small Patient Populations
BioMarin's strategy with respect to most of its drug candidates is to target
disorders where the patient populations are small. BioMarin's initial drug
candidates, BM101 and BM102, target patients with MPS-I and MPS-VI,
respectively. BioMarin estimates that in the United States and Canada, there are
only 1,050 patients with MPS-I and 170 to 340 with MPS-VI. In addition, other
drug candidates BioMarin is developing are to treat conditions, such as other
genetic diseases and serious burns, with small patient populations. Due to the
fact that the patient populations in these markets are small, pricing and
reimbursement for BioMarin's drug candidates are critical to its success.
BioMarin cannot be certain that it will be able to obtain sufficient pricing to
justify its product development efforts. BioMarin also cannot be certain that it
will be able to achieve sufficient penetration of these small markets to achieve
commercial success.
Uncertainty of Pharmaceutical Pricing and Related Matters; Need for
Reimbursement
BioMarin's ability to successfully commercialize its drug candidates depends on
the availability of reimbursement for such drugs from government health agencies
(such as Medicare and Medicaid in the United States), private health insurers
and other organizations. The course of treatment for MPS-I using BM101 is
expected to be expensive. BioMarin expects patients to need ongoing treatments
throughout their lifetimes. BioMarin expects that families of patients will not
be capable of paying for this treatment themselves. If medical reimbursement
were denied for this treatment, there would be no commercially viable market for
BM101.
Third party payors (such as government or private health care insurers)
carefully review and increasingly challenge the price charged for drugs.
Reimbursement rates from private companies vary depending on the third-party
payor, the insurance plan and other factors. Reimbursement systems in
international markets vary significantly by country and by region, and
reimbursement approvals must be obtained on a country-by-country basis or on a
named-patient basis. BioMarin cannot be certain that third-party payors will pay
for the costs of its drugs and the courses of treatment. Even if BioMarin is
able to obtain reimbursement from third-party payors, BioMarin cannot be certain
that reimbursement rates will be enough to allow BioMarin to profit from sales
of its drugs.
BioMarin currently has no expertise in reimbursement and expects through the
BioMarin/Genzyme joint venture to rely on Genzyme's expertise to obtain
reimbursement for BM101. BioMarin cannot predict what the reimbursement rates
will be. In addition, BioMarin will need to develop its own reimbursement
expertise for future drug candidates, unless BioMarin enters into collaborations
with other companies with the necessary expertise.
BioMarin expects that reimbursement in the future will be subject to increased
restrictions both in the United States and internationally. The escalating cost
of health care has led to increased pressure on the health care industry to
reduce costs. Governmental and private third-party payors have proposed health
care reforms and cost reductions. In the United States there have been a number
of federal and state proposals to control the cost of health care, including the
cost of drug treatments. In certain foreign markets, the government controls the
pricing which would affect the profitability of drugs. Current government
regulations and possible future legislation regarding health care may affect
BioMarin's future revenues from sales of its drugs and may adversely affect
BioMarin's business and prospects.
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Government Regulation; No Assurance of Regulatory Approvals
BioMarin's drug candidates are subject to extensive regulation by the federal
government, principally the FDA, and by state governments. FDA regulations
govern the development, testing, manufacturing, advertising and selling of drug
products. When BioMarin's products are distributed abroad, they are subject to
regulations of foreign governments.
Before BioMarin can commercially sell its products in the United States,
BioMarin must obtain FDA approval for each drug and indication it intends to
commercialize. The FDA approval process is typically lengthy and expensive, and
approval or the timing of approval is never certain. As part of the FDA approval
process, BioMarin must conduct, at its own expense, preclinical studies and
clinical trials on each drug candidate. Even if the FDA grants approval, it may
later withdraw its approval if BioMarin fails to comply with their regulations
or if subsequent problems with BioMarin's drug candidates occur. FDA approval
may also limit the uses or indications for which BioMarin's drug candidates may
be promoted and sold.
In addition, manufacture of BioMarin's drug products must comply with the FDA's
current Good Manufacturing Practice ("cGMP") regulations. The cGMP regulations
govern quality control and documentation policies and procedures. BioMarin's
manufacturing facilities are continuously subject to inspection by the FDA and
the State of California, before and after product approval. BioMarin is
currently in the process of developing the manufacturing site and process for
commercial manufacture of its first drug candidate. BioMarin's facility has not
been inspected by any governmental entity. Before commercial manufacturing may
commence, BioMarin must obtain regulatory approval of its manufacturing facility
and process. BioMarin cannot guarantee that it, or any potential manufacturer of
our drug products, will be able to comply with cGMP regulations. Material
changes to the manufacturing processes after approval are also subject to FDA
review and approval.
Uncertainty of Orphan Drug Designation
In September 1997, BioMarin received orphan drug designation from the FDA for
BM101. In February 1999, BioMarin received orphan drug designation for BM102.
Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if
it is a drug intended to treat a "rare disease or condition." The sponsor that
obtains the first FDA approval for a designated orphan drug for a given rare
disease receives marketing exclusivity for use of that drug for the orphan
indication for a period of seven years.
As part of BioMarin's business strategy, BioMarin intends to develop drugs which
may be eligible for FDA orphan drug designation. Because the extent and scope of
patent protection for BioMarin's drug candidates is uncertain, then orphan drug
designation is particularly important for its products that are eligible for
such designation . BioMarin plans to rely on the exclusivity period under the
orphan drug designation to maintain a competitive position. However, BioMarin
does not know if the FDA will grant orphan drug designation for any of its
products other than BM101 and BM102 or marketing exclusivity for any of its
products. Even if BioMarin obtains drug designation, BioMarin cannot guarantee
that exclusivity would effectively protect the product from competition. Orphan
drug designation does not shorten the development or FDA review time of a drug
so designated nor give the drug any advantage in the FDA review or approval
process.
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Uncertain Ability to Protect Patents and Proprietary Technology and Information
Where appropriate, BioMarin seeks patent protection for certain aspects of its
technology. However, for many of the enzymes BioMarin is developing, including
BM101 and BM102, meaningful patent protection may not be available. Composition
of matter patents will not be available for BM101 and BM102.
The patent positions of biotechnology companies are extremely complex and
uncertain. The scope and extent of patent protection for some of BioMarin's
products, including BM101, are particularly uncertain because some of the
enzymes BioMarin is developing have existed in the public domain for many years.
This means that other parties have published the structure of the enzyme, the
methods for purifying or producing the enzyme or the methods of treatment or
use. If such publications exist, they can prevent our patent applications from
issuing or can limit the scope of coverage for issued patents.
In addition, BioMarin's owned and licensed patents and patent applications do
not assure the protection of its intellectual property for a number of other
reasons:
- BioMarin does not know whether its patent applications will result in
actual patents. For example, BioMarin may not have developed a method
for treating a disease before others develop similar methods.
- BioMarin's competitors may interfere in our patent process, which can
delay the grant of a patent and/or reduce the scope of its patent
protection.
- Even if BioMarin receives a patent, it may not provide much practical
protection. The government agencies which grant patents have not
followed a consistent policy. If BioMarin receives a patent but its
scope is narrow, then it will be easier for competitors to design
products which do not infringe on BioMarin's patent.
- Enforcing patents is expensive and may absorb significant management
time. In litigation, a competitor could claim that BioMarin's issued
patents are not valid for a number of reasons. If the court agrees,
BioMarin would lose that patent.
In addition, competitors also seek patent protection for their technology. There
are many patents in our field of technology, and BioMarin cannot guarantee that
it does not infringe on those patents or that it will not infringe on patents
granted in the future. If a patent holder believes BioMarin's product infringes
on the patent, the patent holder may sue BioMarin even if it has received patent
protection for its technology. If someone else claims BioMarin infringes on
their technology, BioMarin would face a number of issues, including:
- Defending a lawsuit which takes significant time and can be very
expensive.
- If the court decides that BioMarin's product infringes on the
competitor's patent, BioMarin may have to pay substantial damages for
past infringement.
- The court may prohibit BioMarin from selling or licensing the product
unless the patent holder licenses the patent to BioMarin. The patent
holder is not required to grant BioMarin a license. If a license is
available, BioMarin may have to pay substantial royalties or grant
cross-licenses to its patents.
- Redesigning BioMarin's product so it does not infringe may not be
possible and could require substantial funds and time.
It is also unclear whether BioMarin's trade secrets will provide useful
protection. While BioMarin uses reasonable efforts to protect its trade secrets,
BioMarin's employees or consultants may unintentionally or willfully disclose
BioMarin's information to competitors. Enforcing a claim that someone else
illegally obtained and is using BioMarin's trade secrets, like patent
litigation, is expensive and time consuming. BioMarin cannot predict the outcome
of such litigation. In addition, courts outside the United States are sometimes
less willing to protect trade secrets.
BioMarin may also support and collaborate in research conducted by government
organizations or by universities. BioMarin cannot guarantee that it will be able
to acquire any exclusive rights to technology or products derived from such
collaborations. If BioMarin does not obtain required licenses or rights,
BioMarin could encounter delays in product development while we attempt to
design around blocking patents or even be prohibited from developing,
manufacturing or selling products requiring such licenses. There is also a risk
that disputes may arise as to the rights to technology or products developed in
collaboration with other parties.
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Dependence on Corporate Partners and Collaborators
On September 4, 1998, BioMarin entered into an agreement with Genzyme to
establish a joint venture dedicated to the worldwide development and
commercialization of BM101 to treat MPS-I. Under the agreement, the joint
venture is owned half by BioMarin and half by Genzyme. Under the joint venture
agreement, Genzyme is responsible for obtaining foreign regulatory approval,
handling sales and marketing of BM101 and obtaining reimbursement.
Furthermore, the joint venture is relying on Genzyme to provide its expertise
and know-how that it has developed through the launch and sale of
Ceredase/Cerezyme for Gaucher disease, a rare genetic disorder. BioMarin cannot
guarantee that Genzyme will devote the resources necessary to successfully
market BM101. In addition, either party may terminate the joint venture for any
reason. If Genzyme were to terminate the joint venture, BioMarin would be
required to undertake Genzyme's responsibilities. BioMarin has no experience in
marketing, selling or obtaining reimbursement approval for any pharmaceutical
products. In addition, BioMarin would be required to pursue foreign regulatory
approvals. Termination of the joint venture could therefore result in
significant delays in product launch in the United States, inability to obtain
third party reimbursement and delays or failure to obtain foreign regulatory
approval, any of which could adversely affect BioMarin's business and results of
operations.
BioMarin's strategy for the research, development and commercialization of
certain of its potential products includes the possibility that BioMarin will
enter into various additional arrangements with corporate partners, licensors,
licensees and others. If BioMarin develops products based on licensed
technologies, BioMarin must pay royalties and make certain other payments. In
addition, BioMarin plans to develop strategic relationships with corporate and
academic partners to further the research, development and commercialization of
drug candidates and proprietary technologies. As a result, BioMarin's success
may also depend upon the success of these relationships, including BioMarin's
partners' ability to fulfill their responsibilities. BioMarin cannot guarantee
that it will be able to develop any of the collaborative relationships necessary
to further BioMarin's business strategy. Even if BioMarin is able to develop
these relationships, BioMarin cannot be certain that these relationships will
result in the successful research, development and/or commercialization of any
drug candidates or proprietary technologies. BioMarin also cannot guarantee that
its partnerships will be exclusive. Partners may still be able to develop drug
treatments and technologies, either independently or with others that compete
with BioMarin's products.
Limited Drug Manufacturing Experience; Scale-Up Risk
BioMarin currently has a contract with Harbor-UCLA to manufacture BM101 in very
limited quantities for use in preclinical studies and clinical trials. BioMarin
has no experience manufacturing any of its drug candidates in volumes that will
be necessary to support commercial sales. BioMarin is in the process of
validating its first manufacturing facility for commercial production of BM101.
BioMarin must develop additional manufacturing facilities and capabilities. In
addition, the FDA must approve BioMarin's manufacture and any third party
manufacture of its drug candidates in commercial quantities. BioMarin is in the
process of moving its manufacturing of BM101 to a new facility. BioMarin is
required by the FDA to demonstrate compliance with cGMP in its new facility.
Because clinical supplies of BM101 were produced in a different facility, the
FDA may require that BioMarin conduct additional clinical trials in order to
demonstrate equivalence with the drugs used in BioMarin's clinical trial. The
FDA will also inspect BioMarin's manufacturing facilities or those of its third
party manufacturers prior to approval to determine compliance with cGMPs.
Failure to comply with cGMPs could delay FDA approval and failure to maintain
compliance after FDA approval could result in recalls of BioMarin's products or
other enforcement actions by the FDA.
BioMarin is currently developing approximately 23,000 square feet of
manufacturing facilities in its Novato location. However, BioMarin cannot
guarantee that its manufacturing facilities under development will be sufficient
for commercial manufacturing of BM101. BioMarin also cannot be certain that
development of its manufacturing facilities will occur on schedule. Even if
BioMarin can establish this capacity, BioMarin cannot be certain that
manufacturing costs will be commercially reasonable.
Before BioMarin receives FDA approval to market any of its drug candidates,
BioMarin will need to expend significant financial resources on process
development, manufacturing scale-up and on development of manufacturing capacity
to support commercial sales. Manufacturers often experience difficulties in
scaling up production of new products, including problems regarding production
yields, purity, quality control and assurance, shortages of qualified personnel
and compliance with FDA regulations. If BioMarin were unable to establish and
maintain commercial scale manufacturing capabilities, sales of BioMarin products
would be adversely affected.
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Limited Marketing and Sales Capability for Products
If BioMarin markets the drug candidates that it is developing, BioMarin will
have to increase its marketing and sales capabilities and establish distribution
channels. As discussed above, BioMarin has recently entered into a joint venture
with Genzyme where Genzyme will be responsible for marketing and distributing
BM101 if it receives FDA approval. BioMarin cannot guarantee that it will be
able to establish sales and distribution capabilities or that BioMarin, the
joint venture or any future collaborators will successfully sell any of its drug
candidates.
To increase BioMarin's marketing and distribution for both its drug candidates
and Glyko, Inc. products, BioMarin will have to increase its current sales force
and/or enter into additional third party marketing and distribution agreements.
BioMarin cannot guarantee that it will be able to hire the qualified sales and
marketing personnel it will need in a timely manner, if at all. Nor can BioMarin
guarantee that it will be able to enter into any marketing or distribution
agreements on acceptable terms or when needed. If BioMarin cannot increase its
marketing capabilities as BioMarin intends, either through increasing BioMarin's
sales force or entering into agreements with third parties, sales of BioMarin's
and Glyko, Inc.'s products may be adversely affected.
Management of Growth
BioMarin's management, administrative and operational resources have been
growing at a rapid pace and BioMarin expects this growth to continue. BioMarin
recently acquired Glyko, Inc. and entered into a joint venture with Genzyme.
Accordingly, BioMarin expects to hire more personnel, expand its facilities and
upgrade its information systems. Additionally, if the joint venture receives FDA
approval for BM101, the joint venture will be required to devote the additional
resources to support the commercialization of BM101.
To manage expansion effectively, BioMarin needs to continue to develop and
improve its operational and financial systems, sales and marketing capabilities,
and expand, train, retain, manage and motivate its employees. In addition, some
of BioMarin's senior management have limited or no experience managing a public
company. BioMarin cannot guarantee that its systems, procedures or controls will
be adequate to support its operations or that its management will be able to
exploit successfully future market opportunities or successfully manage its
relationships with customers and other third parties. BioMarin cannot guarantee
that it will continue to grow or, if BioMarin does, that it will effectively
manage such growth. BioMarin's failure to manage growth would adversely effect
its business and prospects.
Competition
BioMarin's Pharmaceutical segment has many existing and potential competitors,
including large pharmaceutical companies and biotechnology companies. These
competitors have several advantages over BioMarin, including:
- Greater financial resources
- More extensive (and possibly better) research and development programs,
including experience in obtaining regulatory approval
- Greater manufacturing and marketing resources and experience
Such competitors may succeed in developing, manufacturing and marketing products
that are more effective and/or more cost effective than any of BioMarin's
product candidates. They may also succeed in obtaining regulatory approvals for
their products faster than we can obtain them, including obtaining orphan drug
designation, or commercializing their products before we do. In addition, these
companies will compete with BioMarin in attracting qualified personnel and in
attracting parties for licenses, joint ventures or other collaborations. They
will also compete with BioMarin in attracting academic research institutions as
partners and in obtaining licensing of such institution's proprietary
technology. Several biopharmaceutical companies have already established
themselves in the field of enzyme therapeutics, including Genzyme, BioMarin's
joint venture partner.
Another source of competition arises from universities and public and private
research institutions in the biopharmaceutical and human health care field.
While these organizations primarily have educational objectives, they may
develop proprietary technology and acquire patents that BioMarin may need for
the development of our products. BioMarin will attempt to obtain licenses for
such proprietary technology, if available. BioMarin cannot guarantee it will be
able to obtain these licenses on acceptable terms, if at all. BioMarin will also
directly compete with a number of these organizations in the recruitment of
personnel, especially scientists and technicians.
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BioMarin believes that competition for its analytic and diagnostic products and
services are established alternative technologies provided by other companies,
and services provided by laboratory and testing services firms. For example, the
FACE Imaging System competes with alternative carbohydrate analytical
technologies, including capillary electrophoresis, high-pressure liquid
chromatography, mass spectrometry and nuclear magnetic resonance spectrometry.
These competitive technologies have established customer bases and are more
widely used and accepted by scientific and technical personnel in part because
they can be used for non-carbohydrate applications. Companies competing with
BioMarin may have greater financial, manufacturing and marketing resources and
experience.
BioMarin believes that the speed with which others can develop analytic and
diagnostic products, complete clinical testing and regulatory approval processes
and supply commercial quantities to the market will be important competitive
factors. There can be no assurance that others will not independently develop
similar products, duplicate BioMarin's products or design around its patents. In
addition BioMarin may be required to obtain licenses to others' patents. No
assurance can be given that such licenses can be obtained on acceptable terms.
These factors could cause BioMarin. to encounter delays in product market
introductions or adversely affect it's development or sale of products requiring
licenses from third parties. BioMarin'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 BioMarin's financial
position and results of operations.
Substantial Capital Requirements
BioMarin expects to continue to spend substantial amounts for its operations for
the foreseeable future. Activities which will require additional expenditures
include: research and development programs, preclinical and clinical testing,
regulatory processes, establishment of commercial scale manufacturing
capabilities and expansion of sales and marketing activities. How much capital
BioMarin may need will depend on many factors, including:
- The progress, timing and scope of BioMarin's research and development
programs
- The progress, timing and scope of BioMarin's preclinical and clinical
testing
- The time and cost involved in obtaining regulatory approvals
- The cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights
- Installing, validating and scaling-up manufacturing capacity
- Competing technological and market developments
- Changes and developments in BioMarin's existing collaborative,
licensing and other commercial relationships
- Any new collaborative, licensing and other commercial relationships
arrangements that BioMarin may establish
Moreover, BioMarin's fixed expenses such as rent, license payments and other
contractual commitments are substantial and are likely to increase in the
future.
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In the future, BioMarin may need to raise substantial additional capital to fund
operations. BioMarin cannot be certain that any financing will be available when
needed. Even if financing is available, the terms may not be attractive. If
additional financing is raised by selling more stock, GBL's holdings will suffer
further dilution. In addition, BioMarin may be required to grant superior rights
to future stockholders. If BioMarin fails to raise additional financing as
BioMarin needs it, BioMarin may have to slow or adversely change its plans for
growth and its business and prospects may suffer.
Dependence on Qualified Personnel
BioMarin's future growth and success depend on its ability to hire, retain and
train its employees. Because of the specialized scientific nature of BioMarin's
business, BioMarin relies heavily on its ability to attract and retain qualified
scientific, technical and managerial personnel. In particular, the loss of Grant
W. Denison, Jr., Chairman and Chief Executive Officer, John C. Klock, M.D.,
President and Secretary or Christopher M. Starr, Ph.D., Vice President for
Research and Development would be detrimental to BioMarin. BioMarin does not
maintain insurance on the lives of Mr. Denison or Dr. Starr.
The competition for qualified personnel in the biopharmaceutical field is
intense. BioMarin cannot be certain that it can continue to attract and retain
qualified personnel necessary for the development of its business. The loss of
the services of existing personnel as well as the failure to recruit additional
key scientific, technical and managerial personnel in a timely manner would harm
BioMarin's research and development programs and its business and prospects.
Product Liability
BioMarin develops drug treatments for use in humans. The nature of the business
exposes BioMarin to potential product liability risks inherent in the testing,
manufacturing and marketing of human drug treatments. BioMarin currently does
not maintain insurance against product liability lawsuits. Although BioMarin
intends to obtain product liability insurance, BioMarin cannot be certain that
it will be able to obtain adequate insurance coverage. BioMarin cannot be
certain that it can successfully defend any product liability lawsuit brought
against BioMarin. Even if BioMarin is able to establish insurance coverage, the
cost may be prohibitive. If BioMarin is the subject of a successful product
liability claim which exceeds the limits of its insurance coverage, BioMarin may
incur substantial liabilities which would adversely affect its business and
prospects.
Year 2000-Related Problems
The following is intended to constitute "Year 2000 Readiness
Disclosure" under the Year 2000 Information and Readiness Disclosure
Act of 1998.
GBL has conducted a review of potential year-2000 compliance issues. Since GBL
no longer offers products and services for sale, GBL is focusing its inquiry on
the impact of these issues on its internal administrative activities and on its
professional service providers and other third parties. GBL does not currently
anticipate that it will incur material expenditures in connection with any
products or services it previously offered. GBL may incur some expense in
connection with this review, thought it does not currently anticipate that these
expenses will be material.
BioMarin is aware that, potentially, application and system programs may be
unable to process correctly date information for dates after December 31, 1999.
This year 2000 defect could cause the disruption or failure of computer systems.
If present in BioMarin's analytic and diagnostic products, the defect could
expose BioMarin to litigation or a significant decrease in sales of BioMarin's
products. The year 2000 defect could affect both BioMarin's internal information
technology systems and other functional systems that use embedded computer
programs for control or other purposes. The defect could also affect the
information technology and other functional systems of suppliers of products and
services to BioMarin. The defect could affect the overall economy and have a
significant impact on BioMarin.
BioMarin has formed a team to review and resolve those aspects of the year 2000
problem which are within its direct control and adjust to or influence those
aspects which are not within its direct control. The team has reviewed its
analytic and diagnostic products (including those under development) and
determined that these products do not use date data and are year 2000 compliant.
BioMarin's biopharmaceutical products do not have any year 2000 exposure. Based
on representations from its vendors, the team has reviewed the year 2000
compliance status of its major internal information technology programs and
systems used for administrative requirements and determined that such systems
are year 2000 compliant. The team is in the process of reviewing other internal
functional systems that may have a year 2000 defect within the embedded computer
systems used for control. BioMarin believes that it can resolve its significant
internal year 2000 compliance issues before the year 2000 with expenditures that
are currently estimated not to be material. If BioMarin does not achieve on a
timely basis year 2000 compliance for its internal systems, BioMarin's
operations and business could be adversely affected.
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With respect to suppliers, BioMarin does not currently process orders, payments
and other business communications electronically from computer to computer.
However, if BioMarin's suppliers and ultimate customers are not year 2000
compliant within their own systems, their disruptions could have significant
direct or indirect impact on BioMarin's operations and business. Among many
potential impacts, the following are representative of disruptions to which
BioMarin might be subject:
- Financial institutions may not be able to process checks, accept
deposits, provide records, process wire transfers, provide stock
ownership and transfer records and facilitate many other financial
transactions and services.
- Suppliers may not be able to process orders, manufacture products,
deliver in accordance with production schedules, or in general provide
the current level of timely products and services.
- Voice and data communication systems used by BioMarin and its customers
and suppliers might be disrupted.
- Health care suppliers and third party payers may be unable to process
patient records, add to or modify the content of their pharmacy
authorizations, accept or make timely, accurate payments, and handle
the many other data requirements of the
modern health care system. The added costs for back-up systems, for
temporary or emergency fixes and the ongoing requirements to handle
critical functions on a timely basis combined with the resultant
managerial distractions may delay the review and introduction of the
new drugs and new therapeutic practices critical to BioMarin.
With regard to the impact on BioMarin's operations and business as a result of
year 2000 compliance problems incurred by third parties as discuss above,
BioMarin cannot reasonably assess the size, onset and duration of the overall
impact.
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Item 2. Description of Property None.
Item 3. Legal Proceedings
In July 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 4. Submission of Matters to a Vote of Security-Holders None.
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PART II
Item 5. Market For Common Equity and Related Stockholder Matters
As of November 1993, the Company's stock has been listed on the OTC Bulletin
Board under the symbol "GLYK". The Company's Common Shares have been listed and
traded on The Toronto Stock Exchange (TSE) since December, 1992 under the symbol
"GBL." The following table sets forth the sales prices for the Common Shares for
the periods noted, as reported by TSE. Prices are the closing price on the TSE
during the periods indicated.
Prices
(In Canadian Dollars)*
Year Period High Low
1997 First Quarter $0.70 $0.40
1997 Second Quarter $0.96 $0.60
1997 Third Quarter $1.05 $0.65
1997 Fourth Quarter $1.40 $0.75
1998 First Quarter $3.40 $1.20
1998 Second Quarter $4.30 $2.60
1998 Third Quarter $4.55 $3.05
1998 Fourth Quarter $6.75 $3.35
*As of December 31, 1998, the Canadian dollar to U.S. dollar exchange rate was
$0.6535.
Holders
As of February 28, 1999, there were 173 holders of record of 29,564,029
outstanding Common Shares of the Company. Additionally, on such date options to
acquire 449,560 of Common Shares and warrants to acquire 4,330,734 Common Shares
were outstanding.
Certain Canadian Federal Income Tax Considerations
The following is a summary of the principal Canadian federal income tax
considerations generally applicable to a person (a "United States holder") who,
for the purposes of the Income Tax Act (Canada) (the "Canadian Tax Act") and the
Convention between Canada and the United States with respect to Taxes on Income
and Capital (the "Convention") and at all relevant times, is resident in the
United States and not resident in Canada, deals at arm's length with the
Company, holds Common Shares as capital property and does not use or hold and is
not deemed to use or hold the Common Shares in carrying on business in Canada.
Special rules, which are not discussed in this summary, may apply to a United
States holder that is an insurer that carries on an insurance business in Canada
and elsewhere.
This summary is based on the current provisions of the Convention and of the
Canadian Tax Act and the regulations thereunder, all specific proposals to amend
the Canadian Tax Act and the regulations announced by the Minister of Finance
(Canada) prior to the date hereof (the "Proposed Amendments") and the published
administrative practices of Revenue Canada, Taxation. This summary assumes the
Proposed Amendments will be enacted in the form currently proposed. This summary
does not take into account or anticipate any changes in the governing law, other
than the Proposed Amendments, whether by federal, governmental or legislative
decision or action, nor does it take into account the tax legislation or
considerations of any province, territory or foreign jurisdiction.
This summary is of a general nature only and is not, and should not be
interpreted as, legal or tax advice to any particular United States holder and
no representation is made with respect to the Canadian income tax consequences
to any particular person. Accordingly, United States holders are advised to
consult their own tax advisors with respect to their particular circumstances.
Under the Canadian Tax Act and pursuant to the Convention, Canadian withholding
tax will apply to dividends on Common Shares paid or deemed to be paid to a
United States holder at the rate of 15 percent of the gross amount of such
dividends. However, in the case of a United States holder that is a corporation
which owns at least 10 percent of the voting stock of the company, the rate is
reduced to five percent of the gross amount of such dividends.
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In general, a United States holder will not be subject to Canadian income tax on
capital gains arising on the disposition of Common Shares unless (i) at any time
in the five-year period immediately preceding the disposition, 25 percent or
more of the issued shares of any class or series of the Company belonged to the
United States holder, to persons with whom the United States holder did not deal
at arm's length, or to the United States holder and persons with whom he did not
deal at arm's length, and (ii) the value of the Common Shares at the time of the
disposition is derived principally from real property (as defined in the
Convention) situated in Canada.
A disposition of Common Shares to the Company (unless the Company acquires the
shares in the open market in the manner in which shares would normally be
purchased by any member of the public) will result in a deemed dividend to the
United States holder equal to the amount by which the consideration paid by the
Company to acquire the Common Shares exceeds the paid-up capital of such shares
for purposes of the Canadian Tax Act. The amount of such deemed dividend will be
subject to the withholding tax described above.
Dividend Policy
No cash dividends were paid on any class of GBL securities in the last two
years. The Company does not anticipate the payment of dividends in the
foreseeable future. At present, the Company's policy is to retain earnings, if
any, to finance the development of its business. The payment of dividends in the
future will depend upon, among other factors, the Company's earnings, capital
requirements and operating and financial condition.
Item 6. 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 Company's ongoing liquidity 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," and
"Liquidity and Capital Resources."
Overview
Glyko Biomedical Ltd. is a Canadian holding company that at December 31, 1998
owned 41.7% of the outstanding capital stock of BioMarin Pharmaceutical Inc.
(BioMarin). As of October 7, 1998, BioMarin owns 100% of the capital stock of
Glyko, Inc. Glyko, Inc. and BioMarin are operating companies based in
California. On October 7, 1998, BioMarin acquired Glyko, Inc., in a transaction
valued at $14,500,500. As consideration for the acquisition of all of the
outstanding shares of Glyko, Inc., BioMarin issued 2,259,039 shares of common
stock to the Company, assumed Glyko, Inc.'s employee stock options exercisable
for 255,540 shares of BioMarin common stock, and paid $500 in cash. The
following discussion and the accompanying consolidated financial statements
include the accounts of Glyko Biomedical Ltd. and through October 7, 1998 Glyko,
Inc., presented on a consolidated basis plus BioMarin presented on the equity
method of accounting. Subsequent to October 7, 1998, the results of operations
of Glyko, Inc. have been consolidated into the results of operations of
BioMarin. Numerical references in the following discussion are rounded to the
nearest thousand.
Since its inception in October 1990, Glyko, Inc. has engaged in research and
development of new techniques to analyze and manipulate carbohydrates for
research, diagnostic and pharmaceutical purposes. Glyko, Inc. developed a line
of analytic instrumentation laboratory products that include an imaging system,
analysis software and chemical analysis kits. Glyko, Inc., as a wholly owned
subsidiary of BioMarin, continues to develop additional chemical kits for use
with the imaging system, and is also developing a line of carbohydrate
diagnostic products. BioMarin is engaged in the discovery, development and
commercialization of carbohydrate enzyme therapeutics.
The Company's net loss for 1998 was $4,090,000. The primary components of this
loss were the Company's share of the net loss of BioMarin accounted for under
the equity method of accounting and the loss of Glyko, Inc. for the period from
January 1, 1998 to October 7, 1998 (date of acquisition of Glyko, Inc. by
BioMarin). The losses of Glyko, Inc. from October 8, 1998 to December 31, 1998
have been consolidated into BioMarin's loss for that period. GBL expects to
continue to incur losses during 1999 due to its share of BioMarin's net loss
resulting from BioMarin's ongoing research and development of pharmaceutical
product candidates. The BioMarin losses do not have an impact on the cash
position of GBL. As a result of GBL's sale of Glyko, Inc., as of October 7,
1998, GBL has no operating activities and its principal asset is its investment
in BioMarin. While GBL is not obligated to provide this capital, in April, 1999,
the Company entered into a convertible note arrangement with BioMarin in the
amount of $4,300,000, as part of a $26,000,000 convertible note financing which
was closed on April 13, 1999. BioMarin has an accumulated deficit of $15,076,419
at December 31, 1998 and is expected to incur significant losses during 1999 and
beyond. Management of BioMarin believes that the convertible note financing will
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be sufficient to meet its minimum obligations through December 31, 1999.
However, BioMarin will seek additional financing in the near term to fully
execute its business strategies and meet its longer term obligations. Management
of GBL does not believe that at December 31, 1998, there has been any impairment
of its investment in BioMarin.
Results of Operations
The principal operations of GBL relate to the operations of Glyko, Inc. The year
ended December 31, 1997, include the operations of Glyko, Inc. for the entire
year. For the year ended December 31, 1998, the operations of Glyko are only
included for the nine month and seven day period from January 1, 1998 through
October 7, 1998. Glyko, Inc.'s operations from October 8, 1998 through December
31, 1998 are reflected in the accompanying financials statements through the
Company's equity in the loss of BioMarin. Thus the comparisons below, as they
relate to Glyko, Inc. are for twelve months of 1997 versus nine months seven
days of 1998.
Revenues in 1998 were $1,160,000 and consisted of sales of products and services
of $865,000 and other revenues representing development fees of $25,000 and
grant revenues of $270,000. Sales of products and services consisted of sales of
chemical analysis kits and imaging systems, and fees for custom analytic
services. Revenues in 1997 were $2,037,000 and consisted of sales of products
and services of $1,176,000 and other revenues representing technology,
development and licensing fees of $704,000 and grant revenues of $157,000. The
decline in product revenues in 1998 was due to a decrease in sales volume and
due to the sale of Glyko, Inc. to BioMarin in October 1998. The decrease in
other revenues was due to development, technology and licensing fees received in
1997 that did not recur in 1998.
Gross margin on sales of products and services was 67 percent in 1998 and 59
percent in 1997. The increase in gross margin in 1998 was due to a combination
of decreased manufacturing overhead expenses and an increase in product prices
that took effect in July 1997.
Research and development expenses in 1998 were $680,000 compared to $606,000 in
1997, an increase of $74,000. The increase in research and development expenses
was mainly due to the increase in lab personnel and lab supplies purchased.
Selling, general and administrative expense was $690,000 in 1998, an increase of
$127,000 from 1997 expense of $563,000. The increase is due to a reversal in
1997 of prior year's expenses accrued on GBL's statement of operations which
reduced expenses in 1997 by $120,000 and a small increase in advertising and
sales travel in 1998.
Equity in loss of BioMarin for 1998 was $3,803,000 compared to $2,452,000 for
1997, an increase of $1,351,000. The increase was due to the increased net loss
of BioMarin partially offset by a decrease in GBL's percentage ownership of
BioMarin.
Interest income earned in 1998 and 1997 of $28,000 and $13,000, respectively,
reflected earnings on cash invested in short term interest bearing accounts. The
increase in interest income in 1998 resulted from higher cash balances available
for investment compared to 1997. Interest expense in 1998 and 1997 was
immaterial.
Other operating expenses in 1998 of $(165,880) represents the gain on the
settlement of a claim at an amount less than was provided for by the Company.
As a result of GBL's sale of Glyko, Inc. to BioMarin, GBL anticipates having no
revenues and substantially lower expenses in 1999.
Liquidity and Capital Resources
The Company's cash position increased by $2,040,000 in 1998 to $2,568,000. Net
cash proceeds of $2,330,000 relating to 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 and $945,000 from the
settlement of intercompany receivables was partially offset by the investment in
BioMarin of $1,000,000 and net cash used in operating activities of $236,000.
Since its inception, the Company has incurred a cumulative deficit of
$19,080,000 and GBL expects to continue to incur losses during 1999 due to its
share of BioMarin's net loss resulting from BioMarin's ongoing research and
development of pharmaceutical product candidates. As a result of GBL's sale of
Glyko, Inc., as of October 7, 1998, GBL has limited operating activities and its
principal asset is its investment in BioMarin. Accordingly, without further
investments in other companies or technologies, management believes that GBL has
sufficient cash to sustain planned operations. While GBL is not obligated to
provide this capital, in April, 1999, the Company entered into a convertible
note arrangement with BioMarin in the amount of $4,300,000, as part of a
$26,000,000 convertible note financing which was closed on April 13, 1999.
18
<PAGE>
BioMarin has an accumulated deficit of $15,076,419 at December 31, 1998 and is
expected to incur significant losses during 1999 and beyond. Management of
BioMarin believes that the convertible note financing will be sufficient to meet
its minimum obligations through December 31, 1999. However, BioMarin will seek
additional financing in the near term to fully execute its business strategies
and meet its longer term obligations. Management of GBL does not believe that at
December 31, 1998, there has been any impairment of its investment in BioMarin.
See "Risk Factors - Dependence on Investment in BioMarin," "-History of
Operating Losses - Uncertainty of Future Profitability."
Item 7. Financial Statements
The information required to be filed in this item appears on pages F.2 to F.35
and is incorporated herein by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
19
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
Directors and Executive Officers
The directors and executive officers of the company are as follows:
Year Joined
Name Age Position Company
R. William Anderson(1)(2) 57 Director 1990
Brian K. Brandley, Ph.D. 42 Managing Director 1998
John H. Craig 51 Secretary and Director 1992
John S. Glass 62 Director 1994
John C. Klock, M.D. (1) 54 President, Chief Executive
Officer and Director 1990
Gwynn R. Williams(1)(2) 65 Director 1990
Mark I. Young 43 Assistant Secretary and Director 1997
(1) Member of Audit Committee
(2) Member of Compensation Committee
All directors hold office until the next annual meeting of stockholders or until
their successors are elected and qualified. Officers are appointed by the Board
of Directors and serve at the discretion of the Board. There are no family
relationships among the officers and directors of the Company.
Mr. R. William Anderson has served as a Director since 1992. Mr. Anderson has
served as Chief Financial Officer and Vice President, Finance and Administration
of BioMarin since June 1998. Mr. Anderson served as the Vice President, Finance
and Chief Financial Officer at Fusion Medical Technologies, Inc., a
biotechnology company in drug delivery systems,from 1997 to 1998, as the Vice
President, Finance and Chief Financial Officer at Fidus Medical Technology,
Inc., a medical technology company in cardiac arrhythmias, from 1996 to 1997, as
a Director of Recombinant Capital, a consulting firm, from 1994 to 1996, and as
the Vice President, Finance and Chief Financial Officer of Glycomed
Incorporated, a biotechnology company, from 1989 to 1994. Previously, Mr.
Anderson was the Chief Financial Officer at Chiron Corporation, a biotechnology
company and a Controller and Director of Financial Planning and Analysis at
Syntex Laboratories, a pharmaceutical company. Mr. Anderson received a B.S. in
Engineering from the United States Military Academy, an M.S. in Administration
from George Washington University and an M.B.A. from the Harvard Graduate School
of Business Administration.
Brian K. Brandley, Ph.D. has served as the Managing Director of the Company
since April 1998. Dr. Brandley was an Assistant Professor at Rush University
from 1995 to 1998, and was the Senior Scientist, Head of Cell Biology at
Glycomed Incorporated from 1988 to 1995. In 1978, Dr. Brandley received a B.S.
in Biology from the University of Miami. In 1979, Dr. Brandley received an M.S.
in Biology from the University of Miami. In 1982, Dr. Brandley received a
Ph.D.in Biology from the University of Sydney,Australia.
Mr. John H. Craig has served as a Director and Secretary of the Corporation
since 1992 and has been a solicitor and partner with Cassels Brock and Blackwell
and previously with Holden Day Wilson, Toronto law firms, since 1973. Mr. Craig
is a director of a number of public companies listed on the Toronto Stock
Exchange.
Mr. John S. Glass has served as a Director since August 1994 and is Vice
President and Chief Financial Officer of Milkhaus Laboratory, Inc., a clinical
stage biopharmaceutical company. In 1995 he was an independent consultant. From
1968 to 1994 he served in various capacities at Millipore Corporation, most
recently as Director of Investor Relations and Vice President of Millicorp, a
venture capital subsidiary. Previously Mr. Glass was a research and development
manager at Polaroid Corporation. Mr. Glass holds a Masters degree in management
from the Massachusetts Institute of Technology.
Dr. John C. Klock has served as a director, President and Chief Executive
Officer of the Company since December 1992 and has served as Chief Accounting
Officer since October 1996. Dr. Klock is a founder and has
20
<PAGE>
served as the President of Glyko, Inc. from 1989 to present. Dr. Klock was a
founder of Glycomed Incorporated at which he served as Vice President, Medical
Affairs from 1987 to 1990. Dr. Klock was a scientific director at the Institute
of Cancer Research at California Pacific Medical Center from 1981 to 1987. Dr.
Klock was formerly an academic physician and carbohydrate researcher at the
University of California at San Francisco from 1982 to 1986, a researcher at
Murex Corporation from 1984 to 1985. Dr. Klock received a B.S. in Zoology from
Louisiana State University, Baton Rouge and received an M.D. from Tulane
University.
Mr. Gwynn R. Williams has served as a director since December 1992 and is a
founder of Glyko, Inc.(established in 1990). In 1984, Mr. Williams founded
AstroMed Limited and Astroscan Limited, UK manufacturers of scientific
equipment, which entities have since merged into Life Science Resources Ltd. Mr.
Williams was a partner in Arthur Andersen & Co. from 1971 to 1982. Previously,
Mr. Williams was a mathematician with General Motors Research from 1961 to 1970,
and with British Steel from 1958 to 1960. Mr. Williams also served as a director
of Life Science Resources, Ltd. from June 1986 to August 1998. Mr. Williams
received a B.S. in Theoretical Physics from the University of Wales in 1955.
Mr. Mark I. Young has served a Director of the Corporation since March 1997 and
has been the Assistant Secretary of the Corporation since 1992. Mr. Young is a
solicitor and partner with Cassels Brock and Blackwell practicing in the areas
of corporate commercial and securities law. Mr. Young is an officer or director
of a number of public companies listed on The Toronto Stock Exchange.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's officers and directors,
as well as persons who own ten percent or more of a registered class of the
Company's equity securities, to file with the SEC initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of the Company Officers, directors and ten percent or more stockholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company or written representations that no other reports were
required, during the fiscal year ended December 31, 1998, all officers,
directors, and ten percent stockholders complied with all Section 16(a) filing
requirements except that the Forms 5 for all officers, directors, and 10 percent
stockholders were filed late.
21
<PAGE>
Item 10. Executive Compensation
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table contains information about the compensation paid to, or
earned by, those who were, at December 31, 1998, the President, Chief Executive
Officer and Chief Financial Officer of the Company and the Managing Director of
the Company, being the only executive officers of the Company (collectively, the
"Named Executive Officers"). Specific aspects of their compensation are dealt
with in further detail in subsequent tables.
Glyko Biomedical Ltd.:
<TABLE>
============================ ======= ======================================== ==================
<CAPTION>
Name and Principal Position Long-term
Year Annual Compensation Compensation
----------- ---------- ------------------ ==================
Securities Under
Other Annual Options Granted
Salary Bonus Compensation (#)
(U.S.$) (U.S.$) (U.S.$)
============================ -------- ----------- ---------- ------------------ ==================
<S> <C> <C> <C> <C> <C>
John C. Klock
President, Chief Executive
Officer,
Chief Financial Officer,
and Director
1998 18,750 -- -- 11,290(2)
1997 97,226 -- -- 64,740(2)
1996 187,297 -- -- 75,876(2)
============================ -------- ----------- ---------- ------------------ ------------------
Brian Brandley(1)
Managing Director 1998 101,602 -- -- 150,000(2)
============================ ======== =========== ========== ================== ==================
<FN>
(1) On April 1, 1998, Brian Brandley, Ph.D. was appointed as
Managing Director of the Company and Christopher M. Starr, Ph.D.
resigned as Vice President of Research and Development.
(2) Options were assumed by BioMarin as part of the sale of Glyko, Inc. on
October 7, 1998. See "Interest of Insiders in Material Transactions."
</FN>
</TABLE>
22
<PAGE>
BioMarin Pharmaceutical Inc.(1):
<TABLE>
============================ ======== ========================================= ==================
<CAPTION>
Name and Principal Position Long-term
Year Annual Compensation Compensation
----------- ------------ ---------------- ==================
Other Annual Securities Under
Compensation Options Granted
Salary Bonus (U.S.$) (#)
(U.S.$) (U.S.$)
============================ -------- ----------- ------------ ---------------- ==================
<S> <C> <C> <C> <C> <C>
John C. Klock 1998 222,450 87,500(2) -- 300,000
President and Director 1997 146,914 -- -- --
============================ -------- ----------- ------------ ---------------- ------------------
R. William Anderson 1998 90,484 -- -- 200,000
Vice-President, Finance
and Administration and
Chief Financial Officer
============================ ======== =========== ============ ================ ==================
<FN>
(1) The Company owns 41.7% of BioMarin. Certain officers and directors of the
Company are also officers and directors of BioMarin.
(2) Includes amounts paid in 1999 for 1998.
</FN>
</TABLE>
Option Grants in 1998
Pursuant to the Company's stock option plan (the "Plan"), options under the Plan
may be granted for any term up to ten years, are non-assignable, and are subject
to earlier termination upon the termination of an optionee's employment for any
cause including retirement, permanent disability but not death. In the event of
death of an optionee, his estate may be entitled for a period of six months
thereafter to exercise any option which a deceased optionee would have been
entitled to exercise if then alive but in any event not after the date of
expiration of the option. No individual may hold options to purchase more than
5% of the total number of the Company's Common Shares outstanding from time to
time.
<TABLE>
<CAPTION>
Number of % of Total
Securities Options Granted
Underlying Options to Employees in
Name Granted(1) Financial Year Exercise Price
(Cdn.$/Security) Expiration Date
- - ------------------------- -------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
John C. Klock 11,290(2) 5% $1.25 31-DEC-02
- - ------------------------- -------------- ------------------- ------------------ -------------------
Brian Brandley 150,000(2) 64% $3.45 31-MAR-03
- - ------------------------- -------------- ------------------- ------------------ -------------------
<FN>
(1) Securities Under Options Granted refers to Common Shares.
(2) Options granted in 1998 were assumed by BioMarin as part of the Glyko,
Inc. sale on October 7, 1998.
</FN>
</TABLE>
23
<PAGE>
Aggregate Option Exercises and Fiscal Year End Option Value Table
<TABLE>
============================ ============= ============== =================================== ====================================
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options at in-the-money Options at
December 31, 1998 December 31, 1998(1)
--------------- ------------------- ------------------ ------------------
Shares
Acquired Value
on Exercise Realized Exercisable Unexercisable
Name (Cdn.$) Exercisable Unexercisable (Cdn.$) (Cdn.$)
- - ---------------------------- ------------- -------------- --------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
R. William Anderson 20,000 $48,000 90,520 -- $535,340 --
- - ---------------------------- ------------- -------------- --------------- ------------------- ------------------ ------------------
Brian Brandley (2) -- -- 28,125 121,875 $92,812 $495,000
- - ---------------------------- ------------- -------------- --------------- ------------------- ------------------ ------------------
John H. Craig 20,000 $48,000 90,520 -- $535,340 --
- - ---------------------------- ------------- -------------- --------------- ------------------- ------------------ ------------------
John S. Glass 20,000 $20,000 87,000 -- $515,100 --
- - ---------------------------- ------------- -------------- --------------- ------------------- ------------------ ------------------
John C. Klock(2) (3) 534,672 $1,106,167 140,616 -- $923,646 --
- - ---------------------------- ------------- -------------- --------------- ------------------- ------------------ ------------------
Gwynn R. Williams 20,000 $48,000 90,520 -- $535,340 --
- - ---------------------------- ------------- -------------- --------------- ------------------- ------------------ ------------------
Mark I. Young -- -- 39,000 -- $228,300 --
============================ ============= ============== =============== =================== =================== =================
<FN>
(1) Based on the closing price of Common Shares on the Toronto Stock Exchange
on December 31, 1998 of $6.75.
(2) As part of the sale of Glyko, Inc. on October 7, 1998, these options have
now been converted into options to purchase shares of BioMarin.
(3) These Common Shares acquired were purchased by a loan from the Company.
See "Indebtedness of Directors, Executive Officers And Senior Officers."
</FN>
</TABLE>
Compensation Of Directors
On January 22, 1998, each non-executive director of the Company was granted an
option to purchase 16,000 Common Shares at an exercise price of Cdn.$1.25 (which
options expire on December 31, 2002) in lieu of monetary compensation for
services rendered in their capacity as directors.
Employment Agreement
Dr. Klock's Glyko, Inc. employment agreement has been replaced by an employment
agreement with BioMarin whereby, Dr. Klock is to devote 100% of his time to
BioMarin.
Stock Option Plan
The Company has a stock option plan (the "Plan") under which options to purchase
Common Shares may be granted by the board of directors of the Company to
directors, officers, consultants and key employees of the Company. Options
granted under the Plan may either be "incentive stock options" under Section 422
of the United States Internal Revenue Code, or non-statutory options. The Plan
is administered by the board of directors of Glyko. Options granted under the
Plan will have an exercise price which will not be less than the market price,
less any permissible discounts, of the Common Shares on the date prior to the
date of grant, which market price is deemed to be the closing sales price, or
the closing bid price if no sales were reported, of the Common Shares on any
established stock exchange or national market system upon which the Common
Shares are listed, including The Toronto Stock Exchange, or, if listed upon more
than one exchange or system, the exchange or system with the greatest volume of
trading in Common Shares on the date prior to the date of grant, or, if there is
no established market for the Common Shares, the fair market value of the Common
Shares as determined by the board of directors. Options will be exercisable over
a number of years specified at the time of the grant which cannot exceed ten
24
<PAGE>
years. The aggregate number of Common Shares subject to options granted under
the Plan cannot exceed three million Common Shares and no one optionee is
entitled to hold options exceeding five percent of the Common Shares outstanding
at the time of the grant. Also, the maximum number of shares which may be
reserved for issuance to insiders under the Plan shall not exceed 10 percent of
common shares outstanding at the time of the grant.
Incentive stock options granted under the Plan terminate within 90 days of the
termination of an optionee's employment. Non-statutory options granted under the
Plan terminate within a period of time following the termination of the
optionee's employment, consulting or officer or director relationship which is
determined by the board of directors. Options also terminate within 12 months of
the death or total and permanent disability of the optionee. Options granted
under the Plan are not transferable. As of February 28, 1999 449,560 options
(net of exercised options) had been approved by the board of directors.
Options will only be granted in compliance with applicable securities
legislation, and the Plan will be operated in conformity with the requirements
of any stock exchange upon which the Common Shares of the Company may become
listed.
25
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table lists certain information regarding beneficial ownership of
the Glyko's Common Shares as of February 28, 1999, by (i) those persons who own
more than 5 percent of the Company's common stock, (ii) the Company's Chief
Executive Officer, (iii) each of the Company's directors, and (iv) the total
amount of Common Shares held by the Company's officers and directors as a group.
<TABLE>
- - ------------------------------ ---------------------------------- ---------------------- =======================
<CAPTION>
Name and Address of Beneficial Number of Shares Held Percent of Class
Title of Class Owner
- - ------------------------------ ---------------------------------- ---------------------- =======================
<S> <C> <C> <C>
Common Shares New York Life Insurance Company 4,185,000(1) 13.6%
51 Madison Avenue
New York, NY 10010
- - ------------------------------ ---------------------------------- ---------------------- =======================
Common Shares LaMont Asset Management 3,759,069(2) 12.7%
Baarerstrasse 10
P.O. box 4639
6304 Zug, Switzerland
- - ------------------------------ ---------------------------------- ---------------------- =======================
Common Shares Gwynn R. Williams 3,485,188 (3) 11.6%
c/o Life Science Research Ltd.
3rd Floor Salisbury House
15 Victoria Street
Douglas, Isle of Man
British Isles, UK
- - ------------------------------ ---------------------------------- ---------------------- =======================
Common Shares Trianon Opus One Inc. 1,764,000 6.0%
Julius Baer Securities Inc.
330 Madison Avenue
New York, NY 10017
- - ------------------------------ ---------------------------------- ---------------------- =======================
Common Shares John C. Klock 627,817(4) 2.1%
c/o BioMarin Pharmaceutical
371 Bel Marin Keys Blvd. #210
Novato, CA 94949
- - ------------------------------ ---------------------------------- ---------------------- =======================
Common Shares John H. Craig 113,521(5) *
c/o Cassels Brock & Blackwell,
Scotia Plaza, Suite 2100,
40 King Street West
Toronto, ON M5H 3C2
- - ------------------------------ ---------------------------------- ---------------------- =======================
Common Shares R. William Anderson 92,520 (6) *
c/o BioMarin Pharmaceutical
371 Bel Marin Keys Blvd. #210
Novato, CA 94949
- - ------------------------------ ---------------------------------- ---------------------- =======================
</TABLE>
26
<PAGE>
<TABLE>
- - ------------------------------ ---------------------------------- ---------------------- =======================
<CAPTION>
Name and Address of Beneficial Number of Shares Held Percent of Class
Title of Class Owner
- - ------------------------------ ---------------------------------- ---------------------- =======================
<S> <C> <C> <C>
- - ------------------------------ ---------------------------------- ---------------------- =======================
Common Shares John S. Glass 109,000 (7) *
Milkhaus Laboratory, Inc.
48 Main Street
Boxford, MA 01921
- - ------------------------------ ---------------------------------- ---------------------- =======================
Common Shares Mark I. Young 42,000(8) *
c/o Cassels Brock & Blackwell,
Scotia Plaza, Suite 2100, 40
King Street West,
Toronto, ON M5H 3C2
- - ------------------------------ ---------------------------------- ---------------------- =======================
Common Shares All Officers and Directors 4,470,046(9) 14.8%
- - ------------------------------ ---------------------------------- ---------------------- =======================
<FN>
* Less than 1%
(1) Includes 1,311,562 Common Shares issuable upon exercise of common share
purchase warrants.
(2) Includes 20,000 Common Shares issuable upon exercise of common share
purchase warrants.
(3) Includes 92,520 Common Shares issuable upon exercise of options within 60
days of February 28, 1999 and 312,568 Common Shares issuable upon exercise
of common share purchase warrants.
(4) Includes 2,000 Common Shares issuable upon exercise of options within 60
days of February 28, 1999.
(5) Includes 41,000 Common Shares issuable upon exercise of options within 60
days of February 28, 1999.
(6) Includes 92,520 Common Shares issuable upon exercise of options within 60
days of February 28, 1999.
(7) Includes 41,000 Common Shares issuable upon exercise of options within 60
days of February 28, 1999.
(8) Includes 41,000 Common Shares issuable upon exercise of options within 60
days of February 28, 1999 (9) Includes 337,560 Common Shares issuable upon
exercise of options within 60 days of February 28, 1999 and 312,568 Common
Shares issuable upon exercise of common share purchase warrants.
</FN>
</TABLE>
Item 12. Certain Relationships and Related Transactions
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 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. As a result of additional funds raised
by BioMarin during 1997 and 1998 (see Footnote 6 to Glyko Biomedical, Ltd.
Financial Statements), the Company's ownership in BioMarin was reduced to 41.7%
of BioMarin's outstanding common stock at December 31, 1998.
BioMarin and the Company 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 all current and future
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. Under the same License
Agreement, BioMarin granted the Company. a cross-license, similar in scope, 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 June 1997, the Company granted options to purchase 23,000 shares of
the Company's common stock to Mr. Anderson, Mr. Craig, Mr. Glass,
Mr. Williams and Mr. Young for their services as directors, granted options to
purchase 64,740 shares of the Company's common stock to Dr. John Klock as an
incentive bonus and granted options to purchase 40,350 shares of the
Company's common stock to Dr. Starr as an incentive bonus. Each option was
exercisable at Cdn.$0.65 per share.
In January 1998, the Company granted options to purchase 16,000 shares of
the Company's common stock to Mr. Anderson, Mr. Craig, Mr. Glass,
Mr. Williams and Mr. Young for their services as directors, granted options to
27
<PAGE>
purchase 11,290 shares of the Company's common stock to Dr. John Klock as an
incentive bonus and granted options to purchase 6,920 shares of the Company's
Common Stock to Dr. Chris Starr as an incentive bonus. Each option was
exercisable at Cdn.$1.25 per share.
In May 1998, the Company granted options to purchase 150,000 shares of the
Company's common stock at an exercise price of Cdn.$3.45 per share to Dr. Brian
Brandley as consideration for his acceptance of his employment with Glyko, Inc.
As previously discussed, BioMarin assumed Glyko, Inc.'s employee stock options
(previously exercisable for shares of GBL stock) exercisable for 255,540 shares
of BioMarin common stock as part of the sale of Glyko, Inc. to BioMarin.
Prior to the sale of Glyko, Inc. to BioMarin, the Company subleased office and
lab space, certain administrative and research and development functions to
BioMarin. BioMarin reimburses the Company for rent, salaries and related
benefits and other administrative costs and the Company reimburses BioMarin for
salaries and related benefits. BioMarin reimbursed the Company a net $183,000 in
1998 and a net $241,000 in 1997. Subsequent to the sale of Glyko, Inc., BioMarin
moved its corporate headquarters and laboratory to other buildings in Novato and
no longer subleases from the Company. The Company also provided analytical
services and products to BioMarin at a 27% discount in 1998 and 1997. Total
receipts to the Company from sales to BioMarin totaled $113,000 in 1998 and
$39,000 in 1997. Glyko, Inc. continues to reimburse BioMarin for salaries and
other shares expenses and continues to provide analytical services and products
to BioMarin.
On October 7, 1998, GBL sold 100% of the outstanding capital stock of Glyko,
Inc. to BioMarin. As consideration for such sale, BioMarin issued 2,259,039
shares of common stock of BioMarin to GBL, agreed to assume options to purchase
up to 585,969 shares of the GBL's common stock which options were previously
issued to employees of Glyko, Inc. (such "assumption" meaning the agreement by
each optionee to accept share of BioMarin common stock upon exercise of such
options in lieu of the Company's Common Shares) and paid GBL $500 in cash. The
shares of BioMarin common stock were valued at $6.00 per share, yielding a total
value of $13,554,234, and the options assumed were valued using the
Black-Scholes pricing model at $945,766, which, when combined with the $500 in
cash, resulted in total consideration of $14,500,500.
Dr. John Klock, the President and a director of the Company, is also the
President and a director of BioMarin. In June 1997, Dr. Klock was sold 800,000
shares of BioMarin's common stock for a purchase price of $800,000, paid for
with a full recourse note, secured by the underlying stock, due on July 31,
2000. Mr. Gwynn Williams, who is a director of the Company and also a major
stockholder of GBL, is also a director of BioMarin, and in such capacity was
previously granted an option to purchase 20,000 shares of BioMarin's common
stock at an exercise price of $1.00 per share. Mr. Raymond W. Anderson, a
director of the Company, is also an officer of BioMarin and on June 22, 1998,
was granted an option to purchase 200,000 shares of BioMarin's common stock at
an exercise price of $4.00 per share.
In November 1998, GBL loaned $712,261 to Dr. John Klock to exercise expiring
stock options. The loan is secured by the underlying stock and is with full
recourse
In January 1999, the Company granted options to purchase 4,000 shares of
the Company's Common Stock to Mr. Anderson, Mr. Craig, Mr. Glass,
Dr. Klock, Mr. Williams and Mr. Young for their services as directors at an
exercise price of Cdn.$6.00 per share.
28
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K
(a) Documents are filed as exhibits to this report as enumerated in the
Index to Exhibits hereto, Part III Item I.
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended December 31, 1998.
Part III
Item 1. Index to Exhibits
Exhibit Description
Number
2.1 Share Exchange Agreement between Glyko Biomedical, Ltd. and
BioMarin Pharmaceutical Inc. dated September 15, 1998.
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).
10.1 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).
10.2 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).
10.3 Glyko Biomedical Share Option Plan - 1994 (filed as exhibit 10.1
to Form 10-QSB dated June 30, 1994 and incorporated herein by
reference).
10.4 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).
10.5 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).
10.6 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.)
10.7 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.
10.8 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.
10.9 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.
22.2 Notice of Special Meeting of Shareholders, 1998 Annual Information
Circular and Form of Proxy. Filed as Definitive 14A documents on
February 4, 1999, and incorporated herein by reference.
27.1 Financial Data Schedule (see Financial Data Schedule hereto
attached at page 66)
<PAGE>
SIGNATURES
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: April 15, 1999 By: \s\ John C. Klock, M.D.
- - ---------------------------- ------------------------------
John C. Klock, M.D.
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John C. Klock, his attorney-in-fact, with
the power of substitution, for him in any and all capacities, to sign any
amendments to the Report on Form 10-KSB and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
Signature Title Date
\s\ John C. Klock, M.D. April 15, 1999
- - ----------------------------------- ----------------
John C. Klock, M.D. President, Chief Executive
Officer, Director
and Chief Accounting Officer
\s\ Brian K. Brandley April 15, 1999
- - ----------------------------------- ----------------
Brian K. Brandley, Ph.D. Managing Director
\s\ R. William Anderson April 15, 1999
- - ----------------------------------- ----------------
R. William Anderson Director
\s\ John S. Craig April 15, 1999
- - ----------------------------------- ---------------
John H. Craig Secretary and Director
\s\ John S. Glass April 15, 1999
- - ----------------------------------- ---------------
John S. Glass Director
\s\ Gwynn R. Williams April 15, 1999
- - ----------------------------------- ---------------
Gwynn R. Williams Director
\s\ Mark I. Young April 15, 1999
- - ----------------------------------- ---------------
Mark I Young Assistant Secretary
and Director
30
<PAGE>
Index to Financial Statements
Glyko Biomedical Ltd.'s Consolidated Financial Statements
Report of ndependent Public Accountants F.2
Consolidated Balance Sheets at December 31, 1998 and 1997 F.3
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997 F.4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1998 and 1997 F.5
Consolidated Statements of Cash Flows
for the years ended December 31, 1998 and 1997 F.6
Notes to Consolidated Financial Statements F.7 to F.13
BioMarin Pharmaceutical, Inc.'s Consolidated Financial Statements
Report ofIndependent Public Accountants F.14
Consolidated Balance Sheets at December 31, 1998 and
December 31, 1997 F.15 Consolidated Statements of Operations
for the year ended December 31, 1998 and the periods
from March 21, 1997 (inception) to December 31, 1998 and 1997 F.16
Consolidated Statements of Stockholders' Equity
for the year ended December 31, 1998 and the periods
from March 21, 1997 (inception) to December 31, 1998 and 1997 F.17
Consolidated Statements of Cash Flows for the year ended
December 31, 1998 and the periods from March 21, 1997
(inception) to December 31, 1998 and 1997 F.19
Notes to Consolidated Financial Statements F.20 to F.34
F.1
<PAGE>
Report of Independent Public Accountants
To the Stockholders of Glyko Biomedical Ltd.:
We have audited the accompanying consolidated balance sheets of Glyko
Biomedical Ltd. and subsidiaries (the Company) as of December 31, 1998
and 1997 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Glyko
Biomedical Ltd. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
\s\ Arthur Andersen LLP
San Francisco, California Arthur Andersen LLP
February 17 , 1999
(Except for the matter discussed in the
fourth paragraph of Note 1, for which
the date is April 13, 1999)
F.2
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. Financial Statements
GLYKO BIOMEDICAL, LTD.
CONSOLIDATED BALANCE SHEETS
(In U.S. dollars)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1998 1997
------------------------ -----------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,567,824 $ 528,280
Trade receivables - 141,743
Inventories - 95,210
Note receivable 100,000 -
Other current assets 9,710 15,179
------------------------ -----------------------
Total current assets 2,677,534 780,412
Investment in BioMarin Pharmaceutical Inc. 7,674,729 3,025,990
Property, plant and equipment, net - 118,910
Note receivable from stockholder 712,261 -
Other assets - 2,206
------------------------ -----------------------
Total assets $ 11,064,524 $ 3,927,518
======================== =======================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ - $ 38,916
Accrued liabilities 411,109 393,408
Deferred rent and related costs - 365,880
------------------------ -----------------------
Total current liabilities 411,109 798,204
Stockholders' equity:
Common stock, no par value, unlimited shares authorized, 28,020,234 and
21,573,044 shares issued and outstanding at December 31, 1998
and December 31, 1997, respectively 17,963,167 13,154,224
Additional paid in capital 11,222,691 4,068,564
Common stock warrants and options 547,285 929,585
Deferred compensation - (33,364)
Accumulated deficit (19,079,728) (14,989,695)
------------------------ -----------------------
Total stockholders' equity 10,653,415 3,129,314
------------------------ -----------------------
Total liabilities and stockholders' equity $ 11,064,524 $ 3,927,518
======================== =======================
</TABLE>
The accompanying notes are an integral part of these statements.
F.3
<PAGE>
GLYKO BIOMEDICAL, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
( in U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Sales of products and services $ 865,164 $ 1,175,699
Other revenues 294,752 860,935
------------------- -------------------
Total revenues: 1,159,916 2,036,634
Expenses:
Cost of products and services 284,860 482,770
Research and development 679,783 605,803
Selling, general and administrative 689,617 562,888
Other (165,880) -
------------------- -------------------
Total expenses: 1,488,380 1,651,461
------------------- -------------------
Income (loss) from operations (328,464) 385,173
Equity in loss of BioMarin Pharmaceutical Inc. (3,803,058) (2,452,422)
Interest income 42,822 12,610
Other loss (1,333) (1,219)
------------------- -------------------
Net loss $ (4,090,033) $ (2,055,858)
=================== ===================
Net loss per common share, basic and diluted $ (0.17) $ (0.10)
=================== ===================
Weighted average number of shares
used in computing per share amounts 23,873,798 20,536,058
=================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
F.4
<PAGE>
GLYKO BIOMEDICAL, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In U.S. dollars)
<TABLE>
<CAPTION>
Common Stock Common
---------------------------- Additional Stock Deferred Accumulated
Shares Amount Paid In Capital Warrants Compensation Deficit Total
------------- ------------- ---------------- ---------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 14,567,944 $ 11,304,356 $ - $ 278,085 $ - $ (11,357,978) $ 224,463
Net loss for the year - - - - - (1,575,859) (1,575,859)
Exercise of stock options 100 48 - - - - 48
Issuance of common stock
and warrants in a private
placement financing, net
of issuance costs of $152,156 2,675,000 898,661 - 155,812 - - 1,054,473
------------- ------------- ----------------- ---------- ------------- ------------- -------------
Balance at December 31, 1996 17,243,044 $ 12,203,065 $ - $ 433,897 $ - $ (12,933,837) $ (296,875)
Net loss for the year - - - - - (2,055,858) (2,055,858)
Exercise of stock options 50,000 22,976 - - - - 22,976
Grant of options to consultants - - 90,152 - (33,364) - 56,788
Issuance of common stock
and warrants in a private
placement financing, net of
issuance costs of $160,881 4,280,000 928,183 - 495,688 - - 1,423,871
Additional paid in capital
resulting from the sale of
common stock by BioMarin
Pharmaceutical, Inc. - - 3,978,412 - - - 3,978,412
------------- ------------- ----------------- ---------- ------------- ------------- -------------
Balance at December 31, 1997 21,573,044 $13,154,224 $4,068,564 $929,585 ($33,364) ($14,989,695) $3,129,314
Net loss for the year - - - - - (4,090,033) (4,090,033)
Exercise of stock options 1,467,516 1,469,081 - - - - 1,469,081
Exercise of stock warrants 4,825,643 3,269,122 - (382,300) - - 2,886,822
Issuance of stock pursuant
to licensing contract 100,000 70,740 - - - - 70,740
Issuance of stock pursuant
to a consulting agreement 54,031 - - - - - -
Amortization of deferred
compensation - - - - 33,364 - 33,364
Additional paid in capital
resulting from the sale of
common stock by BioMarin
Pharmaceutical, Inc. - - 7,154,127 - - - 7,154,127
------------- ------------- --------------- ----------- ------------- ------------- -------------
Balance at December 31, 1998 28,020,234 $17,963,167 $11,222,691 $547,285 $ - ($19,079,728) $10,653,415
============= ============= =============== =========== ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F.5
<PAGE>
GLYKO BIOMEDICAL, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in U.S. dollars)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,090,033) $ (2,055,858)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization - 115,481
Equity in the loss of BioMarin Pharmaceutical Inc. 3,803,058 2,452,422
Amortization of deferred compensation 33,364 -
Loss on disposal of property and equipment - 1,452
Changes in assets and liabilities:
Trade receivables - 14,433
Inventories - (26,758)
Other current assets (9,710) 10,840
Accounts payable - (135,816)
Accrued liabilities 27,556 (30,907)
Deferred rent and related costs - 96,162
----------------- -----------------
Total adjustments 3,854,268 2,497,309
----------------- -----------------
Net cash provided by (used in) operating activities (235,765) 441,451
Cash flows from investing activities:
Investment in BioMarin Pharmaceutical Inc. (1,000,002) (1,500,000)
Purchases of property, plant and equipment - (71,010)
Deconsolidation of Glyko, Inc. assets (267,347) -
Settlement of amounts due from Glyko, Inc. 1,212,278 -
----------------- -----------------
Net cash used in investing activities (55,071) (1,571,010)
Cash flows from financing activities:
Notes receivable issued for the exercise of stock options (100,000) -
Net proceeds from the issuance of common stock and warrants
in a private placement - 1,423,871
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 2,359,640 22,976
----------------- -----------------
Net cash provided by financing activities 2,330,380 1,446,847
----------------- -----------------
Net increase in cash 2,039,544 317,288
Cash and cash equivalents, beginning of period 528,280 210,992
----------------- -----------------
Cash and cash equivalents, end of period $ 2,567,824 $ 528,280
================= =================
Supplemental disclosure of non-cash financing activities:
Common stock and common stock warrants issued
in exchange for financing services $ - $ 160,881
Note receivable issued for the exercise of stock options $ 712,261 $ -
</TABLE>
The accompanying notes are an integral part of these statements.
F.6
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Description of the Business
Glyko Biomedical Ltd. (the Company or GBL) is a Canadian company which
was established in 1992 to acquire all of the outstanding capital stock
of Glyko, Inc., a Delaware corporation. The Company was incorporated for
the sole purpose of acquiring Glyko, Inc. Both entities were under
common control and the share exchange was accounted for in a manner
similar to a pooling. Since its inception in October 1990, Glyko, Inc.
has engaged in research and development of new techniques to analyze and
manipulate carbohydrates for research, diagnostic and pharmaceutical
purposes. Glyko, Inc. has developed a line of analytic instrumentation
laboratory products that include an imaging system, analysis software
and chemical analysis kits.
In October 1996, GBL formed BioMarin Pharmaceutical Inc. (BioMarin), a
Delaware corporation in the development stage, 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% of BioMarin's outstanding
capital stock. As of December 31, 1997, the Company began recording its
share of BioMarin's net loss 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. On August 3, 1998
BioMarin raised an additional $8.1 million from third parties. On
September 4, 1998, BioMarin received $8 million from Genzyme Corp.
("Genzyme") upon execution of a joint venture agreement in which
BioMarin issued 1,333,333 shares of common stock to Genzyme. BioMarin
has a 50% interest in the income or loss of the joint venture,
BioMarin/Genzyme, LLC.
On October 7, 1998, GBL sold to BioMarin 100% of the outstanding capital
stock of Glyko, Inc. in exchange for 2,259,039 shares of BioMarin's
common stock. In addition, BioMarin agreed to assume options, previously
issued to employees of Glyko, Inc., to purchase up to 585,969 shares of
GBL's common stock (exercisable into 255,540 shares of BioMarin common
stock) and BioMarin paid $500 in cash. As of December 31, 1998, GBL
owned 41.7% of BioMarin's outstanding capital stock.
Since its inception, GBL has incurred a cumulative deficit of $19,079,728
and the Company expects to continue to incur losses during 1999 due to
its share of BioMarin's net loss resulting from the ongoing research and
development of BioMarin's pharmaceutical product candidates. As a result
of GBL's sale of Glyko, Inc. on October 7, 1998, GBL has limited
operating activities and its principal asset is its investment in
BioMarin. Accordingly, without further investment in other companies or
technologies, management believes that GBL has sufficient cash to sustain
planned operations. BioMarin will require additional capital. While GBL
is not obligated to provide this capital, in April, 1999, the Company
entered into a convertible note arrangement with BioMarin in the amount
of $4,300,000, as part of a $26,000,000 convertible note financing which
was closed on April 13, 1999. BioMarin has an accumulated deficit of
$15,076,419 at December 31, 1998 and is expected to incur significant
losses during 1999 and beyond. Management of BioMarin believes that the
convertible note financing will be sufficient to meet its minimum
obligations through December 31, 1999. However, BioMarin will seek
additional financing in the near term to fully execute its business
strategies and meet its longer term obligations. Management of GBL does
not believe that at December 31, 1998, there has been any impairment of
its investment in BioMarin.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements and related footnotes
have been prepared in conformity with U.S. generally accepted accounting
principles using U.S. dollars as all of the Company's operations were
located in the United States. The consolidated financial statements
include the accounts and operations of the Company and Glyko, Inc for
the year ended December 31, 1997 and for the period from January 1, 1998
through October 7, 1998, the date of the sale of Glyko, Inc. to
BioMarin. The results of operations of BioMarin have been reported in
F.7
<PAGE>
the Company's financial statements for the years ended December 31, 1998
and 1997, based on the equity method of accounting. Subsequent to
October 7, 1998, the results of operations of Glyko, Inc. have been
consolidated into the results of operations 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.
Use of Estimates:
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make certain estimates and assumptions that effect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. Significant estimates made by management at December 31,
1997, include allowance for doubtful accounts receivable, and certain
other reserves, including an accrual for deferred rent.
Cash and Cash Equivalents:
Cash and cash equivalents consist of amounts held with banks and
short-term investments with original maturities of 90 days or less.
Inventories:
Inventories consist of analytic kits and instrument-based systems held
for sale. Inventories are stated at the lower of cost (first-in,
first-out method) or estimated market value.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. The cost and
accumulated depreciation for property, plant and equipment sold, retired,
or otherwise disposed of are relieved from the accounts, and the
resulting gains or losses are reflected in the consolidated statements of
operations. Depreciation is computed using the straight-line method over
the following estimated useful lives:
Office furniture 5 years
Computer equipment 3 years
Lab and production equipment 5 years
Sale of Glyko, Inc. and Investment in BioMarin Pharmaceutical Inc.
BioMarin acquired Glyko, Inc. from GBL through the exchange of BioMarin
stock for Glyko, Inc. stock and accounted for the acquisition based upon
the fair market value of the BioMarin stock issued, the assumption of
responsibility for certain stock options previously issued to Glyko, Inc.
employees (see Note 1), and $500 in cash. In consolidating Glyko, Inc.,
BioMarin recorded intangible assets, including goodwill, to the extent
that the fair market value of the stock issued exceeded the fair market
value of the tangible assets of Glyko, Inc. acquired. GBL recorded the
stock of BioMarin received at the historical cost basis of its investment
in Glyko, Inc. GBL accounts for its investment in BioMarin using the
equity method of accounting. However, as it has not recorded its
investment in BioMarin at fair market value, it does not record its share
of the losses recorded by BioMarin related to the write off or
amortization of intangible assets recorded on acquisition of Glyko, Inc.
During the period from October 7, the date of acquisition of Glyko, Inc,
to December 31, 1998, BioMarin recorded a charge to operations of
$2,625,000 in connection with the write-off of in-process research and
development acquired in the purchase of Glyko, Inc. and $271,274 for the
amortization of goodwill and other intangible assets, which are being
amortized over ten years. In recording its share of BioMarin's loss for
this period, GBL reduced this loss for its share of the write-off of
in-process technology and the amortization of goodwill and other
intangible assets.
In addition, to the extent that the issuance of stock by BioMarin to
third parties results in an increase in or decrease in the Company's
F.8
<PAGE>
ownership of the net assets of BioMarin, the Company reflects this
increase or decrease as paid-in capital as reflected in the consolidated
statements of stockholders' equity (deficit) and an increase or decrease
in its investment in BioMarin.
Product Sales:
The Company recognizes product revenues and related cost of sales upon
shipment of products. Service revenues are recognized upon completion of
services as evidenced by the transmission of reports to customers. Other
revenues, principally licensing and distribution fees, are recognized
upon completion of applicable contractual obligations.
At times, the Company has received payments in advance for future product
shipments or hardware maintenance and service contracts. Such payments
are classified as deferred revenue on the accompanying consolidated
balance sheets. Upon shipment of products, revenue is recognized and the
corresponding liability (deferred revenue) is reduced. Revenues from
maintenance and service contracts are recognized monthly pro rata over
the period of the contract and the corresponding liability (deferred
revenue) is reduced.
During 1994, the Company recorded a charge to operations of $219,811
related to the termination of an agreement with one of its stockholders.
This charge was the estimated fair value of 500,000 shares of common
stock to be received by the stockholder in settlement 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
stockholder was a stockholder in the Company from 1990 until April 1998.
At December 31, 1998 the liability of $219,811 is included in accrued
liabilities in the accompanying consolidated balance sheets.
Net Loss per Share:
Potentially dilutive securities outstanding at December 31, 1998 and
1997, respectively, include options for the purchase of 548,290 and
2,424,402 shares of common stock and warrants for the purchase of 5.8
million and 10.9 million shares of common stock. These securities were
not considered in the computation of dilutive loss per share because
their effect would be anti-dilutive for the years ended December 31, 1998
and 1997.
New Accounting Standards
During the year ended December 31, 1998, the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information". The Company concluded that it has only one operating
segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, which is effective for
fiscal years beginning after June 15, 1999 is not expected to have a
material impact on the Company's financial position or results of
operations.
3. Property, Plant and Equipment
Property, plant and equipment at December 31, 1998 and 1997 consisted of
the following:
December 31,
1998 1997
--------------- ---------------
Lab equipment $- $229,701
Computer equipment - 94,712
Production equipment - 37,164
Office furniture - 13,510
Leasehold improvements - 68,343
--------------- ---------------
- 443,430
--------------- ---------------
Less accumulated depreciation - (324,520)
--------------- ---------------
Property, plant and equipment, net $- $118,910
=============== ===============
F.9
<PAGE>
4. Income Taxes
The Company's deferred tax asset at December 31, 1998 and 1997 is:
December 31,
1998 1997
--------------- ---------------
Net operating loss carryovers $563,000 $5,153,000
Research and development expenses - -
capitalized for tax purposes - 62,000
Research and development
credit carryovers - 593,000
Issuance costs 6,000 137,000
Other temporary differences - (255,000)
--------------- ---------------
649,000 5,690,000
Valuation allowance (649,000) (5,690,000)
--------------- ---------------
Net deferred tax asset $- $-
=============== ===============
The reconciliation of the effective tax rate is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
Amount % Amount %
------------------ ------------- ------------------ ------------
<S> <C> <C> <C> <C>
U.S. Statutory tax rate $(1,391,000) (34)% $(699,000) (34)%
State taxes, net of federal
income tax benefit (245,000) (6)% (123,000) (6)%
Effects of international
losses and loss in equity of
subsidiary 1,610,000 39% 933,000 45 %
Research and development tax
credit - - (56,000) (2)%
Loss carryforward utilized - - (105,000) (5)%
Other 26,000 1% 4,000 -
Change in valuation allowance -
- 46,000 2 %
------------------ ------------- ------------------ ------------
Provision for income taxes $ - 0 % $ - 0 %
================== ============= ================== ============
</TABLE>
In connection with the sale of Glyko, Inc., the U.S. federal and state
net tax operating loss carryforwards and the related valuation allowances
were consolidated into the financial statements of BioMarin.
At December 31, 1998, the Company has net operating loss carryforwards
for Canadian income tax purposes of approximately $1.3 million which
expire from 1999 to 2003.
5. Note Receivable
As part of its compensation for certain services, GBL issued stock
options to a consulting group. These options are in the process of being
approved by the Toronto Stock Exchange. GBL loaned $100,000 to the
consulting group in anticipation that the Toronto Stock Exchange would
approve the stock options. The excess of the fair market value of the GBL
stock at December 31, 1998 over the exercise price of the options
F.10
<PAGE>
significantly exceeds the amount of the loan. The options are held as
security for the loan. This note was repaid in full in 1999.
In November 1998, GBL loaned $712,261 to an officer of the Company to
exercise expiring stock options. The loan is secured by the stock and is
a full recourse note
6. Commitments and Contingencies
In July 1998, the claim by Millipore Corp. 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. This was recognized in the second quarter
and six-month ended June 30, 1998 results of operations.
7. Stockholders' Equity
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 all
current and future 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. As consideration for this license, BioMarin issued the
Company 7,000,000 shares of BioMarin common stock. Under the same License
Agreement, BioMarin granted the Company. a cross-license, similar in
scope, to all improvements BioMarin may make upon the licensed
intellectual property.
On October 7, 1998, GBL sold to BioMarin 100% of the outstanding capital
stock of Glyko, Inc. in exchange for 2,259,039 shares of BioMarin's
common stock plus BioMarin agreed to assume options, previously issued to
employees of Glyko, Inc., to purchase up to 585,969 shares of GBL's
common stock (exercisable into 255,540 shares of BioMarin common stock)
and BioMarin paid $500 in cash. As a result of this transaction, as of
December 31, 1998, GBL's share of BioMarin's outstanding capital stock
increased from 36.2% to 41.7%. 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. 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 1998, the Company recorded an increase to its
additional paid in capital by $7,154,127 as a result of the sale of
common stock by BioMarin.
8. Stock Option Plan
The Company has a stock option plan (the Plan) under which options to
purchase common stock may be granted by the Board of Directors to
directors, officers, consultants and key employees at not less than fair
market value, less any permissible discounts, on the date of grant.
Options granted under the Plan may be incentive stock options (as defined
under Section 422 of the U.S. Internal Revenue Code) or non-statutory
F.11
<PAGE>
stock options. Options are exercisable over a number of years specified
at the time of the grant which cannot exceed ten years. The maximum
aggregate number of shares which may be granted and sold under the Plan
is 3,000,000 shares.
The Company accounts for the Plan under APB Opinion No. 25, under which
no compensation cost has been recognized, except for options granted to
consultants, because, under the Option Plan, the option exercise price
equals the market value of stock on the date of grant. In general, the
Plan options vest over 48 months and all options expire after 5 years or
90 days after employee termination.
Had compensation cost for the Plan been determined consistent with FASB
Statement No. 123, the Company's net loss would have been increased to
the following pro forma amounts:
1998 1997
Net loss As reported $(4,090,033) $(2,055,858)
Pro forma (4,283,405) $(2,138,587)
Net loss per As reported $(0.17) $(0.10)
common Pro forma $(0.18) $(0.10)
share
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years.
F.12
<PAGE>
A summary of the status of the Company stock option plan at December 31,
1998 and 1997 and changes during the years then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
1998 1997
Shares Wtd avg ex Shares Wtd avg ex
price (2) price (2)
---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Outstanding beginning
of year 2,424,402 Cdn. $1.22 2,254,597 Cdn. $ 1.36
Granted (1) 314,550 Cdn. $2.40 528,870 Cdn. $ 0.71
Exercised (1,467,516) Cdn. $1.52 (50,000) Cdn. $ 0.65
Assumed (3) (585,969) Cdn. $1.51 - -
Canceled (137,177) Cdn. $1.38 (309,065) Cdn. $ 1.41
---------------- ----------------
Outstanding at end of
year 548,290 Cdn. $0.85 2,424,402 Cdn. $1.22
---------------- ----------------
Exercisable at end of year 548,290 2,045,312
Weighted average fair
value of options granted Cdn $1.29 Cdn. $0.50
<FN>
(1) In 1997, includes 150,000 options issued to consultants with
an average fair value of $ 0.22 per option excluded from pro
forma net loss and pro forma net loss per common share.
(2) The US$ equivalent of Canadian $1.00 at December 31, 1998 was
approximately $0.6535. The weighted average exercise price is
quoted in Cdn.$ as the Company's Common Stock is traded on
the Toronto Stock Exchange.
(3) In connection with the sale of Glyko, Inc. to BioMarin,
effective October 7, 1998, BioMarin agreed to assume 585,969
options to purchase common stock of GBL (exercisable into
255,540 shares of common stock of BioMarin.)
</FN>
</TABLE>
There are 2,065,906 options available for grant under the plan at
December 31, 1998. The average remaining contractual life of the options
outstanding at December 31, 1998 is 2 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1998 and 1997,
respectively: risk-free weighted average interest rates of 5.4 and 5.3
percent; expected dividend yield of zero percent; expected life of 4
years for the Plans' options; expected volatility of 65 and 87 percent.
9. Related Party Transactions
The Company has entered into certain transactions with its stockholders
since its inception. These transactions include the purchase of supplies
and equipment and rental of the Company's facilities. Total costs of
these transactions for the years ended December 31, 1998 and 1997 were
approximately $0 and, $20,060, respectively.
Prior to the sale of Glyko, Inc. to BioMarin, the Company subleased
office and lab space to, and performed certain administrative and
research and development functions for BioMarin. BioMarin reimbursed the
Company for rent, salaries and related benefits and other administrative
costs and the Company reimburses BioMarin for salaries and related
benefits. BioMarin reimbursed the Company a net $183,000 in 1998 and a
net $241,000 in 1997. The Company also provided analytical services and
products to BioMarin at a 27% discount in 1998 and 1997. Total receipts
to the Company from sales to BioMarin totaled $113,000 in 1998 and
$39,000 in 1997.
F.13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of BioMarin Pharmaceutical Inc.:
We have audited the consolidated balance sheets of BioMarin Pharmaceutical Inc.
(a Delaware corporation in the development stage) as of December 31, 1998 and
1997, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the year ended December 31, 1998 and
the periods from March 21, 1997 (inception) to December 31, 1997, and December
31, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
BioMarin Pharmaceutical Inc. as of December 31, 1998 and 1997, and the results
of its operations and its cash flows for the year ended December 31, 1998 and
the periods from March 21, 1997 (inception) to December 31, 1997, and December
31, 1998, in conformity with generally accepted accounting principles.
\s\ Arthur Anderson LLP
San Francisco, California Arthur Andersen LLP
March 17, 1999 (Except for the
matter discussed in Note 12,
for which the date is April 13, 1999)
F.14
<PAGE>
BIOMARIN PHARMACEUTICAL INC.
(a development-stage company)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------------- ---------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 9,413,662 $ 5,987,433
Short-term investments 1,975,800 900,827
Accounts receivable, net 148,396 --
Due from Glyko Biomedical, Ltd. 114,005 79,607
Due from joint venture 418,712 --
Inventories 71,730 --
Prepaid expenses 676,214 539,445
--------------
---------------
Total current assets 12,818,519 7,507,312
PROPERTY AND EQUIPMENT, net 6,223,058 145,683
GOODWILL AND OTHER INTANGIBLE ASSETS 11,703,726 --
INVESTMENT IN JOINT VENTURE 684,657 --
DEPOSITS 79,142 --
-------------- --------------
Total assets $ 31,509,102 $ 7,652,995
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,340,355 $ 168,062
Accrued liabilities 640,016 43,395
Due to Glyko, Inc. -- 61,072
Notes payable short-term 24,366 --
--------------
---------------
Total current liabilities 2,004,737 272,529
LONG-TERM LIABILITIES: Long-term portion of notes payable 109,845 --
---------------
--------------
Total liabilities 2,114,582 272,529
-------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value: 30,000,000 shares authorized, 26,176,180 and
20,566,500 shares issued and outstanding at December 31, 1998 and 1997,
respectively 26,176 20,567
Additional paid-in capital 47,867,868 12,548,924
Warrants 128,240 128,240
Deferred compensation (986,425) (217,000)
Notes receivable from stockholders (2,564,920) (2,337,500)
Deficit accumulated during the development stage (15,076,419) (2,762,765)
-------------- ---------------
Total stockholders' equity 29,394,520 7,380,466
-------------- ---------------
Total liabilities and stockholders' equity $ 31,509,102 $ 7,652,995
============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F.15
<PAGE>
BIOMARIN PHARMACEUTICAL INC.
(a development-stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998, AND FOR THE
PERIODS FROM MARCH 21, 1997 (INCEPTION) TO DECEMBER 31, 1997
AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
Period from Period from
March 21, 1997 March 21, 1997
Year Ended (Inception), to (Inception), to
December 31, 1998 December 31, 1997 December 31, 1998
--------------------- --------------------- ---------------------
REVENUES:
<S> <C> <C> <C>
Revenues--products and services $ 250,297 $ -- $ 250,297
Revenues from joint venture 837,457 -- 837,457
Revenues--other 102,655 -- 102,655
--------------------- --------------------- ---------------------
Total revenues 1,190,409 -- 1,190,409
OPERATING COSTS AND EXPENSES:
Cost of goods sold 107,942 -- 107,942
Research and development 10,502,636 1,913,795 12,416,431
General and administrative expenses 3,530,886 914,299 4,445,185
--------------------- --------------------- ---------------------
Loss from operations (12,951,055) (2,828,094) (15,779,149)
INTEREST INCOME 684,572 65,329 749,901
EQUITY IN LOSS OF JOINT VENTURE (47,171) -- (47,171)
--------------------- --------------------- ---------------------
Net loss $ (12,313,654) $ (2,762,765) $ (15,076,419)
===================== ===================== =====================
NET LOSS PER SHARE, basic and diluted $(0.55) $(0.34) $(0.93)
===================== ===================== =====================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 22,488,481 8,136,475 16,184,162
===================== ===================== =====================
</TABLE>
The accompanying notes are an integral part of these statements.
F.16
<PAGE>
BIOMARIN PHARMACEUTICAL INC.
(a development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MARCH 21, 1997 (INCEPTION), TO DECEMBER 31, 1997,
FOR THE YEAR ENDED DECEMBER 31, 1998, AND FOR
THE PERIOD FROM MARCH 21, 1997 (INCEPTION), TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Warrants
---------------- ------------ ------------- ---------------
Shares Amount Capital Shares Amount
---------------- ------------ ------------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 21, 1997 -- $ -- $ -- -- $ --
Issuance of common stock to Glyko
Biomedical, Ltd. on March 21, 1997,
for cash, $1.00 per share 1,500,000 1,500 1,498,500 -- --
Issuance of common stock to Glyko
Biomedical, Ltd. in June 1997 in exchange
for technology, $1.00 per share 7,000,000 7,000 (7,000) -- --
Issuance of common stock in October 1997,
$1.00 per share (net of issuance costs of
$439,720, including the issuance of
299,000 shares of common stock,
$1.00 per share, and warrants to purchase
an additional 299,000 shares of common
stock for brokerage services) 4,039,000 4,039 3,595,241 299,000 47,840
Issuance of common stock to employees
in exchange for notes in October 1997,
$1.00 per share 2,500,000 2,500 2,497,500 -- --
Issuance of common stock and warrants
on December 31, 1997, $1.00 per share
(net of issuance costs of $592,309,
including the issuance of 502,500
shares of common stock, $1.00 per
share, and warrants to purchase an
additional 502,500 shares
of common stock for brokerage services) 5,527,500 5,528 4,929,663 502,500 80,400
Common stock options granted in
exchange for services -- -- 35,020 -- --
Interest on notes receivable -- -- -- -- --
Net loss for the period from
March 21, 1997 (inception), to December 31, 1997 -- -- -- -- --
---------------- ------------ ------------------ ------------- ---------------
BALANCE, DECEMBER 31, 1997 20,566,500 $ 20,567 $ 12,548,924 801,500 $ 128,240
================ ============ ================== ============= ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F.17
<PAGE>
BIOMARIN PHARMACEUTICAL INC.
(a development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MARCH 21, 1997 (INCEPTION), TO DECEMBER 31, 1997,
FOR THE YEAR ENDED DECEMBER 31, 1998, AND FOR
THE PERIOD FROM MARCH 21, 1997 (INCEPTION), TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Notes Accumulated Deficit
Deferred from Development Stockholders'
Compensation Stockholders Stage Equity
----------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C>
BALANCE, MARCH 21, 1997 $ -- $ -- $ -- $ --
Issuance of common stock to Glyko
Biomedical, Ltd. on March 21, 1997,
for cash, $1.00 per share -- -- -- 1,500,000
Issuance of common stock to Glyko
Biomedical, Ltd. in June 1997 in exchange
for technology, $1.00 per share -- -- -- --
Issuance of common stock in October 1997,
$1.00 per share (net of issuance costs of
$439,720, including the issuance of
299,000 shares of common stock,
$1.00 per share, and warrants to purchase
an additional 299,000 shares of common
stock for brokerage services) -- -- -- 3,647,120
Issuance of common stock to employees
in exchange for notes in October 1997,
$1.00 per share (200,000) (2,300,000) -- --
Issuance of common stock and warrants
on December 31, 1997, $1.00 per
share (net of issuance costs of $592,309,
including the issuance of 502,500 shares
of common stock, $1.00 per share, and
warrants to purchase an additional 502,500
shares of common stock for brokerage services) -- -- -- 5,015,591
Common stock options granted in
exchange for services (17,000) -- -- 18,020
Interest on notes receivable -- (37,500) -- (37,500)
Net loss for the period from
March 21, 1997 (inception), to December 31, 1997 -- -- (2,762,765) (2,762,765)
----------------- ------------------ ------------------- -----------------
BALANCE, DECEMBER 31, 1997 $ (217,000) $ (2,337,500) $ (2,762,765) $ 7,380,466
================= ================== =================== =================
</TABLE>
The accompanying notes are an integral part of these statements.
F.17
<PAGE>
BIOMARIN PHARMACEUTICAL INC.
(a development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MARCH 21, 1997 (INCEPTION), TO DECEMBER 31, 1997,
FOR THE YEAR ENDED DECEMBER 31, 1998, AND FOR
THE PERIOD FROM MARCH 21, 1997 (INCEPTION), TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Warrants
---------------- ------------ ------------- ---------------
Shares Amount Capital Shares Amount
---------------- ------------ ------------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 20,566,500 $ 20,567 $ 12,548,924 801,500 $ 128,240
Issuance of common stock on June 30, 1998,
for cash, $6.00 per share (net of issuance
costs of $263,208, including the issuance
of 31,368 shares of common stock, $6.00 per
share, for brokerage services) 598,535 598 3,327,404 -- --
Issuance of common stock on July 14, 1998,
for cash, $6.00 per share (net of issuance
costs of $387,474, including the issuance
of 64,579 shares of common stock, $6.00 per
share, for brokerage services) 1,385,414 1,386 7,923,624 -- --
Issuance of common stock on August 3, 1998,
for cash, $6.00 per share (net of issuance
costs of $12,318, including the issuance
of 2,053 shares of common stock, $6.00 per
share, for brokerage services) 31,386 31 175,967 -- --
Issuance of common stock to Genzyme
Corporation on September 4, 1998,
for cash, $6.00 per share 1,333,333 1,333 7,998,665 -- --
Issuance of common stock to Glyko
Biomedical, Ltd. for the purchase
of Glyko, Inc. on October 7, 1998,
for common shares, $6.00 per share
and the assumption of options of
Glyko, Inc. employees (see Note 1) 2,259,039 2,259 14,859,063 -- --
Exercise of common stock options 1,973 2 1,971 -- --
Interest on notes receivable -- -- -- -- --
Deferred compensation on stock options -- -- 1,032,250 -- --
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
---------------- ------------ ------------------ ------------- ---------------
BALANCE, DECEMBER 31, 1998 26,176,180 $26,176 $ 47,867,868 801,500 $128,240
================ ============ ================== ============= ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F.18
<PAGE>
BIOMARIN PHARMACEUTICAL INC.
(a development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MARCH 21, 1997 (INCEPTION), TO DECEMBER 31, 1997,
FOR THE YEAR ENDED DECEMBER 31, 1998, AND FOR
THE PERIOD FROM MARCH 21, 1997 (INCEPTION), TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Notes Accumulated Deficit
Receivable During Total
Deferred from Development Stockholders'
Compensation Stockholders Stage Equity
----------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 $ (217,000) $ (2,337,500) $ (2,762,765) $ 7,380,466
Issuance of common stock on June 30, 1998,
for cash, $6.00 per share (net of issuance
costs of $263,208, including the issuance
of 31,368 shares of common stock, $6.00 per
share, for brokerage services) -- -- -- 3,328,002
Issuance of common stock on July 14, 1998,
for cash, $6.00 per share (net of issuance
costs of $387,474, including the issuance
of 64,579 shares of common stock, $6.00 per
share, for brokerage services) -- -- -- 7,925,010
Issuance of common stock on August 3, 1998,
for cash, $6.00 per share (net of issuance
costs of $12,318, including the issuance
of 2,053 shares of common stock, $6.00 per
share, for brokerage services) -- -- -- 175,998
Issuance of common stock to Genzyme
Corporation on September 4, 1998,
for cash, $6.00 per share -- -- -- 7,999,998
Issuance of common stock to Glyko
Biomedical, Ltd. for the purchase
of Glyko, Inc. on October 7, 1998,
for common shares, $6.00 per share
and the assumption of options of
Glyko, Inc. employees (see Note 1) -- -- -- 14,861,322
Exercise of common stock options -- -- -- 1,973
Interest on notes receivable -- (133,000) -- (133,000)
Deferred compensation on stock options (1,032,250) -- -- --
Amortization of deferred compensation 262,825 (94,420) -- 168,405
Net loss -- -- (12,313,654) (12,313,654)
----------------- ------------------ ------------------- -----------------
BALANCE, DECEMBER 31, 1998 $ (986,425) $ (2,564,920) $(15,076,419) $ 29,394,520
================= ================== =================== =================
</TABLE>
The accompanying notes are an integral part of these statements.
F.18
<PAGE>
BIOMARIN PHARMACEUTICAL INC.
(a development-stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIODS FROM
MARCH 21, 1997 (INCEPTION) TO DECEMBER 31, 1997 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
Period from Period from
Year Ended (Inception), to (Inception), to
December 31, December 31, December 31,
1998 1997 1998
----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(12,313,654) $(2,762,765) $(15,076,419)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 307,645 4,790 312,435
Amortization of deferred compensation 262,825 -- 262,825
Amortization of goodwill 271,274 -- 271,274
Compensation in the form of common stock and common --
stock options 18,020 18,020
Loss from joint venture 47,131 -- 47,131
Write-off of in-process technology 2,625,000 -- 2,625,000
Changes in operating assets and liabilities:
Accounts receivable (148,396) -- (148,396)
Due from Glyko Biomedical, Ltd. (34,398) (79,607) (114,005)
Due from joint venture (418,712) -- (418,712)
Inventories (71,730) -- (71,730)
Prepaid expenses (136,769) (539,445) (676,214)
Deposits (79,142) -- (79,142)
Accounts payable 1,172,293 168,062 1,340,355
Accrued liabilities 596,621 43,395 640,016
Due to Glyko, Inc. (61,072) 61,072 --
----------------- ----------------- -----------------
Net cash used in operating activities (7,981,084) (3,086,478) (11,067,562)
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,385,020) (150,473) (6,535,493)
Investment in joint venture (731,788) -- (731,788)
Sale of short-term investments (1,074,973) (900,827) (1,975,800)
----------------- ----------------- -----------------
Net cash used in investing activities (8,191,781) (1,051,300) (9,243,081)
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 134,211 -- 134,211
Bridge loan -- 880,000 880,000
Accrued interest on notes receivable from stockholders (227,420) (37,500) (264,920)
Proceeds from sale of common stock, net of issuance costs 19,692,303 9,282,711 28,975,014
----------------- ----------------- -----------------
Net cash provided by financing activities 19,599,094 10,125,211 29,724,305
----------------- ----------------- -----------------
Net increase in cash and cash equivalents 3,426,229 5,987,433 9,413,662
CASH AND CASH EQUIVALENTS:
Beginning of period 5,987,433 -- --
----------------- ----------------- -----------------
End of period $ 9,413,662 $ 5,987,433 $ 9,413,662
================= ================= =================
</TABLE>
The accompanying notes are an integral part of these statements.
F.19
<PAGE>
BIOMARIN PHARMACEUTICAL INC.
(a development-stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations and Business Risks
BioMarin Pharmaceutical Inc. (BioMarin or the Company) is a privately held
biopharmaceutical company specializing in the discovery, development and
commercialization of carbohydrate enzyme therapeutics. Since inception in 1997,
BioMarin has applied its proprietary enzyme technology to the development of
products in five therapeutic areas: genetic diseases, burn and wound care,
fungal infections, pro-fertility and inflammation (psoriasis). With its recent
acquisition of Glyko, Inc., BioMarin added analytical and diagnostic products
and services in the area of carbohydrate biology. BioMarin was incorporated on
October 25, 1996, in the state of Delaware. BioMarin first began business on
March 21, 1997 (inception), and issued 1,500,000 shares of common stock to Glyko
Biomedical, Ltd. (GBL) for $1,500,000. Beginning in October 1997, BioMarin
issued stock to outside investors, resulting in GBL's ownership of BioMarin
being reduced to 41.3 percent at December 31, 1997.
Since inception, the Company has devoted substantially all of its efforts to
research and development activities, including preclinical studies and clinical
trials, the establishment of laboratory and clinical scale manufacturing
facilities, clinical manufacturing, and related administrative activities.
On September 4, 1998, the Company entered into an agreement with Genzyme
Corporation (Genzyme) to establish a joint venture dedicated to the development
and commercialization of (alpha)-L-iduronidase (BM101) to treat
mucopolysaccharidosis-I (MPS-I) (Note 8).
On October 7, 1998, the Company acquired Glyko, Inc., a wholly owned subsidiary
of GBL, in a transaction valued at $14,500,500. The transaction was accounted
for as a purchase and resulted in Glyko, Inc. becoming a wholly owned subsidiary
of the Company. Glyko, Inc. provides products and services that perform
sophisticated carbohydrate analysis for research institutions and commercial
laboratories. As consideration for the acquisition of all of the outstanding
shares of Glyko, Inc., BioMarin issued 2,259,039 shares of common stock to GBL,
assumed Glyko, Inc.'s employee stock options exercisable for 255,540 shares of
BioMarin common stock, and paid $500 in cash (see Note 11). GBL's ownership of
BioMarin was 41.7 percent at December 31, 1998.
Through December 31, 1998 the Company had accumulated losses during its
development stage of $15,076,419 and has continued to incur significant losses
subsequent to December 31, 1998. Management expects to incur further losses in
1999 and beyond. As further discussed in Note 12, the Company entered into a
convertible note financing in the amount of $26,000,000 on April 13, 1999.
Management believes that this financing will be sufficient to meet the Company's
minimum obligations through at least December 31, 1999. However, the Company
will seek additional financing in the near term to execute its business
strategies and meet its longer term obligations.
F.20
<PAGE>
The Company's lead product candidate, BM101, has completed clinical trials, and
a Biologics License Application (BLA) is expected in 1999. There can be no
assurance that the Company's research and development efforts will be
successfully completed or that its products will be shown to be safe and
effective. There can be no assurance that its products will be approved for
marketing by the U.S. Food and Drug Administration (FDA) or any equivalent
foreign government agency or that its products will be successfully
commercialized or achieve any significant degree of market acceptance.
BioMarin's core technology is based on the biological applications of
carbohydrate-active enzymes in therapeutic indications. In June 1997, rights to
certain related technology were transferred to BioMarin by GBL in exchange for
7,000,000 shares of BioMarin common stock (see Note 3). Certain of the Company's
products rely on proprietary technology and patents owned by certain
universities and other institutions and licensed to BioMarin. These universities
also provide research and development services. Cessation of relationships with
these universities could significantly affect the Company's future operations.
In order to grow significantly, the Company must expand its efforts to develop
new products in pharmaceutical applications. The Company will also need to
establish manufacturing capabilities and to develop marketing capabilities
and/or enter into collaborative arrangements with third parties having the
capacity for such manufacturing or marketing.
BioMarin's product candidates require regulatory approval by government
agencies. This includes preclinical and clinical testing and approval processes
in the United States and other countries. Approvals can take several years and
can require substantial expenditures. There can be no assurance that
difficulties or excessive costs will not be encountered by the Company in this
process, which could delay or preclude the Company's marketing of its products.
There can be no assurance that any of BioMarin's current or future product
candidates 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, gain reasonable reimbursement levels,
or be successfully marketed.
In addition, the Company is subject to a number of risks, including the need for
additional financing, dependence on key personnel, small patient population,
patent protection, significant competition from larger organizations, dependence
on corporate partners and collaborators, and expected increased restrictions on
reimbursement, as well as other changes in the healthcare industry.
Basis of Presentation
These consolidated statements include the accounts of BioMarin, Glyko, Inc., a
wholly owned subsidiary of BioMarin, and BioMarin Genetics, Inc., a wholly owned
subsidiary of BioMarin formed for the purpose of the joint venture discussed in
Note 8. All significant intercompany transactions have been eliminated.
Concentration of Credit Risk
Financial instruments that may potentially subject the Company to concentration
of credit risk consist principally of cash, cash equivalents, and short-term
investments. All cash, cash equivalents, and short-term investments are placed
in financial institutions with strong credit ratings, which minimizes the risk
F.21
<PAGE>
of loss due to nonpayment. The Company has not experienced any losses due to
credit impairment or other factors related to its financial instruments.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates made by management include determination of progress to date under
research and development contracts (see Notes 6 and 8).
Cash and Cash Equivalents
For the statements of cash flows, the Company treats liquid investments with
original maturities of less than three months as cash and cash equivalents.
Available-for-Sale Securities
The Company records its investment securities as available-for-sale because the
sale of such securities may be required prior to maturity.
Inventories
Inventories consist of analytic kits, and instrument-based systems held for
sale. Inventories are stated at the lower of cost (first-in, first-out method)
or estimated market value. All inventories at December 31, 1998, belong to
Glyko, Inc.
Investment in Joint Venture and Related Revenue
Under the terms of the Company's joint venture agreement with Genzyme (Note 8),
the Company and Genzyme have each agreed to provide 50 percent of the funding
for the joint venture. All research and development, sales and marketing, and
other activities performed by Genzyme and the Company on behalf of the joint
venture are billed to the joint venture at cost. Any profits of the joint
venture will be shared equally by the two parties. Losses of the joint venture
($1,769,257 at December 31, 1998) are allocated in proportion to the funding
provided by each joint venture partner. Through December 31, 1998, each joint
venture partner had provided $1,569,285 of funding to the joint venture.
During the year ended December 31, 1998, the Company billed $1,674,915 under the
agreement, of which $837,457, or 50 percent, was recognized as revenue in
accordance with the Company's policy of recognizing revenue to the extent that
research and development costs billed have been funded by Genzyme. At December
31, 1998, the Company had a receivable of $418,712 related to these billings.
The Company accounts for its investment in the joint venture on the equity
method. Accordingly, the Company recorded a reduction in its investment in the
joint venture of $884,628 during the year ended December 31, 1998, representing
its 50 percent share of the loss of the joint venture. The percentage of the
research and development costs billed to the joint venture that was funded by
F.22
<PAGE>
the Company (50 percent, or $837,457) was recorded as a credit to the Company's
equity in the loss of the joint venture.
Research and Development
Research and development expenses include the expenses associated with contract
research and development provided to third parties, research and development
provided in connection with the joint venture including clinical and regulatory
costs, and internal research and development costs. Research and development
costs are expensed as incurred.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method. Leasehold improvements are amortized over the life of the
asset or the term of the lease, whichever is shorter. Significant additions and
improvements are capitalized, while repairs and maintenance are charged to
expense as incurred.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
------------------------------------ -------------------------
Estimated
1998 1997 Useful Lives
----------------- ----------------- -------------------------
<S> <C> <C> <C>
Computer hardware and software $ 161,994 $ 27,688 3 years
Office furniture and equipment 372,037 -- 5 years
Laboratory equipment 3,468,978 119,002 5 years
Shorter of life of
Leasehold improvements 2,532,484 3,783 asset or lease term
----------------- -----------------
6,535,493 150,473
Less: Accumulated depreciation (312,435) (4,790)
----------------- -----------------
Total, net $ 6,223,058 $ 145,683
================= =================
</TABLE>
Depreciation expense for the year ended December 31, 1998 and for the periods
from March 21, 1997 (inception) to December 31, 1997 and 1998, was $307,645,
$4,790, and $312,435, respectively.
Goodwill and Other Intangible Assets
In connection with the acquisition of Glyko, Inc. discussed in Note 1, the
Company acquired certain intangible assets including developed technology,
customer relationships and goodwill. These assets are being amortized over
approximately 10 years.
The purchase price of $14,500,500 was allocated to the net tangible and
intangible assets acquired, based on the relative fair value of these assets as
determined in an independent appraisal. In connection with this allocation
$2,625,000 was expensed as a charge for the purchase of in-process research and
development. In performing this allocation, the Company considered, among other
factors, Glyko, Inc.'s technology research and development projects in-process
at the date of acquisition. With regard to the in-process research and
development projects, the Company considered factors such as the stage of
development of the technology at the time of acquisition, the importance of each
F.23
<PAGE>
project to the overall development plan, alternative future use of the
technology and the projected incremental cash flows from the projects when
completed and any associated risks.
Total amortization expense from October 7, 1998 (date of acquisition), to
December 31, 1998, was $271,274.
Accrued Liabilities
Accrued liabilities consisted of the following:
December 31
----------- ---- -------------
1998 1997
----------- -------------
Vacation $ 123,274 $ 25,579
Other 516,742 17,816
----------- ------------
Total $ 640,016 $ 43,395
=========== =============
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.
Revenue from the joint venture is recognized to the extent that research and
development costs billed by the Company have been funded by Genzyme.
Net Income (Loss) per Share
Basic net income (loss) per share is calculated by dividing net income (loss) by
the weighted average common shares outstanding during the period. Diluted net
income per share is calculated by dividing net income by the weighted average of
common stock outstanding and potential common shares during the period.
Potential common shares include dilutive shares issuable upon the exercise of
outstanding common stock options, warrants, and contingent issuances of common
stock. For periods in which the Company has losses, such potential common shares
are excluded from the computation of diluted net loss per share, as their effect
is antidilutive.
Potentially dilutive securities include:
<TABLE>
<CAPTION>
December 31
---------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Options to purchase common stock 2,801,240 297,000
Warrants to purchase common stock 801,500 801,500
----------------- -----------------
Total 3,602,740 1,098,500
================= =================
</TABLE>
F.24
<PAGE>
Segment Reporting
For the year ended December 31, 1998, the Company adopted the provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information".
The Company operates two segments. The Analytic and Diagnostic segment
represents the operations of Glyko, Inc. which involve the manufacture and sale
of analytic and diagnostic products. The Pharmaceutical segment represents the
research and development activities related to the development and
commercialization of carbohydrate enzyme therapeutics. Management of the Company
has concluded that the operations of the Analytic and Diagnostic segment are,
and will continue to be, immaterial with respect to the Company's overall
activities and, thus, disclosure of segment information is not required.
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is not expected to have a
material impact on the Company's financial position or results of operations.
2. BRIDGE LOANS:
In the third quarter of 1997, the Company drew upon a bridge loan from certain
stockholders in the amount of $880,000. This bridge loan was converted into
880,000 shares of common stock in the fourth quarter of 1997.
3. STOCKHOLDERS' EQUITY:
Common Stock and Warrants
On March 21, 1997, BioMarin's parent company, GBL, provided initial equity
funding by purchasing 1,500,000 shares of common stock for $1,500,000.
BioMarin and GBL have entered into a License Agreement dated June 26, 1997,
pursuant to which GBL granted BioMarin an exclusive, worldwide, perpetual,
irrevocable, royalty-free right and license to certain of its 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 GBL and its subsidiaries as of the
date of the license agreement for application in therapeutic uses, including
without limitation, drug discovery and genomics. As consideration for this
license, BioMarin issued to GBL 7,000,000 shares of BioMarin common stock. Under
the same License Agreement, BioMarin granted GBL an exclusive, worldwide,
perpetual, irrevocable, royalty-free cross-license to all improvements BioMarin
may make upon the licensed intellectual property.
As disclosed in the accompanying statements of stockholders' equity, the Company
closed a number of private placements in 1997 and 1998. In connection with these
placements, an entity with which the chief executive officer and chairman of the
board is affiliated (see Note 7) was issued a total of 899,500 shares (valued at
$1,389,500) and warrants (valued at $128,240) to purchase an additional 801,500
shares of common stock. These issuances were made for brokerage services
F.25
<PAGE>
rendered in connection with these placements and were accounted for as a cost of
raising capital. The warrants expire on various dates in 2001.
In connection with the October 1997 placement, the Company received notes from
three executive officers (see below) of the Company to purchase 2,500,000 shares
of common stock. These notes earn interest at an annual rate of 6 percent. In
addition, 880,000 shares were issued to stockholders to retire an $880,000
bridge loan.
Notes Receivable from Stockholders
Notes receivable from stockholders relate to shares issued in October 1997 to
three executive officers of the Company, bear interest at 6 percent per annum,
and are due on July 31, 2000, or on the date of the employee's termination,
whichever is earlier. The notes are secured by the underlying stock and are with
full recourse. Interest was imputed at nine percent, resulting in an interest
discount and related deferred compensation of $200,000, which is being amortized
over the life of the notes. Amortization expense for the year ended December 31,
1998, and for the periods from March 21, 1997 (inception), to December 31, 1997
and 1998, was $94,420, $37,500, and $131,920, respectively.
Deferred Compensation
In connection with certain stock option grants during the year ended December
31, 1998, the Company recognized deferred compensation totaling $1,032,250,
which is being amortized over the four-year estimated service periods of the
grantees. Amortization expense recognized during the year ended December 31,
1998, was $168,405.
4. INCOME TAXES:
The significant components of net deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
December 31
---------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Net operating loss carryforwards $ 9,792,000 $ 1,052,000
Research and development credit carryforwards 1,760,000 210,000
Research and development capitalized 50,000 0
Other (160,000) (255,000)
Valuation allowance (11,442,000) (1,007,000)
------------------ ------------------
Net deferred tax asset $ -- $ --
================== ==================
</TABLE>
F.26
<PAGE>
The net operating loss carryforwards and research and development credit
carryforwards include the net operating loss carryforwards ($4,567,000) and
research and development credits carryforwards ($701,000) and related valuation
allowances ($5,269,000) of Glyko, Inc.
The reconciliation of the effective tax rate is as follows:
<TABLE>
<CAPTION>
Period from March 21, Period from March 21,
Year ended 1997 (Inception), to 1997 (Inception), to
December 31, 1998 December 31, 1997 December 31, 1998
------------------------- ------------------------ ------------------------
Amount % Amount % Amount %
--------------- --------- ---------------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. statutory tax rate $ (4,164,000) (34) $ (821,000) (34) $ (4,985,000) (33)
State taxes, net of federal income tax
benefit (735,000) (6) (145,000) (6) (880,000) (6)
Research and development tax credit (634,000) (5) (142,000) (5) (776,000) (5)
Other 656,000 5 149,000 5 805,000 5
Change in valuation allowance 4,877,000 40 959,000 40 5,836,000 39
--------------- --------- ---------------- --------- --------------- ---------
Provision for income taxes $ -- -- $ -- -- $ -- --
=============== ========= ================ ========= =============== =========
</TABLE>
As of December 31, 1998, net operating loss carryforwards are approximately
$24.1 million and $12.4 million for federal and California income tax purposes,
respectively. These federal and state carryforwards expire beginning in the year
2011 and 2004, respectively.
The Company also has research and development credits available to reduce future
federal and California income taxes, if any, of approximately $1,760,000 and
$580,000, respectively, at December 31, 1998. These federal and state
carryforwards expire beginning in 2012 and 2013, respectively.
The net operating loss carryforwards and research and development credits
related to Glyko, Inc. as of October 7, 1998, can only be utilized to offset
future taxable income and tax, respectively, if any, of Glyko, Inc. In addition,
the Tax Reform Act of 1986 contains provisions that may limit the net operating
loss carryforwards and research and development credits available to be used in
any given year should certain events occur, including sale of equity securities
and other changes in ownership. The acquisition of Glyko, Inc. and the related
issuance of stock represented a change of ownership under these provisions.
There can be no assurance that the Company will be able to utilize net operating
loss carryforwards and credits before expiration.
Deferred income taxes are recorded to reflect the tax consequences on future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at each period-end. The Company has a cumulative net
operating loss carryforward since inception, resulting in net deferred tax
assets. A valuation allowance is placed on the net deferred tax assets to reduce
them to an assumed net realizable value of zero.
5. STOCK OPTION PLANS:
The Company's 1997 Stock Option Plan (the Plan) provides for the grant of
incentive common stock options and nonstatutory common stock options to
F.27
<PAGE>
employees, directors, and consultants of the Company. The maximum aggregate
number of shares that may be optioned and sold under the Plan is 5,000,000
shares.
Had compensation cost for the Plan been determined consistent with SFAS No. 123
for option grants to employees, the effect on the Company's net loss would have
been as follows:
<TABLE>
<CAPTION>
Period from Period from
March 21, 1997 March 21, 1997
Year Ended (Inception), to (Inception), to
December 31, 1998 December 31, 1997 December 31, 1998
------------------- -------------------- -------------------
<S> <C> <C> <C>
Net loss as reported $ (12,313,654) $ (2,762,765) $ (15,076,419)
Pro forma effect of SFAS No. 123 (468,000) (1,640) (469,640)
------------------- -------------------- -------------------
Pro forma net loss $ (12,781,654) $ (2,764,405) $ (15,546,059)
=================== ==================== ===================
Net loss per common share as reported (0.55) (0.34) (0.93)
=================== ==================== ===================
Pro forma loss per common share (0.57) (0.34) (0.96)
=================== ==================== ===================
</TABLE>
F.28
<PAGE>
A summary of the status of the Company's stock option plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average Exercisable Weighted Average
Exercise at End of Fair Value of
Option Shares Price Year Options Granted
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at March 21, 1997 -- $ --
Granted 297,000 1.00 $0.22
Exercised -- --
Canceled -- --
---------------
Outstanding at December 31, 1997 297,000 1.00 232,000
==============
Granted 2,507,660 4.18 $2.40
Exercised (1,973) 1.00
Canceled (1,447) 1.00
---------------
Outstanding at December 31, 1998 2,801,240 $3.84 761,609
=============== ==============
</TABLE>
There are 2,198,760 options available for grant under the Plan at December 31,
1998. The average remaining contractual life of the options outstanding at
December 31, 1998, is four years.
As of December 31, 1998, the 2,801,240 options outstanding consist of the
following:
<TABLE>
<CAPTION>
Number of Options Weighted Average Number of Options
Outstanding Exercise Price Contractual Life Exercisable
- - -------------------------- ------------------ ---------------------- ------------------------
<S> <C> <C> <C>
398,020 $1.00 3.88 347,333
255,540 2.30 3.11 180,846
1,548,000 4.00 9.03 202,875
599,680 6.00 4.69 30,555
- - -------------------------- ------------------------
2,801,240 761,609
========================== ========================
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 1997 and 1998: risk-free interest rates ranging from 5.2 to 6.2
percent; expected dividend yield of 0 percent; expected life of four years for
the Plan's options; and expected volatility of 0 percent.
F.29
<PAGE>
6. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company leases office space and research and testing laboratory space in
various facilities under operating agreements expiring at various dates through
2009. Future minimum lease payments for the year ended December 31 are as
follows:
1999 $1,336,910
2000 1,173,573
2001 1,019,827
2002 1,014,837
2003 866,405
Thereafter 2,820,662
---------------
Total $ 8,232,214
===============
Rent expense for the year ended December 31, 1998 and for the periods from March
21, 1997 (inception), to December 31, 1997 and 1998, was $380,1873, $34,613, and
$414,800, respectively.
Research and Development Funding Commitments
The Company uses experts and laboratories at universities and other institutions
to perform research and development activities. The Company has also licensed
technology from certain institutions. Funding commitments to these institutions
for the year ended December 31 are as follows:
1999 $1,076,335
2000 305,900
2001 50,000
2002 50,000
2003 50,000
---------------
Total $ 1,532,235
===============
Consulting Agreements
BioMarin had agreements with two consultants whereby the consultants were paid
cash and granted common stock options in exchange for services. Options for
206,000 shares of common stock were granted in satisfaction for these services.
These options were valued at $35,020 and were expensed during the period from
March 21, 1997 (inception), through December 31, 1997.
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
F.30
<PAGE>
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.
7. RELATED-PARTY TRANSACTIONS:
BioMarin has contractual agreements for office space and certain administrative,
research, and development functions with Glyko, Inc. BioMarin reimbursed Glyko,
Inc. for rent, salaries and related benefits, and other administrative costs.
Glyko, Inc. also reimburses BioMarin for salaries and related benefits. BioMarin
also reimbursed Glyko, Inc. for a net $205,418, $240,848, and $446,266 for the
year ended December 31, 1998, and the periods from March 21, 1997 (inception) to
December 31, 1997 and 1998.
As discussed in Note 3, during August 1997, the Company entered into an agency
agreement with an entity with which the chief executive officer and chairman of
the board is affiliated. During June 1998, the Company entered into a second
agency agreement. The Company issued a total of 899,500 shares of common stock
and warrants to purchase another 801,500 shares of common stock to this entity
and its affiliates for brokerage services pursuant to the terms of these
agreements, also discussed in Note 3.
In addition, at December 31, 1998 and 1997, the Company had recorded amounts due
from GBL of $114,005, and $79,607 respectively.
8. COLLABORATIVE AGREEMENTS:
Genzyme
Effective September 4, 1998, the Company entered into an agreement (the
Collaboration Agreement) with Genzyme to establish a joint venture dedicated to
the worldwide development and commercialization of BM101 to treat MPS-I. In
conjunction with the formation of the joint venture, the Company established a
wholly owned subsidiary, BioMarin Genetics, Inc. The Company has a 49 percent
interest in the joint venture, BioMarin Genetics, Inc. has a 1 percent interest,
and Genzyme has the remaining 50 percent interest.
Under the Collaboration Agreement, BioMarin and Genzyme are each required to
make capital contributions to the joint venture in an amount equal to 50 percent
of costs and expenses associated with the development and commercialization of
BM101. The parties also agree to share the profits equally from such
commercialization. In addition, Genzyme purchased 1,333,333 shares of BioMarin
common stock at $6.00 per share for total proceeds of $7,999,998 in a private
placement and is obligated to purchase an additional $10,000,000 of common stock
at the initial public offering price in a private placement concurrent with the
initial public offering of the Company's stock. Genzyme has also agreed to pay
BioMarin $12,100,000 in cash upon FDA approval of the BLA for BM101.
Other Agreements
The Company is engaged in research and development collaborations with various
academic institutions, commercial research groups, and other entities. The
agreements provide for sponsorship of research and development by the Company
F.31
<PAGE>
and may also provide for exclusive royalty-bearing intellectual property
licenses or rights of first negotiation regarding licenses to intellectual
property development under the collaborations. Typically, these agreements are
terminable for cause by either party upon 90 days' written notice.
9. COMPENSATION PLANS:
Employment Agreements
The Company has entered into employment agreements with seven officers of the
Company. All of these agreements are terminable without cause by the Company
upon six months' prior notice, or by the officer upon three months' prior
written notice to the Company, with the Company obligated to pay salary and
benefits hereunder until such termination. The annual salaries committed to
under these agreements total approximately $1,000,000.
401(k) Plan
The Company participates in the Glyko Retirement Savings Plan (the 401(k) Plan).
Most employees (the Participants) are eligible to participate following the
start of their employment, on the earlier of the next occurring January 1 or
July 1. Participants may contribute up to 15 percent of their current
compensation to the 401(k) Plan or an amount up to a statutorily prescribed
annual limit. The Company pays the direct expenses of the 401(k) Plan but does
not currently match or make contributions to employee accounts.
1997 Stock Plan
In November 1997, the Board adopted, and in April 1998, the stockholders
approved, the 1997 Stock Plan (the 1997 Plan), which provided for the
reservation of a total of 3,000,000 shares of common stock for issuance under
the 1997 Plan. In December 1998, the Board adopted, and in January 1999, the
stockholders approved, an amendment to the 1997 Plan to increase the number of
shares reserved for issuance under it to an aggregate of 5,000,000 and to add an
"evergreen provision" providing for an annual increase in the number of shares
which may be optioned or sold under the 1997 Plan without need for additional
Board or stockholder action to approve such increase (which increase shall be
the lesser of 4 percent of the then-outstanding capital stock, 2,000,000 shares,
or a lower amount set by the Board). The 1997 Plan provides for the grant of
stock options and the issuance of restricted stock by the Company to its
employees, officers, directors, and consultants.
1998 Employee Stock Purchase Plan
In December 1998 the Board adopted, and in January 1999 the stockholders
approved, the 1998 Employee Stock Purchase Plan (the 1998 Purchase Plan). A
total of 250,000 shares of Company common stock has been reserved for issuance
under the 1998 Purchase Plan, plus annual increases equal to the lesser of 0.5
percent of the outstanding capital stock, 200,000 shares, or a lesser amount set
by the Board. As of December 31, 1998, no shares have been issued under the 1998
Purchase Plan. The implementation of this plan is contingent on the completion
of an initial public offering.
1998 Director Option Plan
The 1998 Director Option Plan (the Director Plan) was adopted by the Board of
Directors in December 1998 and approved by the stockholders in January 1999. The
Director Plan provides for the grant of nonstatutory stock options to
F.32
<PAGE>
nonemployee directors. A total of 200,000 shares of Company common stock, plus
an annual increase equal to the number of shares needed to restore the maximum
aggregate number of shares available for sale under the Director Plan or the
lesser of 0.5 percent of the outstanding capital stock, 200,000 shares, or a
lesser amount set by the Board, have been reserved for issuance under the
Director Plan. As of December 1998, no options have been granted under the
Director Plan.
In January 1999, the Board granted 621,774 stock options under the 1997 Plan to
employees and directors of the Company at $7.00 per share and subsequently
granted 55,000 stock options to employees of the Company at $7.00 per share. The
Company's management estimates that these stock option prices reflect current
market value.
10. SUPPLEMENTAL CASH FLOW INFORMATION:
The following noncash transactions took place for the periods presented:
<TABLE>
<CAPTION>
Period from Period from
March 21, 1997 March 21, 1997
Year Ended (Inception), to (Inception), to
December 31, 1998 December 31, 1997 December 31, 1998
---------------------- ---------------------- --------------------
<S> <C> <C> <C>
Common stock issued in exchange for notes $-- $ 2,500,000 $ 2,500,000
Compensation in the form of common stock and
common stock options -- 18,020 18,020
Common stock and common stock warrants issued in
exchange for brokerage services 588,000 929,740 1,517,740
Bridge loan converted to common stock -- 880,000 880,000
</TABLE>
11. GLYKO, INC.:
On October 7, 1998, the Company entered into an agreement to acquire all of the
outstanding stock of its affiliate, Glyko, Inc. The total consideration for the
acquisition was $14,500,500, comprising 2,259,039 shares of common stock of the
Company, valued at $6.00 per share, the assumption of options held by certain
Glyko, Inc. employees to purchase shares of GBL's common stock, which will
require 255,540 shares of the Company's common stock to be issued if fully
exercised, and $500 in cash. The acquisition was accounted for as a purchase.
F.33
<PAGE>
The following unaudited pro forma consolidated financial information reflects
the results of operations for the year ended December 31, 1998 and for the
periods from March 21, 1997 (inception), to December 31, 1997 and 1998 as if the
acquisition had occurred on January 1, 1998 and March 21, 1997 (inception),
respectively: <TABLE> <CAPTION>
Period from
March 21, Period from
1997 (Inception), March 21, 1997
Year ended to December 31, (Inception), to
December 31, 1998 1997 December 31, 1998
-------------------- ------------------- ------------------
<S> <C> <C> <C>
Revenues $ 2,530,325 $ 1,995,562 $ 4,345,887
Loss from operations (13,044,201) (6,027,890) (17,532,186)
Net loss (12,379,832) (5,953,934) (16,797,384)
Net loss per share, basic and diluted (0.56) (0.57) (0.93)
Weighted average number of common shares outstanding 24,214,135 10,464,474 18,133,509
</TABLE>
12. SUBSEQUENT EVENT:
On April 13, 1999, the Company entered into a convertible note financing
agreement in the amount of $26,000,000. Of this amount, GBL invested $4,300,000.
These notes bear interest at 10 percent per annum.
All unpaid principal, together with all unpaid interest, shall be due and
payable upon the earlier of (a) April 2002 (the "Maturity Date"), (b)
immediately prior to a sale of all of the assets of the Company or a merger or
acquisition of the Company with another entity, or (c) an initial public
offering with net proceeds to the Company of at least $20,000,000.
On the Maturity Date, in lieu of any repayment in cash, the Company has the
right to convert the amounts owed under the notes, in whole or part, into fully
paid and nonassessable shares of common stock of the Company.
At any time prior to the Maturity Date, the notes automatically convert to
shares of common stock of the Company immediately prior to (a) any merger or
acquisition of the Company, (b) a sale of all the assets of the Company, or (c)
an initial public offering with net proceeds to the Company of at least
$20,000,000.
The price at which the notes will convert into shares of common stock is
initially set at $10.00 per share and is subject to certain adjustments for
possible future events. The convertible note agreement also contains certain
anti-dilutive provisions.
F.34
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000908401
<NAME> Glyko Biomedical, Ltd.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
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