-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JPpdaHYbMgYtFH51JTdYvnPN/73/2y8tEJtWmlM4MR66OSKNPm5D+D2jDQFAW+Bq sNBWBS5b+qklKAu4kRjIpg== 0000912057-00-025825.txt : 20000523 0000912057-00-025825.hdr.sgml : 20000523 ACCESSION NUMBER: 0000912057-00-025825 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000522 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINESYS PHARMACEUTICALS INC CENTRAL INDEX KEY: 0001096328 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-27571 FILM NUMBER: 641273 BUSINESS ADDRESS: STREET 1: 3771 JACOMBS ROAD STREET 2: UNIT 415 CITY: RICHMOND BC CANADA BUSINESS PHONE: 6042790363 MAIL ADDRESS: STREET 1: 3771 JACOMBS ROAD UNIT 415 CITY: RICHMOND BC CANADA STATE: A1 10QSB 1 FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000. / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ____ to ____. Commission file number 000-27571. KINeSYS PHARMACEUTICALS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Nevada 98-0210050 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 3771 Jacombs Road, Unit 415 Richmond, B.C., Canada V6V 2L9 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (604) 279-0363 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /X/ Yes / / No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. / / Yes / / No APPLICABLE ONLY TO CORPORATE ISSUERS: -2- State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 9,640,747 as of March 31, 2000. Transitional Small Business Disclosure Format (Check one): / / Yes /X/ No -3- PART I -- FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
CONTENTS ============================================================================================= CONSOLIDATED INTERIM FINANCIAL STATEMENTS Balance Sheets 5 Statements of Operations 6 Statements of Cash Flows 7 Notes to the Financial Statements 8-10
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=========================================================================================================== KINeSYS PHARMACEUTICALS, INC. CONSOLIDATED INTERIM BALANCE SHEETS MARCH 31 June 30 2000 1999 (UNAUDITED) - ----------------------------------------------------------------------------------------------------------- ASSETS CURRENT Cash $ 11,035 $ 109,481 Accounts receivable (net of allowance for doubtful accounts of $4,200 and $2,200) 233,660 34,640 Inventories 386,759 112,061 Prepaid expenses (Note 3) 325,584 18,936 --------------------------------- 957,038 275,118 FIXED ASSETS, net of accumulated depreciation 26,286 29,340 GOODWILL, net of accumulated amortization of $134,149 and $24,391 597,566 707,324 --------------------------------- $ 1,580,890 $ 1,011,782 =========================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES CURRENT Accounts payable $ 153,696 $ 91,678 Accrued liabilities 41,184 82,613 --------------------------------- 194,880 174,291 LOANS PAYABLE (Note 4) 317,231 - --------------------------------- 512,111 174,291 --------------------------------- STOCKHOLDERS' EQUITY Share capital Authorized 100,000,000 Preferred shares, par value $0.00001 100,000,000 Common shares, par value $0.00001 Issued (Note 3) 9,640,747 Common shares (June 30, 1999 - 8,380,897 common shares) 96 84 Additional paid-in capital 2,455,117 1,195,279 Accumulated deficit (1,386,531) (370,312) Accumulated other comprehensive income - foreign currency translation adjustment 97 12,440 --------------------------------- 1,068,779 837,491 --------------------------------- $ 1,580,890 $ 1,011,782 ===========================================================================================================
The accompanying notes form an integral part of these consolidated interim financial statements. -5-
============================================================================================================ KINeSYS PHARMACEUTICALS, INC. CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS (UNAUDITED) MARCH 31 March 31 MARCH 31 March 31 2000 1999 2000 1999 For the periods ended (3 MONTHS) (3 Months) (9 MONTHS) (9 Months) - ------------------------------------------------------------------------------------------------------------ SALES $ 342,959 $ 36,325 $ 416,337 $ 218,357 COST OF GOODS SOLD 244,608 30,860 288,706 124,948 --------------------------------------------------------------------- 98,351 5,465 127,631 93,409 --------------------------------------------------------------------- EXPENSES Advertising and promotion 233,366 39,508 551,972 84,428 Amortization of goodwill 36,586 - 109,758 - Bad debts 1,634 (719) 1,634 719 Bank charges and interest 2,317 2,607 4,309 9,983 Commissions 12,986 1,716 15,273 (11,161) Consulting fees 34,304 17,222 96,908 47,143 Depreciation 2,740 1,383 8,099 4,864 Office and other 25,548 16,532 63,122 35,032 Professional fees 50,987 14,430 112,686 42,309 Rent 8,515 3,619 21,905 13,227 Repairs and maintenance - 880 - 6,887 Salaries and benefits 41,878 12,767 98,826 60,746 Stock option compensation - - - 257,269 Trade shows and travel 24,733 8,626 59,358 41,165 --------------------------------------------------------------------- 475,594 118,571 1,143,850 592,611 --------------------------------------------------------------------- LOSS BEFORE EXTRAORDINARY ITEM (377,243) (113,106) (1,016,219) (499,202) EXTRAORDINARY GAIN ON DEBT RESTRUCTURING - - - 59,203 --------------------------------------------------------------------- NET LOSS FOR THE PERIOD $ (377,243) $ (113,106) $ (1,016,219) $ (439,999) =========================================================================================================== BASIC AND DILUTED LOSS PER SHARE: Loss per share before extraordinary item $ (0.04) $ (0.03) $ (0.11) $ (0.15) Extraordinary item - - - 0.02 --------------------------------------------------------------------- Loss per share for the period $ (0.04) $ (0.03) $ (0.11) $ (0.13) =========================================================================================================== WEIGHTED AVERAGE SHARES OUTSTANDING 9,640,747 3,317,204 9,400,689 3,317,204 ===========================================================================================================
The accompanying notes form an integral part of these consolidated interim financial statements. 6
============================================================================================================ KINeSYS PHARMACEUTICALS, INC. CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (UNAUDITED) For the nine-month periods ended March 31 2000 1999 - ------------------------------------------------------------------------------------------------------------ CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net loss for the period $ (1,016,219) $ (439,999) Items not involving cash Depreciation of fixed assets 8,099 4,864 Amortization of goodwill 109,758 - Stock option compensation - 257,269 Gain on debt restructuring - (59,203) Decrease (increase) in assets Accounts receivable (199,020) 16,694 Inventories (274,698) 39,482 Prepaid expenses 453,202 (1,279) Increase (decrease) in liabilities Accounts payable and accrued liabilities 20,589 174,118 --------------------------------- (898,289) (8,054) --------------------------------- INVESTING ACTIVITIES Net proceeds on sale of fixed assets - 4,006 Purchase of fixed assets (5,045) - --------------------------------- (5,045) 4,006 --------------------------------- FINANCING ACTIVITIES Issuance of common shares 500,000 68,414 Repayment of loans payable - (29,660) Repayment of advance from stockholders - (26,946) Proceeds on loans payable 317,231 - --------------------------------- 817,231 11,808 --------------------------------- INCREASE (DECREASE) IN CASH DURING THE PERIOD (86,103) 7,760 Effect of exchange rate on cash (12,343) (4,613) CASH, beginning of period 109,481 17,514 --------------------------------- CASH, end of period $ 11,035 $ 20,661 =========================================================================================================== SUPPLEMENTAL INFORMATION Interest paid $ 5,856 $ 7,905 Non-cash financing activity Expenses paid with issuance of common shares $ 759,850 $ - ===========================================================================================================
The accompanying notes form an integral part of these consolidated interim financial statements. 7 ================================================================================ KINeSYS PHARMACEUTICALS, INC. NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2000 AND 1999 - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The consolidated interim financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these consolidated interim financial statements be read in conjunction with the consolidated financial statements of the Company for the year ended June 30, 1999 and notes thereto included in the Company's 10-SB registration statement. The Company follows the same accounting policies in preparation of interim reports. Results of operations for the interim periods are not indicative of annual results. On May 4, 1999, the Company completed a major transaction acquiring all of the issued and outstanding common and preferred shares of KINeSYS Pharmaceutical Inc. ("KINeSYS Canada"), a Canadian company engaged in the manufacture and distribution of cosmoceutical products (Note 2). Upon the acquisition of KINeSYS Canada, the Company abandoned its previous activities in mineral exploration. Accordingly, KINeSYS Canada is treated as the predecessor business and the comparative amounts for the period ended March 31, 1999 are those of KINeSYS Canada. Loss per share for 1999 is calculated on a pro-forma basis. These accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As at March 31, 2000 the Company has had no significant operations and the Company's subsidiary has posted overall operating losses since its inception. The continuation of the Company is dependent upon the continuing financial support of creditors and stockholders and obtaining long-term financing as well as achieving a profitable level of operations. Management plans to raise equity capital to finance the operations and capital requirements of the Company. Amounts raised will be used to develop a U.S. focus for marketing arrangements, to enhance the Company's e-commerce ability through its website, to provide financing for the purchase and manufacture of inventories and for other working capital purposes including operational systems upgrades. While the Company is expending its best efforts to achieve the above plans, there is no assurance that any such activity will generate funds that will be available for operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that might arise from this uncertainty. 8 ================================================================================ KINeSYS PHARMACEUTICALS, INC. NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2000 AND 1999 - -------------------------------------------------------------------------------- 2. ACQUISITION OF KINeSYS PHARMACEUTICAL INC. On May 4, 1999, the Company acquired all of the issued and outstanding common and preferred stock of KINeSYS Canada. KINeSYS Canada is a company incorporated in December 1993 in British Columbia, Canada that is engaged in the manufacture and distribution of cosmoceutical products for active individuals and athletes. Consideration for the purchase was the issuance of 3,052,021 shares of common stock of the Company. The transaction was accounted for as a purchase. Accordingly, the operations of KINeSYS Canada have been included in the consolidated financial statements from May 4, 1999. The value of the consideration paid, being the common stock of the Company, was determined using quoted trading prices close to the date of substantial agreement to the terms of the acquisition of $0.197 per share. The value of the consideration paid exceeded the net book value of KINeSYS Canada at the transaction date by $731,715. The excess consideration, or "goodwill", is being amortized to income on a straight-line basis over five years. The summarized unaudited pro-forma results of operations set forth below for the nine-month period ended March 31, 1999 assume that the acquisition occurred as of July 1, 1998 and include expenses for the amortization of goodwill created on acquisition.
Nine Months Ended March 31, 1999 ---------------- Sales $ 182,033 Net loss for the period before discontinued operations and extraordinary item $ (512,798) Net loss for the period $ (473,697) Basic and diluted loss per share $ (0.14) - ------------------------------------------------------------------------------------------------------------
3. SHARE CAPITAL (a)During the nine-month period ended March 31, 2000 the Company issued 759,850 shares of common stock in exchange for future advertising and promotional services. The transactions were valued at $1.00 per share being the trading value of the Company's shares at the dates of the transaction which approximates the fair value of the services received. Such expenses are recorded as prepaid expenses in these financial statements and are being amortized on a monthly basis. (b)In October and November 1999, the Company received $500,000 on the issuance of the 500,000 shares of common stock pursuant to private placements. 9 ================================================================================ KINeSYS PHARMACEUTICALS, INC. NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000 AND 1999 - -------------------------------------------------------------------------------- 4. LOAN PAYABLE Unsecured, payable on demand with 30 days notice, interest at 10% per annum $ 249,390 Collateralized by specific account receivable (book value $138,159), interest rate to be determined 67,841 ----------------- $ 317,231
-10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms, or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. In this regard, the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in the forward-looking statements contained in this Form 10-QSB. In evaluating the Company's business, you should give careful consideration to the information set forth below under the caption "Risk Factors That May Affect Future Operating Results," in addition to the other information set forth herein. The inclusion of the forward-looking statements should not be regarded as a representation by the Company, or any other person, that such forward-looking statements will be achieved. Although we believe the that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We undertake no duty to update any of the forward-looking statements, whether as a result of new information, future events or otherwise. In light of the foregoing, readers are cautioned not to place undue reliance on the forward-looking statements contained in this report. OVERVIEW Kinesys supplies innovative high-performance skin and body care products to professional and recreational athletes. By focusing on its current business strategy, the Company intends to solidify its market position in Canada and to expand to other geographical markets in the United States, overseas and via retailers and the company's website on the Internet. Founded in 1993, the Company spent its early years developing formulas, establishing markets for its sunscreen and related products and creating brand awareness. It has traditionally achieved most of its sales in Canada, with occasional sales and product interest in the United States. It now intends to focus on the United States market for its next phase of growth. Management recognizes that directing the Company's efforts to expand into new geographical markets will have a negative short-term impact on revenue, but believes it is warranted by the potential long-term opportunity of selling its primary sun care products in markets which are not as subject to the seasonal variations found in Canada. On May 4, 1999, Goldsearch Corporation ("Goldsearch"), a Nevada corporation, merged (the "Merger") with Kinesys Canada. On May 4, 1999, Goldsearch issued 3,052,021 shares of its -11- Common Stock to the holders of Kinesys Canada's issued and outstanding shares of common stock in exchange for 100% of the issued and outstanding common stock of Kinesys Canada. Prior to the Merger, Goldsearch had focused its operations in the area of mineral exploration and had only nominal assets and liabilities. After the merger, former Kinesys Canada stockholders owned approximately 39% of the issued and outstanding Common Stock of the Company. The merger has been accounted for using the purchase method of accounting with Kinesys Canada considered to be the predecessor business. This treatment is appropriate because the preexisting shareholders of Goldsearch, after the Merger, retain the power to elect the Board of Directors and to replace management. Present management is acceptable to the majority of shareholders but could be replaced at the discretion of the Board of Directors at any time. No voting agreement or other private contractual arrangement constrains the ability of the majority of shareholders to exercise their right under Nevada law to control the Company. Currently-outstanding warrants will, when exercised, result in even more voting power being vested in the hands of the former Goldsearch shareholders. Following the Merger, the business conducted by the Company is the business conducted by Kinesys Canada prior to the Merger with the additional focus of growth opportunities in the U.S., overseas, and on the Internet. In conjunction with the Merger, the Company changed its name to "Kinesys Pharmaceuticals, Inc." The Company's shares were until December 1, 1999 traded on the Over the Counter Bulletin Board (the "OTCBB") operated by the National Association of Securities Dealers, Inc. under the symbol "KNES." The Company is currently seeking to have its shares re-listed on the OTCBB. In view of the evolving nature of its business and its limited operating history, the Company has limited experience forecasting its revenues. Therefore, the Company believes that period-to-period comparisons of financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. To date, the Company has incurred substantial costs to develop its product line, establish brand recognition and secure sales and distribution channels. The Company will continue to incur costs to develop new products, develop new customers, build brand awareness and grow the business. These costs may not correspond with any meaningful increases in revenues in the near term. RESULTS OF OPERATIONS THREE MONTHS ENDED March 31, 2000 AND 1999 The results for this period discuss the consolidated operating results of the Company for the quarters ending March 31, 2000 and March 31, 1999. Revenue Sales of $342,959 and $36,325 for the three months ended March 31, 2000 and 1999, respectively, were derived primarily from the sale of the Company's sunscreen products. During 1999, the Company's attentions were primarily focused on putting in place effective cost controls and management systems, and increasing sales and marketing efforts. Sales in the three months ended March 31, 2000 have accordingly increased as a result of last year's stepped-up efforts. -12- Operating expenses The Company's operating expenses consist of sales and marketing and general and administrative expenses. Operating expenses were $435,108 and $118,571 for the quarters ended March 31, 2000 and 1999, respectively, including $36,586 of goodwill amortization as a result of the acquisition of Kinesys Canada. No goodwill amortization was recorded during the quarter ended March 31, 1999. Advertising and promotion expense for the quarter ended March 31, 2000 of $233,366 increased $193,858 or 491% from the comparable period in 1999. Sales commissions for the quarter ended March 31, 2000 of $12,986 rose $11,270 or 657% over the commissions paid in the comparable period of 1999. Bank charges and interest resulted in net income of $1,547 for the quarter ended March 31, 2000 compared with expense of $2,607 in the comparable period of 1999. Professional fees paid to the Company's accountants, attorneys and computer consultants for the quarter ended March 31, 2000 of $14,365 decreased $65 or 0.5% from the comparable period in 1999. Salaries and benefits for these periods were $41,878 and $12,767, respectively. Expense for stock option compensation was nil in both periods. Expenses for travel and participation in trade shows were $24,733 for the quarter ended March 31, 2000 and $8,626 for the comparable period in 1999. A significant portion of the increase in advertising and promotion expense for the quarter ended March 31, 2000 is attributable to design costs associated with the creation of new packaging, point of purchase displays, and collateral material to be utilized in the official launch of the Company's product line in the United States and its re-launch in Canada in the spring of 2000. The increase in costs associated with the redesign of the KINeSYS brand is a one-time expense and is not likely to recur in future periods. The Company will reinvest capital as needed to update the design and look of the brand to keep it current in the marketplace. The increase in advertising, promotion and commissions costs also represents the increased cost of promotional giveaways and an increase in commissions paid on increased sales. The increase in management salaries and benefits is attributed to the conversion of two management salary and benefits packages from Canadian to United States Funds. NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999 Revenue Sales of $416,337 and $218,357 for the nine months ended March 31, 2000 and 1999, respectively, were derived primarily from the sale of the Company's sunscreen products. During 1998 and 1999, the Company's attentions were primarily focused on putting in place effective cost controls and management systems, and increasing sales and marketing efforts. Sales in 2000 have accordingly increased as a result of last year's stepped-up efforts. The company spent the latter half of the 1999 calendar year completely redesigning its packaging and marketing material to make it available to retailers by March 2000. The sales attained in 1999 consisted of the selling of existing inventory of the original packaging design as the new packaging design was to be ready for shipping to retailers in the spring of 2000. . Operating expenses The Company's operating expenses consist of sales and marketing and general and administrative expenses. Operating expenses were $1,103,364 and $592,611 for the nine months ended March 31, 2000 and 1999, respectively, including $109,758 of goodwill amortization as a result of the acquisition of Kinesys Canada. No goodwill amortization was recorded during the nine months ended March 31, 1999. -13- Advertising and promotion expense for the nine months ended March 31, 2000 of $551,972 increased $467,544 or 554% from the comparable period in 1999. Sales commissions for the nine months ended March 31, 2000 of $15,273 rose over the comparable period of 1999, during which period commissions were refunded to the company in a net amount of $11,161. Bank charges and interest for the nine months ended March 31, 2000 of $445 decreased $9,538 from $9,983 in the comparable period of 1999. Professional fees paid to the Company's accountants, attorneys and computer consultants for the nine months ended March 31, 2000 of $76,064 increased $33,755 or 80% from the comparable period in 1999. Salaries and benefits for these periods were $98,826 and $60,746, respectively. Expense for stock option compensation decreased to nil in the nine months ended March 31, 2000 from $257,269 in the comparable period of 1999. Expenses for travel and participation in trade shows were $59,358 for the nine months ended March 31, 2000 and $41,165 for the comparable period in 1999. The increase in these numbers (particularly advertising, promotion and commissions) for the nine months ended March 31, 2000 represents the increased cost of the design of the new bottle, packaging and promotional collateral material, promotional giveaways and an increase in commissions paid on increased sales. A large expense was attributable to the recognition of an employee benefit relating to the grant of stock options to employees and directors in the nine months ended March 31, 1999, which was not duplicated in 2000. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of liquidity is its potential to raise additional cash through operations and the exercise of stock options held by certain investors. The Company raised approximately $400,000 upon exercise of options to purchase 533,333 shares of Common Stock on May 30, 1999, and raised an additional $400,000 upon exercise of warrants to purchase 400,000 shares of Common Stock in October, 1999 and $100,000 through sale of Common Stock to a private purchaser. The Company has additional outstanding options to purchase 320,000 Common shares at an exercise price of $1.25 per share. Holders of these options are not required to exercise them, and if they do not exercise, there will be no cash proceeds to the Company. The Company's auditors, BDO Dunwoody LLP, have deemed that continuation of the Company as a "going concern," as defined by U.S. generally accepted accounting principles, is dependent upon the Company obtaining additional working capital. The Company is taking steps to raise additional capital, as its current cash reserves and proceeds from the additional options when exercised over the next three months are expected to allow the company to fulfill all orders for the remainder of 2000 and begin to plan for the 2001 season. The Company intends to conduct private placement sales of its equity securities if and when its cash reserves are depleted. There can be no assurance that any shares of Common Stock of the Company can or will be sold or that other sources of loans or funds will be available to the Company if and when needed. The failure of the Company to obtain adequate additional capital may require the Company to postpone some or all of the expansion of its proposed business operations and, potentially, to cease its operations. Any additional equity financings may involve substantial dilution to the Company's then-existing shareholders. RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS Investment in the shares of our common stock involves a high degree of risk. Investors should carefully consider the risks described below, together with all of the other information included in this registration statement, before making an investment decision. If any of the -14- following risks actually occurs, our business, financial condition or operating results could be materially adversely affected. In such case, the trading price of our common stock could decline, and investors may lose all or part of their investment. NEED FOR ADDITIONAL FINANCING. During the next 12 months, the Company's foreseeable cash requirements are expected to be met by a combination of existing cash, revenue generated by the Company's sales, and additional equity financing. The Company is currently devoting substantial resources to the development of its products and to the establishment of sales and distribution relationships. Substantial additional capital may be required in the future to fund product development and product launch cycles. No assurance can be given that additional financing will be available or that, if available, such financing will be obtainable on terms favorable to the Company or its shareholders. If needed capital is unavailable, the Company's ability to continue in business will be jeopardized. To the extent the Company raises additional capital by issuing equity or securities convertible into equity, ownership dilution to the Company's shareholders will result. HISTORY OF LOSSES AND NEGATIVE CASH FLOW; ANTICIPATED CONTINUED LOSSES. Since the Company's inception, it has incurred significant losses and negative cash flow, and as of December 31, 1999, it had an accumulated deficit of $1,346,045. The Company has not achieved profitability and it expects to continue to incur operating losses for the foreseeable future as it funds operating and capital expenditures in areas such as establishment and expansion of markets, advertising, brand promotion, sales and marketing, and operating infrastructure. The Company cannot assure investors that it will ever achieve or sustain profitability or that its operating losses will not increase in the future. COMPETITION. The market for sunscreen and other skin care products is highly competitive. The competition for the Company's products comes largely from large, well-established multinational companies with longer operating histories, greater name recognition, larger retail bases and significantly greater financial, technical, and marketing resources than the Company. Competition from these sources could materially adversely affect the Company's business, operating results or financial condition. Competitive factors in the athletic skin care market include innovative products, product quality, marketing and distribution resources and price. While the Company believes that it has the experience and ability to compete within its identified market, there can be no assurance that the Company will be able to compete successfully against current or future competitors. RELIANCE ON KEY INDIVIDUALS; NEED TO HIRE CEO AND OTHER QUALIFIED PERSONNEL. The Company is dependent upon the active participation of several key management personnel, including Jeffrey Kletter, President, and Jocelyn Kletter, Vice President. The Company does not currently maintain key employee insurance policies. Mr. Jonathan Mara, the past CEO, left the Company on February 29, 2000 to pursue other opportunities. The duties of the CEO are being fulfilled by the President and Vice President. The Company is actively -15- seeking to recruit a new CEO with skills more suitable for the Company at its current stage, but there can be no guarantee that the Company will find a suitable candidate, or that a suitable candidate can be induced to work for the Company. The Company will likely need to recruit additional qualified personnel in order to expand according to its business plan. Although the Company is committed to offering competitive salaries, stock options, benefits and an appealing work environment, there can be no assurance that Kinesys will be able to attract such persons or retain any of its key personnel. The failure to attract and retain key personnel could have a material adverse effect on the Company's viability. PRODUCT LIABILITY. The Company's business exposes it to potential product liability claims which are inherent in the manufacture and sale of skin care products. Although no such claim has been brought against the Company to date, and to the knowledge of the Company no such claim is threatened or likely, the Company may face liability to product users for damages resulting from the faulty design or manufacture of products. Although the Company maintains product liability insurance coverage, there can be no assurance that product liability claims will not exceed coverage limits or that such insurance will continue to be available at commercially reasonable rates, if at all. Consequently, a product liability claim or other claim in excess of insured liabilities or with respect to uninsured liabilities could have a material adverse effect on the Company. DEPENDENCE ON NEW MARKETS The Company's future growth, if any, depends in part on its ability to penetrate new markets. There can be no assurance that Kinesys will be successful in locating or penetrating any new markets for its products. HIGH COST OF INVENTORY Due to the nature of the Company's business, the Company is required to invest a significant portion of its capital in building and maintaining inventory. The Company strives to to predict its inventory requirements in an effort to avoid carrying excess inventory that will decrease in value. However, there can be no assurance that inventory held by the Company will not become unsalable or diminish in value prior to sale. A significant decline in the value or usability of inventory could have a significant adverse affect on the Company's financial position. LIMITED LIQUIDITY AND RESTRICTED TRANSFERABILITY An investment in the Company involves limited liquidity. There is currently no public market for the Company's Common Stock, and no assurance can be given that a public market will develop. An investment in the Company is suitable only for sophisticated investors who have no need to have ready access to the capital that they commit to the Company. Potential investors must view an investment in the Company as a long-term commitment. -16- RISKS OF LOW-PRICED STOCKS; PENNY STOCK REGULATIONS. If the Company's Common Stock resumes trading on NASD'S "Over-the Counter Bulletin Board," it will be subject to Rule 15g-9 under the Exchange Act, which imposes certain sales practice requirements on broker-dealers that sell such securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, the rule may affect the ability of broker-dealers to sell the Company's Common Stock and may affect the ability of purchasers to sell any of the Common Stock acquired in the secondary market. PAST BANKRUPTCY The Company emerged from creditor protection under the laws of Canada on December 30, 1998. Although management believes that the financial conditions that led to the Company's bankruptcy will not recur, there can be no assurance that the Company will never again seek legal protection from its creditors. The Company's history with bankruptcy may make merchants or other commercial parties unwilling to extend credit to the Company. If creditors and investors perceive the Company to be at risk of insolvency, it would have an adverse impact on the company's operating performance. SHARE PRICE VOLATILITY. If public trading in our Common Stock resumes, the trading price of the Common Stock could be subject to wide fluctuations in response to quarter to quarter variations in operating results, changes in earnings estimates by analysts, announcements of technological innovations or new products by the Company or its competitors, general conditions in the personal products industries and other events or factors. In addition, in recent years the stock market in general has experienced extreme price fluctuations. This volatility has had a substantial effect on the market price of securities issued by many companies for reasons unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Common Stock. To date, the Company's Common Stock has not traded in sufficient volumes, or for a sufficient length of time, to produce any meaningful evidence of correlation between its price and general market volatility. PRODUCT RECALLS. As with all products subject to governmental regulatory approval, the Company's products can experience performance problems in the field that require review and possible corrective action by the manufacturer. The Company has on at least one occasion been required to recall a substantial amount of one of its products due to a labeling error. Similar product problems in the future could result in market withdrawals or recalls of products, which could have a material adverse effect on the Company's business, financial condition and results of operations. -17- PART II -- OTHER INFORMATION ITEM 5. OTHER INFORMATION Mr. Jonathan Mara, former Chief Executive Officer of the Company, tendered his resignation to the Board of Directors on February 29, 2000 as he had an opportunity to join a company where his past experience was more relevant to the business operations. Operations are presently being conducted by Jeff Kletter and Jocelyn Kletter, the Company's founders. The Company is actively engaged in a search for a new Chief Executive Officer. There can be no guarantee that the Company will find a person meeting its needs, or will be able to fill this position for a cost deemed acceptable by the Company. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KINeSYS Pharmaceuticals, Inc. ---------------------------------------------- (Registrant) May 18, 2000 /s/ Jeff Kletter - ------------------------- ------------------------------------------------ (Date) President -18- EX-27 2 EX-27
5 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 11,035 0 233,660 4,200 386,759 957,038 26,286 2,740 1,580,890 512,111 0 0 0 96 2,455,117 1,580,890 342,959 342,959 244,608 475,594 0 0 0 (377,243) 0 (377,243) 0 0 0 (377,243) (0.04) (0.04)
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