U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

Quarterly Report Under Section13 or 15(d)Of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2002

Commission file number:**000-31479****Biogan International, Inc.(Exact name of small business issuer as specified in itscharter)

 

**Delaware**
**58-1832055**
(State of incorporation)
      (IRS Employer ID Number)**150 King Street West    Suite 2315    Toronto, Ontario, Canada    (Address of principal executive offices)
**M5H 1J9**(Zip Code)
**(416) 214-3270**(Issuer's telephone number)

        Check whether the issuer (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past 12 months (orfor 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**| |** No **|X|**.

APPLICABLE ONLY TO CORPORATE ISSUER:

State the number of shares outstanding of each of the issuer's classes ofcommon equity, as of the latest practicable date:

As of July 19, 2002, the issuer had outstanding 108,066,199shares of its Common Stock, $0.001 par value.**PART I - FINANCIAL INFORMATION****ITEM 1. FINANCIAL STATEMENTS.****BIOGAN INTERNATIONAL, INC.(A DEVELOPMENT STAGE COMPANY)NOTES TO FINANCIAL STATEMENTS

March 31, 2002

BASIS OF PRESENTATION**
In the opinion of the company, the accompanying unaudited financialstatements contain all adjustments (which are of a normal and recurring nature)necessary for a fair presentation of the financial statements. The results ofoperations for the three-month period ended March 31, 2002 are not necessarilyindicative of the results to be expected for the entire year.

These unaudited financial statements and notes should be read in conjunctionwith the audited financial statements and notes for the company for the yearended December 31, 2001.
**1.                HISTORY

Background

Biogan International, Inc. ("Biogan" or the "company") was incorporated    under the laws of the State of Delaware on February 5, 1988 under the name    H.W. Ronney and Company and has been a development stage company since its    inception. The company changed its name to Biogan Medical International,    Inc. in March 1989 after merging with a company of that name, and then    engaged in various medical-related enterprises under the company's new name.    Prior to 1995, either directly or indirectly, through subsidiaries or other    affiliates, the company also engaged in business operations in a variety of    other industries, undergoing several corporate restructurings during that    time.

In 1995, the company began development of a new concept in electrical    motors called the IntorCorp Motor. To assist in the development of the    company's electrical motor concept, the company entered into a consulting    agreement with Technical Development Consultants, Inc. ("TDC"), an    independent electrical engineering consulting firm. As part of the research    and development process, the company's consultants formed a company called    Collective Technologies, LLC, which company acquired any intellectual    property rights held by TDC with respect to the IntorCorp Motor concept. The    company changed its name to Biogan International, Inc. in September 1997 to    avoid any confusion that could result from the use of the word "medical" in    the company's name when the company's emphasis at that time was to promote    the development of the IntorCorp Motor.

Effective February 1998, the company entered into a joint venture    agreement with Collective Technologies, LLC to continue the development of    the IntorCorp Motor through an Idaho corporation, IntorCorp, Inc., in which    the company held a 50% ownership interest. In August 1999, the company    transferred all of its rights and interest in IntorCorp, Inc., including the    company's interest in the IntorCorp Motor and the patent application to the    electromagnetic motor, in connection with an agreement with R-Tec    Engineering Corporation. Under the terms of the agreement, the parties    created an Idaho corporation, R-Tec Holding, Inc., into which the company    transferred its 50% ownership interest in IntorCorp, Inc. in exchange for    4,266,797 shares of common stock of R-Tec Holding, Inc. In September 1999,    the company distributed these shares to its stockholders. Following this    transaction, and having divested itself of certain assets related to the    electrical motor industry and disposed of all of its subsidiaries and other    interests in other affiliates and other entities, the company began to focus    its attention, experience and resources on developing a base metal mining    and smelting operation in the People's Republic of China.

Cooperative Joint Venture

Effective July 1, 2000 the company entered into an asset purchase    agreement with Hechi Industrial Co., Ltd. (Hechi) under the laws of the    People's Republic of China. A Cooperative Joint Venture, Guangxi Guanghe    Metals Co., Ltd. (GGM), was formed for the purpose of engaging in the mining    and milling of non-ferrous metals and for the purpose of operating a copper    smelter to produce blister copper in the Guangxi Province of China.

Pursuant to the transaction, the company paid $1,700,000 and issued    16,800,000 shares of the company's common stock and 30,200 shares of Series    A preferred stock to Hechi in exchange for a 92% equity interest and a 95%    profits interest in GGM.

On July 27, 2001, the company was advised that the transactions    contemplated under the original agreements were not in compliance with    certain laws of the People's Republic of China.

Following discussions with Hechi and its U.S., Chinese and Canadian legal    counsel, the company implemented the acquisition on a restructured basis on    July 19, 2002, in compliance with Chinese legal requirements, more fully    described in Note 12 "Subsequent Events." As a result, Biogan acquired, as    intended under the original agreement with Hechi, a 92% equity interest and    a 95% profits interest in GGM in exchange for 78.4% of Biogan's voting    capital stock. For accounting purposes, the transaction will be treated as a    reverse takeover, with Hechi treated as having acquired Biogan.
**2.                SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
                  B.    COOPERATIVE JOINT VENTURE INVESTMENT

The $1,700,000 referred to in Note 1 above will not be refunded        should the Chinese transaction not be consummated. The common and        preferred shares previously issued were cancelled. The common shares        will be reissued along with a new Series B Preferred Stock in connection        with the re-structuring as outlined in Note 12.

Should the transaction not be consummated, the $1,700,000 will be        written off in which case the stockholders' deficit of $2,447,000 at        March 31, 2002 will become $4,147,000. See next caption "Continued        Existence."

C.    CONTINUED EXISTENCE

The company has had recurring losses from development stage        activities, negative working capital of $4,153,000 and a stockholders'        deficit of $2,447,000. In addition, there is also an uncertainty in        connection with the company meeting its $7,300,000 funding requirement        (Note 12).

The above financial factors raise a substantial doubt about the        company's ability to continue as a going concern. The financial        statements do not include any adjustments to reflect the possible        effects on the recoverability and classification of assets or amounts        and classifications of liabilities that may result from the possible        inability of the company to continue as a going concern. Management        plans to continue in existence are set forth in Note 1 "Cooperative        Joint Venture" and Note 12 "Subsequent Events". There can be no        assurance that the Cooperative Joint Venture will be successful.
**3.                NOTES PAYABLE**Unsecured notes payable, with interest at 10% per annum, are payable on    demand, with payments applied first to any unpaid interest. As of March 31,    2002 the balance consists of the following: Ronald J. Tolman, Stockholder, November 13, 1996.  40,000Rulon L. Tolman, Stockholder, November 13, 1996.   40,000Rulon L. Tolman, Stockholder, April 29, 1999.   10,000Ronald J. Tolman, Stockholder, September 7, 1999.   5,000Hechi Industrial Company Limited, January 3, 2001.   50,000Hechi Industrial Company Limited, February 6, 2001.   19,985Gilles Laverdiere, Vice Chairman & CEO of Biogan, March 31, 2001.   60,000Hechi Industrial Company Limited, May 29, 2001.   19,982Hechi Industrial Company Limited, August 20, 2001.   25,000Total Notes Payable   $ 269,967**4.                 CONVERTIBLE DEBENTURES**
The company issued convertible debentures on March 29, 2000 to Thomson    Kernaghan & Co. Ltd. (TK) and Carbon Mesa Partners, LLC (Carbon Mesa) for    aggregate proceeds of $2,035,000 to assist in financing required    contributions to the joint venture with Hechi under its original terms. Out    of the net proceeds of $1,800,000 from the sale of the debentures,    $1,500,000 was contributed to GGM and $300,000 was retained for working    capital purposes. As of July 19, 2002, Biogan had a total of 108,066,199    shares of common stock outstanding, and debentures convertible, if    contractual limitations on conversion were disregarded, into approximately    94,800,000 shares of common stock.

Prior to September 24, 2001, Biogan defaulted under the provisions of the    debentures and the registration rights agreement due to its failure to    maintain its listing on the NASD's OTC Electronic Bulletin Board and its    failure to timely register with the SEC for resale the shares of common    stock issued or issuable upon conversion of the debentures and exercise of    the warrants. As a result of this failure, penalties totaling $956,000    became due. The company renegotiated the terms of the TK debenture and, on    September 24, 2001, amended the debenture and the Registration Rights    Agreement. Under the amendment, TK waived defaults under the TK debenture    and agreed to extend the maturity date of the TK debenture from February 28,    2002 to February 28, 2003, and provide that unpaid interest shall continue    to accrue on the TK debenture payable quarterly in arrears beginning March    31, 2002. The company also agreed to increase the principal balance of the    TK debenture by $650,000 to $2,120,000 and issue 2,500,000 shares of common    stock to TK in settlement of penalties outstanding under the registration    rights agreement. Accrued interest under both the TK and Carbon Mesa    debentures continues to be payable upon conversion in the form of either    cash or additional shares of common stock, at the company's option, at the    then-applicable conversion rate. Biogan remains in default of the Carbon    Mesa Debenture.

The company also agreed that on or before November 30, 2001, it would    file with the SEC all securities filings that are required to be filed prior    to that date and secure and maintain the listing of Biogan common stock on    an exchange or on the NASD's OTC Electronic Bulletin Board. In addition, the    company agreed to file by January 31, 2002 a registration statement    covering, among other things, the shares of common stock issued or issuable    upon conversion of the debentures and exercise of the warrants. Penalty for    failure to comply with the filing or relisting requirements, was that the    principal amount of the TK debenture would increase by $50,000 for each    30-day period of non-compliance, with a maximum aggregate increase of    $350,000. As a result of the company's failure to comply with the above    filing and listing requirements, the principal amount of the debentures has    increased by a further $200,000, resulting in a balance at March 31, 2002 of    $2,345,000. At March 31, 2002 accrued interest amounted to $270,650.
**11.                RELATED PARTY TRANSACTIONS**
a)     Thomson Kernaghan & Co. Limited (TK) owned 9.9% of        the company's common stock at March 31, 2002 (Note 10.) Disregarding        beneficial ownership limitations, the remaining debentures convert into        approximately 174,000,000 shares of common stock and the Series A        preferred stock (Note 4) converts into 13,200,000 shares of common        stock.

b)    The company's Vice Chairman and three former        officers/stockholders contributed capital of $993,810 for which no        shares of stock were issued (Note 4. "Stockholders Deficit"). Also a        $60,000 10% unsecured demand note (Note 3) and $120,000 in accrued        salary (Note 5) were due the company's Vice Chairman.

c)    There are four 10% unsecured demand notes aggregating        $114,967 due Hechi Industrial Company Limited (Note 3), a co-owner in        GGM. In addition Hechi advanced $81,747 on behalf of Biogan (Note 5).
**12.                SUBSEQUENT EVENTS**The principal amount of the TK convertible debentures has increased by a    further $300,000 and $5,000 of the Carbon Mesa debenture has been repaid    subsequent to March 31, 2002.
The company announced on May 3, 2002, that it had completed a    non-brokered private placement of 15,816,664 special warrants and 150,000    restricted common shares at a price of U.S. $0.03 per special warrant or    common share, for proceeds of U.S. $479,000. The proceeds of the offering    will be used for working capital purposes. The special warrants, which were    offered outside of the U.S., entitle holders to acquire, at no additional    cost, one common share for each special warrant held, at any time before the    earlier of five days after the issuance of a receipt for a final prospectus    from the Ontario Securities Commission and two years from closing. The    common shares issued in the U.S. are subject to restrictions on resale    imposed by the U.S. Securities Act of 1933.

On July 19, 2002 Hechi and the company implemented the revised structure    by completing the following steps:
a)    the Hechi shareholders established a wholly-owned        British Virgin Islands corporation, Fushan Industrial Co., Ltd. (Fushan);
b)    Fushan established a British Virgin Islands        corporation, Biogan International (BVI) Inc.;
        c)    The company and Hechi terminated the original Asset        Purchase Agreement;d)    The company contributed its interest in Guangxi        Guanghe Metals Co., Ltd. to Biogan International (BVI) Inc. in exchange        for a non-interest bearing promissory note in the principal amount of        $1.7 million;
e)   Hechi and the company amended and restated the        agreement establishing the Cooperative Joint Venture to provide for the        replacement of the company by Biogan (BVI) Inc. and
        f)           Fushan and the company entered into a share exchange        agreement pursuant to which the company acquired 100% of Biogan        International (BVI) Inc. in exchange for 16,800,000 shares of the        company's common stock and 3,624,000 shares of Series B Preferred stock.
The Series B Preferred Stock is convertible into 362,400,000 shares of    common stock following shareholder authorization of additional issuable    stock at Biogan's next meeting of shareholders.

In order for the company to earn its 92% equity interest in GGM, it must    contribute additional capital of $7,300,000 to GGM by September 2003. Should    the company not contribute the $7,300,000 or contribute only a partial    amount, its ownership equity will be reduced proportionately. Regardless of    any additional capital contributed, the profit and loss sharing remains at    95%. 

As a result of this transaction, the company's business will be    completely concentrated in the People's Republic of China. Consequently its    continued existence depends on the success of the Cooperative Joint Venture.    Because the company conducts its principal operations in China, it is    subject to significant risks not typically associated with investments in    equity securities of the United States and Western European companies. These    include risks associated with, among others, the political, economic and    legal environment, influence of the State Council over substantially all    aspects of its operations and competition in the mining and refining    industry.

It is the company's management belief that the events outlined above,    along with its plans to raise at least $7,300,000 for modernizing the    properties of GGM will allow the company to continue in existence. As set    forth in Note 2.C. "Continued Existence" there can be no assurance that    these plans will be successfully effected and the company will operate as a    going concern.
**ITEM 2. Management's Discussion and Analysis or Plan of Operation**       The following discussion and analysis should be read inconjunction with our financial statements and notes to financial statementsincluded elsewhere in this Annual Report on Form 10-KSB. This report and ourfinancial statements and notes to financial statements contain forward-lookingstatements, which generally include the plans and objectives of management forfuture operations, including plans and objectives relating to our futureeconomic performance and our current beliefs regarding capital we might need andrevenues we might earn pursuant to the revised joint venture and implementationof our business strategies. The forward-looking statements and associated risksmay include, relate to or be qualified by other important factors including,without limitation, anticipated trends in our financial condition and results ofoperations.
        Any of the factors described above or in the "Risk Factors"section below could cause our financial results, including our net income (loss)or growth in net income (loss) to differ materially from prior results, which inturn could, among other things, cause the price of our common stock to fluctuatesubstantially.
**Overview**
        We were incorporated on February 5, 1988 under the laws ofthe State of Delaware. Historically, we had been engaged in medical and medicalrelated enterprises and subsequently the development of electrical motors. In1999, we entered into certain transactions with R-Tec Corporation through whichwe divested ourselves of assets related to the electrical motor industry.

        In the year 2000, we entered into a joint venture agreementwith Hechi Industrial Co. Ltd, a mining company operating in the GuangxiProvince of China, in anticipation of changing the focus of our business to thesmelting and mining of non-ferrous metals in China. However, in July 2001, wewere advised that the transactions were not in compliance with the laws of thePRC. Following discussion with Hechi and our U.S., Chinese and Canadian legalcounsel, on July 19, 2002, we implemented our transaction with Hechi on arestructured basis, in compliance with Chinese legal requirements. Hechi and theCompany implemented the revised structure for the acquisition by completing thefollowing steps: (1) the Hechi shareholders established a wholly-owned BritishVirgin Islands corporation, Fushan Industrial Co. Ltd.; or Fushan, (2) Fushanestablished a British Virgin Islands corporation, Biogan International (BVI)Inc., or Biogan (BVI); (3) the company and Hechi terminated the Asset PurchaseAgreement; (4) the company contributed its interest in GGM to Biogan (BVI) inexchange for a non-interest bearing demand promissory note in the principalamount of $1.7 million; (5) Hechi and the company amended and restated theagreement establishing GGM to provide for the replacement of the company byBiogan (BVI); and (6) Fushan and the company entered into a share exchangeagreement dated July 19, 2002 pursuant to which the company acquired 100% ofBiogan (BVI) in exchange for 16,800,000 shares of the company's common stock,3,624,000 shares of the company's Series B Convertible Preferred Stock andadditional capital contributions of $7,300,000 which are to be paid by September1, 2003. 

        The Series B Convertible Preferred Stock is convertible into362,400,000 shares of our common stock following stockholder authorization ofadditional issuable common stock at our next meeting of stockholders.Accordingly, as a result of these transactions, we acquired, as intended underthe original agreement with Hechi, a 92% equity interest and a 95% profitsinterest in GGM in exchange for 78.4% of our voting capital stock (assuming theconversion of all of the outstanding shares of Series A Convertible PreferredStock and all of the outstanding shares of Series B Convertible PreferredStock). For accounting purposes the transaction will be accounted for as areverse takeover with Hechi treated as having acquired Biogan.
**Results of Operations
*Three Months Ended March 31, 2002 Compared to the Three Months Ended March  31, 2001*
        We had no significant revenues in the three-month periodended March 31, 2002. For the three month period ended March 31, 2002, we had anet loss of $485,548, compared to a net loss of $357,698 for the three monthperiod ended March 31 ,2001. The increased loss in the first quarter of 2002relative to the first quarter 2001, primarily reflects penalties related todebentures issued by the company in March 2000. 

        Effective July 1, 2000, we entered into an asset purchaseagreement with Hechi. The Asset Purchase Agreement provided for our acquisitionof certain of Hechi's assets, including a 9% interest in Gaofeng Mining CompanyLimited (which owns and operates the Gaofeng mine and processing facilities) a100% interest in the Wuxu Mine and ore processing facilities and a 100% interestin the Hechi copper smelter. On July 27, 2001, we were advised that thetransactions contemplated under the original agreements were not in compliancewith certain laws of the PRC and, therefore, void. Between the effective date ofthe acquisition agreement and prior to the determination that the transactionwas void under the laws of the PRC, we believed that we had properly consummatedthe joint venture transactions with Hechi and, therefore, had focused corporateresources entirely upon managing the mining operations of Hechi and did notengage in any other business operations. Since July 27, 2001 we have focused ourresources on restructuring the transaction with Hechi. In effecting thetransaction in its original form and subsequently restructuring it, we incurredsubstantial expenses in fiscal years 2000, 2001 and in the first quarter of2002, which contributed significantly to our losses over these periods. Inaddition, because the original transaction was deemed void we did not benefitfrom revenue generated by Hechi during 2000 and 2001.
**Employees

        The company currently has 3 full time employees. As aresult of our transaction with Hechi, substantially all of our personnel will belocated in China. As of June 2002, GGM employed 1068 people, of which 60 wereemployed at the Wuxu mineral processing mill, 683 at the Gaofeng mine and 325 atthe Hechi copper smelter. Of these 28 were employed in an administrativecapacity.
**Liquidity and Capital Resources**
        During and since 1999, we have funded our activitiesprimarily from loans from private parties in exchange for promissory notes, andcapital contributions from Gilles Laverdiere, our current Vice Chairman andChief Executive Officer. In March 2000, we completed an offering of twodebentures in the initial principal amounts of $2,000,000 and $35,000,respectively. From the net proceeds of $1,800,000 from the sale of thedebentures, we contributed $1,500,000 to GGM, which was used primarily topurchase metal concentrates, and we retained $300,000 for working capitalpurposes.

        On August 18, 2000 and December 5, 2000, TK converted anaggregate of $530,000 of the principal balance of its debenture plus relatedinterest into 3,379,489 shares of our common stock. In 2000 we repaid $5,000 ofthe $35,000 principal amount of the Carbon Mesa Debenture. An additional $10,000was paid on the Carbon Mesa Debenture in 2002. Under amendments to the TKdebenture and registration rights agreement, TK waived defaults under thedebenture and agreed to extend its maturity date from February 28, 2002 toFebruary 28, 2003, and provided that unpaid interest would continue to accrue onthe TK debenture payable quarterly in arrears beginning March 31, 2002. We alsoagreed to increase the principal balance of the TK debenture by $650,000 to$2,120,000 and issue 2,500,000 shares of common stock to TK in settlement ofpenalties outstanding under the registration rights agreement. Accrued interestunder both the TK and Carbon Mesa debentures continues to be payable uponconversion in the form of either cash or additional shares of our common stock,at our option, at the then-applicable conversion rate. We remain in default ofthe Carbon Mesa Debenture.

        In addition, we agreed that on or before November 30, 2001,we would file with the SEC all securities filings that are required to be filedprior to that date and secure and maintain the listing of our common stock on anexchange or on the NASD's OTC Electronic Bulletin Board. In addition, we agreedto file by January 31, 2002 a registration statement covering, among otherthings, the shares of common stock issued or issuable upon conversion of thedebentures and exercise of the warrants. Penalty for failure to comply with thefiling or relisting requirements, was that the principal amount of the TKdebenture would increase by $50,000 for each 30-day period of non-compliance,with a maximum aggregate increase of $350,000. As a result of our failure tocomply with the above filing and listing requirements, the principal amount ofthe TK debenture has increased by $350,000, to $2,470,000.

        On May 3, 2002 we raised $479,000 pursuant to a privateplacement. These funds will be used by the company to pay expenses related tothe implementation of the revised structure and for general expenses includingoverhead, travel expenses and professional fees.

        The execution and success of our strategy is largelydependent on our ability to raise necessary funds. The company intends tocontribute $7,300,000 to GGM. Currently the assets of GGM are self sustainingand can continue to be so for the foreseeable future. However, because ofcapital limitations these assets are operating below capacity and are thereforeearning less revenue and are less profitable than they could be given additionalcapital. It is our expectation that both revenue and profitability will risewith the introduction of additional capital in an amount that will providereasonable returns on the capital investment. Additionally, management expectsto diversify its product offering in an attempt to smooth out the effects ofmarket cyclicality. To the extent we are not successful in raising capital tofurther contribute to the GGM we will continue to operate our assets at theircurrent capacity until such time as additional capital becomes available. In theevent, we do not contribute the agreed to $7,300,000 to GGM by September 1, 2003our equity interest in GGM will be proportionately reduced but will in no eventbe less than 70%. Our profits interest in GGM will remain fixed at 95%regardless of the amount and timing of our capital contributions. In addition,under Chinese law, in the event a joint venture party fails to make an agreed tocapital contribution the government may in some cases revoke the joint venturelicense forcing the joint venture to begin winding-up proceedings. The jointventure parties may, in such cases, renegotiate the terms of the capitalcontribution subject to approval from the relevant authorities. There can be noassurance that we will be able to obtain public or private third-party sourcesof financing or that favorable terms for such financing will be available. If weraise additional funds by issuing equity or convertible debt securities, optionsor warrants, further dilution to our existing stockholders may result. Inaddition, any debt financing or other financing of securities senior to commonstock may include financial and other covenants that will restrict ourflexibility. Any failure to comply with these covenants would have a materialadverse effect on our business, prospects, financial condition and results ofoperations. If adequate funds are not available, we may be required to delay,scale back or eliminate portions of our planned operations or to obtain fundsthrough arrangements with partners or others that may require us to relinquishrights to some of our assets. Accordingly, the inability to obtain financingcould result in a significant loss of ownership and/or control of our assets andcould also adversely affect our ability to fund our planned operations.

 

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

        None

Item 2. CHANGES IN SECURITIES

        Not applicable
Item 3. DEFAULTS ON SENIOR SECURITIES

        None

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote of security holders during this period.

Item 5. OTHER INFORMATION

        None

 

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits filed with this report

        None

(b) Reports on Form 8-K

        None

SIGNATURES

In accordance with the requirements of the SecuritiesExchange Act of 1934, the Registrant caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

  

Biogan International, Inc.

 

(Registrant)

Date: August 2, 2002  

   /s/ Gilles Laverdiere                

  

Gilles Laverdiere

  

Vice Chairman and Chief Executive Officer

 

Date: August 2, 2002  

   /s/ Robert Doyle                   

  

Robert Doyle

  

Executive Vice-President and Chief Financial Officer**********