FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission File # 0-24875
BIOENVISION, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-4025857
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State or other jurisdiction IRS
of incorporation or organization Employer ID No.
509 Madison Avenue Suite 404 New York, N.Y. 10022
_________________________________________________
(Address of principal executive offices)
(Issuer's Telephone Number) (212) 750-6700
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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 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
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As of April 28, 2003, there were 17,087,786 shares of the issuer's common stock,
par value $.001 per share (the "Common Stock") outstanding.
Transitional small Business Disclosure Format (Check One): YES [ ] No [X]
C O N T E N T S
Page
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Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition or Plan of Operation 9 - 15
Item 4. Controls and Procedures 15
Part II - Other Information 16
Bioenvision, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2003 2002
---------------- ------------
ASSETS (unaudited)
Current assets
Cash and cash equivalents $ 8,214,270 $ 12,882,521
Restricted cash 290,000
Deferred costs - current 184,091
Accounts receivable 45,753 50,000
Prepaid expenses 45,529
------------ ------------
Total current assets 8,595,552 13,116,612
Property and equipment, net 53,248 587
Intangible assets, net 16,084,011 16,921,792
Goodwill 4,704,100 4,704,100
Security deposits 79,111
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Total assets $ 29,516,022 $ 34,743,091
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 324,693 $ 434,316
Accrued expenses 741,023 1,513,859
Accrued dividends payable 790,299 131,328
Deferred revenue - current 368,182
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Total current liabilities 1,856,015 2,447,685
Deferred tax liability - noncurrent 7,199,700 7,656,000
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Total liabilities 9,055,715 10,103,685
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Stockholders' equity
Preferred stock - $0.001 par value; 5,920,000 shares authorized
and 5,916,966 shares issued and outstanding 5,917 5,917
Common stock - par value $0.01; 50,000,000 shares authorized
and 16,887,786 shares issued and outstanding at March 31, 2003
and June 30, 2002, respectively 16,887 16,887
Additional paid-in capital 46,170,116 45,491,555
Accumulated deficit (25,884,959) (21,027,299)
Accumulated other comprehensive income 152,346 152,346
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Stockholders' equity 20,460,307 24,639,406
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Total liabilities and stockholders' equity $ 29,516,022 $ 34,743,091
============= =============
The accompanying notes are an integral part of these statements.
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Bioenvision, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
March 31, March 31,
--------------------------------- --------------------------------
2003 2002 2003 2002
------------ ------------ ------------ -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Contract revenue $ 45,753 $ 184,091 $ 463,935 $ 552,273
------------ ------------ ------------ -----------
Costs and expenses
Research and development 319,760 283,805 1,162,108 687,020
General and administrative 1,050,172 185,181 2,743,160 488,837
Depreciation and amortization 338,688 231,982 1,005,709 241,699
------------- ------------ ------------ -----------
Total costs and expenses 1,708,620 700,968 4,910,977 1,417,556
Loss from operations (1,662,867) (516,877) (4,447,042) (865,283)
Interest income (expense)
Interest and finance charges (458,628) (325,000) (912,258)
Interest income 27,875 117,054
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27,875 (458,628) (207,946) (912,258)
------------- ------------ ------------ -----------
Net loss before income tax benefit (1,634,992) (975,505) (4,654,988) (1,777,541)
Income tax benefit 152,100 456,300
------------- ------------ ------------ -----------
Net loss (1,428,892) (975,505) (4,198,668) (1,777,541)
Cumulative preferred stock dividend (216,415) (658,972)
------------- ------------ ------------ -----------
Net loss available to common stockholders $ (1,699,307) $ (975,505) $ (4,857,660) $(1,777,541)
============= ============ ============ ===========
Basic and diluted net loss per share of
common stock $(0.10) $(0.07) $(0.29) $(0.17)
===== ===== ===== =====
Weighted average shares used in
computing basic and diluted
net loss per share 16,887,786 14,045,109 16,887,786 10,435,997
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
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Bioenvision, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
March 31,
2003 2002
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(unaudited) (unaudited)
Cash flows from operating activities
Net loss $ (4,198,688) $(1,777,541)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 1,005,710 241,699
Financing charges - noncash 906,125
Amortization of deferred tax liability (456,300)
Compensation costs - options issued to nonemployees 598,559
Changes in assets and liabilities
Deferred costs 184,091 276,136
Deferred revenue (368,182) (552,273)
Accounts payable (109,623) (28,810)
Prepaid expenses (45,529)
Accounts Receivable 4,247
Security deposits (79,111)
Officer's salary - accrued 105,067
Other accrued expenses and liabilities (692,837) (1,434)
------------ ----------
Net cash used in operating activities (4,157,663) (831,031)
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Cash flows from investing activities
Purchase of intangible assets (161,183)
Capital expenditures (59,405)
Restricted cash (290,000)
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Net cash used in investing activities (510,588) -
------------ ----------
Cash flows from financing activities
Bank overdraft 33,094
Other liabilities - related party 797,937
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Net cash provided by financing activities - 831,031
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Net decrease in cash and equivalents (4,668,251) -
Cash and equivalents, beginning of period 12,882,521 -
------------ ----------
Cash and equivalents, end of period $ 8,214,270 $ -
============ ==========
Supplemental disclosure of cash flow information
Interest paid $ - $1,625
Supplemental disclosure of non-cash financing and investing activities:
Non cash conversion of officers salary into common stock $ - $ 910,681
===========
Non cash conversion of trade payables into common stock $ - $ 322,613
===========
Non cash issuance of warrants related to SCO financing agreement $ - $ 1,755,000
===========
Non cash issuance of stock related to Pathagon acquisition $ - $12,600,000
===========
The accompanying notes are an integral part of these statements.
-3-
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE A - GENERAL
Description of business
Bioenvision, Inc. ("Bioenvision" or the "Company") is an emerging
biopharmaceutical company whose primary business focus is the acquisition,
development and distribution of drugs to treat cancer. The Company has a broad
range of products and technologies under development, but its two lead drugs are
Clofarabine and Modrenal(TM). Modrenal(TM) is approved for marketing in the U.K.
for advanced breast cancer. The Company's plan is to bring Modrenal(TM) into the
U.S. to perform further clinical trials and to access the U.S. market. Most of
the Company's other drugs are now in clinical trials in various stages of
development.
The Company was incorporated as Express Finance, Inc. under the laws of the
State of Delaware on August 16, 1996, and changed its name to Ascot Group, Inc.
in August 1998 and further to Bioenvision, Inc. in December 1998.
On February 1, 2002, the Company completed the acquisition of Pathagon, Inc.
("Pathagon"), a privately held company focused on the development of novel
anti-infective products and technologies. Pathagon's principal products are
OLIGON(TM) and methylene blue. Affiliates of SCO Capital Partners LLC, the
Company's financial advisor and consultant, owned 82% of Pathagon prior to the
acquisition. The Company acquired 100% of the outstanding shares of Pathagon in
exchange for 7,000,000 shares of the Company's Common Stock. The acquisition has
been accounted for as a purchase business combination in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 141.
In May 2002, Bioenvision consummated a private placement financing pursuant to
which Bioenvision raised gross proceeds of $17.7 million and issued an aggregate
of 5,916,666 shares of Series A convertible participating preferred stock, par
value $.001 per share, for $3.00 per share and warrants to purchase an aggregate
of 5,916,666 shares of Common Stock (the "Private Placement"). See Note G below.
Prior to the acquisition of Pathagon and the Private Placement, the Company
devoted most of its efforts to establishing a new business (raising capital,
research and development, etc.) and had been a development stage enterprise.
Management believes it now has the financial resources to market some of the
Company's late-stage products, which could lead to significant revenues from
royalty payments and sales revenues. Accordingly, the financial statements no
longer reflect the required disclosure for a Development Stage Enterprise.
NOTE B - INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all the adjustments (consisting only of normal
recurring accruals) necessary to present fairly the consolidated financial
position as of March 31, 2003 and the consolidated results of operations for the
three months and nine months ended March 31, 2003 and 2002, and cash flows for
the nine months ended March 31, 2003 and 2002.
The condensed consolidated balance sheet at June 30, 2002 has been derived from
the audited financial statements at that date, but does not include all the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. For further
information, refer to the audited consolidated financial statements and
footnotes thereto included in the Form 10-KSB filed by the Company for the year
ended June 30, 2002.
The condensed consolidated results of operations for the three months and nine
months ended March 31, 2003 and 2002 are not necessarily indicative of the
results to be expected for any other interim period or for the full year.
NOTE C - STOCK BASED COMPENSATION
As permitted by SFAS No. 123, "Accounting for Stock Based Compensation", the
Company accounts for stock based compensation arrangements with employees in
accordance with provisions of Accounting Principles Board ("APB") Opinion
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No. 25, "Accounting for Stock Issued to Employees". Compensation expense for
stock options issued to employees is based on the difference on the date of
grant, between the fair value of the Company's stock and the exercise price of
the option. No stock based employee compensation cost is reflected in net loss,
as all options granted under those plans had an exercise price equal to the
market value of the underlying common stock at the date of grant. The company
accounts for equity instruments issued to non-employees in accordance with the
provisions of SFAS 123. The Company expects to continue applying the provisions
of APB 25 for equity issuances to employees. The following table illustrates the
effect on net loss and loss per share as if the fair value based method had been
applied to all outstanding and unvested awards in each period.
3 months ended March 31, 9 months ended March 31,
------------------------ ------------------------
2003 2002 2003 2002
---------- --------- ---------- ----------
Net loss as reported (1,699,307) (975,505) (4,857,660) (1,777,541)
---------- --------- ---------- ----------
Deduct: Total stock based
employee compensation
determined under fair value
based method for all awards,
net of related tax effects (152,042) - (274,267) -
---------- --------- ---------- ----------
Pro forma net loss (1,851,349) (975,505) (5,131,927) (1,777,541)
---------- --------- ---------- ----------
Loss per share:
Basic and diluted -
as reported $ (0.10) $ (0.07) $ (0.29) $ (0.17)
Basic and diluted -
pro forma $ (0.11) $ (0.07) $ (0.30) $ (0.17)
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BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE D - NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of common
shares outstanding during the periods. Diluted net loss per share is computed
using the weighted average number of common shares and potentiall dilutive
common shares outstanding during the periods. Options and warrants to purchase
6,054,544 and 4,854,444 shares of common stock have not been included in the
calculation of net loss per share for the three months and nine months ended
March 31, 2003 and 2002, respectively, as their effect would have been
antidilutive.
NOTE E - ACQUISITION OF PATHAGON
March 31, 2003 June 30, 2002
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(unaudited)
Patent and licensing rights $17,648,731 $17,487,548
Less accumulated amortization 1,564,720 565,756
----------- -----------
$16,084,011 $16,921,792
=========== ===========
On February 1, 2002, the Company completed the acquisition of Pathagon. The
acquisition was accounted for as a purchase business combination in accordance
with SFAS 141. The Company issued 7,000,000 shares of common stock to complete
the acquisition, which was valued at $12,600,000 based on the 5-day average
trading price of the stock ($1.80) surrounding November 22, 2001, the day of the
Company's announcement of the agreed-upon acquisition. The acquired patents and
licensing rights of OLIGON(TM) and methylene blue (collectively referred to as
"Purchased Technologies") were recorded at their fair market value as determined
by an outside consultant, which was approximately $17,576,000. The patent and
licensing rights acquired are being amortized over 13 years, which is the
estimated remaining contractual life of these assets. Since the estimated fair
value of the Purchased Technologies was at least equal to the amount paid, the
purchase price, net of assumed liabilities, was allocated to Purchased
Technologies. The transaction qualified as a tax-free merger that resulted in a
difference between the tax basis value of the assets acquired and the fair
market value of the patents and licensing rights. As a result, a deferred tax
liability was recorded for approximately $7,909,000. The purchase price exceeded
the fair market value of the net assets acquired, resulting in the recording of
Goodwill of $4,704,100. Pathagon had no operations other than holding the
patents and licenses acquired. As Pathagon had no operations, its pro forma
financials would not be meaningful and thus are not presented.
The Company now has the worldwide rights to the use of thiazine dyes, including
methylene blue, for in vitro and in vivo inactivation of pathogens in biological
fluids. Methylene blue is one of only two compounds used commercially to
inactivate pathogens in blood products, and is currently used in many European
countries to inactivate pathogens in fresh frozen plasma. The Company believes
that, as a result of the mechanism of action of its proprietary technology, its
systems also have the potential to inactivate many new pathogens before they are
identified and before tests have been developed to detect their presence in the
blood supply. Because the Company's systems are being designed to inactivate
rather than merely test for pathogens, the Company's systems also have the
potential to reduce the risk of transmission of pathogens that would remain
undetected by testing.
The OLIGON(TM) technology is a patented antimicrobial technology that can be
incorporated into the manufacturing process of many implantable devices. The
patented process, involving two dissimilar metals (silver and platinum) creates
an electrochemical reaction that releases silver ions that destroy bacteria,
fungi and other pathogens. The Company intends to commercialize the technology
in partnership with leading medical devices manufacturers.
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BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
On May 6, 1997, Baxter Healthcare Corporation, acting through its Edwards
Clinical-Care Division ("Edwards"), entered into an Exclusive License Agreement
with Implemed, Inc. ("Implemed"), a predecessor in interest to the Company.
Pursuant to the terms of the License Agreement, among other things, Edwards
licensed certain intellectual property technology relating to the manufacture of
antimicrobial polymers from Implemed.
On May 7, 2002, the Company executed an amendment to the original license
agreement between Oklahoma Medical Research Foundation ("OMRF") and Bridge
Therapeutic Products, Inc. ("BTP"), a predecessor of Pathagon, relating to the
licensing of methylene blue. Under the terms of the amendment, OMRF agreed to
the assignment of the original license agreement by BTP to Pathagon. Pursuant to
the amendment, the Company paid OMRF $100,000 and issued 200,000 shares of the
Company's Common Stock and a five-year warrant to purchase an additional 200,000
shares of Common Stock. The exercise price of the warrant is $2.33 per share,
subject to adjustment. The Company capitalized the costs of approximately
$1,145,600 related to this amendment as an intangible asset and will amortize
this asset over the remaining life of the methylene blue license agreement.
NOTE F - LICENSE AND CO-DEVELOPMENT AGREEMENTS
Clofarabine
We have a license from Southern Research Institute, which is located in
Birmingham, Alabama, to develop and market purine nucleoside analogs which,
based on third-party studies conducted to date, may be effective in the
treatment of leukemia and lymphoma. The lead compound of these purine-based
nucleosides is known as Clofarabine. Under the terms of the agreement with
Southern Research Institute, we were granted the exclusive worldwide license,
excluding Japan and Southeast Asia, to make, use and sell products derived from
the technology for a term expiring on the date of expiration of the last patent
covered by the license (subject to earlier termination under certain
circumstances), and to utilize technical information related to the technology
to obtain patent and other proprietary rights to products developed by us and by
Southern Research Institute from the technology. We are developing Clofarabine
initially for the treatment of leukemia and lymphoma and to study its potential
role in the treatment of solid tumors.
To facilitate the development of Clofarabine, we entered into a co-development
agreement with ILEX Oncology, Inc. ("ILEX") in March 2001. Under the terms of
the co-development agreement, ILEX is required to pay all development costs in
the United States and Canada, and 50% of approved development costs worldwide
outside the U.S. and Canada (excluding Japan and Southeast Asia). ILEX is
responsible for conducting all clinical trials and the filing and prosecution of
applications with applicable regulatory authorities in the United States and
Canada. The Company retains the right to handle those matters in all territories
outside the United States and Canada (excluding Japan and Southeast Asia). The
Company retained the exclusive manufacturing and distribution rights in Europe
and elsewhere worldwide, except for the United States, Canada, Japan and
Southeast Asia. Under the co-development agreement, ILEX will receive certain
rights if it performs its development obligations in accordance with that
agreement. The Company would be required to pay ILEX a royalty on sales outside
the U.S., Canada, Japan and Southeast Asia. In turn, ILEX, which would receive
U.S. and Canadian distribution rights, would pay the Company a royalty on sales
in the U.S. and Canada. In addition, the Company is entitled to certain
milestone payments and is currently discussing such payments with ILEX. The
Company also granted ILEX an option to purchase $1 million of Common Stock after
completion of the pivotal Phase II clinical trial, and ILEX has an additional
option to purchase $2 million of Common Stock after the filing of a new drug
application in the United States for the use of Clofarabine in the treatment of
lymphocytic leukemia. The exercise price per share for each option is determined
by a formula based around the date of exercise. Under the co-development
agreement, ILEX also pays royalties to Southern Research Institute based on
certain milestones. The Company continues to pay royalties to Southern Research
Institute in respect to Clofarabine.
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BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
Modrenal(TM)
We hold an exclusive license, until the expiration of existing and new patents
related to Modrenal(TM) (trilostane), to market trilostane in major
international territories, and an agreement with a United Kingdom company to
co-develop trilostane for other therapeutic indications. Trilostane currently is
manufactured by third-party contractors in accordance with good manufacturing
practices. We have no plans to establish our own manufacturing facility for
trilostane, but will continue to use third-party contractors.
NOTE G - STOCKHOLDERS' TRANSACTIONS
On March 12, 2002, a majority of the Company's stockholders delivered a written
consent to authorize amendment of the Company's certificate of incorporation,
approved by the Company's Board of Directors, to increase the number of
authorized shares of common stock from 25,000,000 to 50,000,000 and to authorize
the issuance of 10,000,000 shares of the Company's Preferred Stock. The
shareholder action became effective, and the amendment was filed and became
effective, on April 30, 2002.
Preferred Stock
On May 7, 2002, the Company authorized the issuance and sale of up to 5,920,000
shares of Series A Convertible Participating Preferred Stock, par value $0.001
per share ("Series A Preferred Stock"). Series A Preferred Stock may be
converted into two shares of common stock at an initial conversion price of
$1.50 per share of common stock, subject to adjustment for stock splits, stock
dividends, mergers, issuances of cheap stock and other similar transactions.
Holders of Series A Preferred Stock also received, in respect of each share of
Series A Preferred Stock purchased in the May 2002 Private Placement by the
Company, one warrant to purchase one share of the Company's common stock at an
initial exercise price of $2.00, subject to adjustment. The purchasers of Series
A Preferred Stock also received certain registration rights.
In May 2002, Bioenvision issued an aggregate of 5,916,666 shares of Series A
convertible participating preferred stock for $3.00 per share and warrants to
purchase an aggregate of 5,916,666 shares of common stock in a private placement
financing. The preferred stock has a par value of $.001 per share and generally
carries rights to vote with the holders of common stock as one class on a
two-for-one basis. The preferred stock is convertible into the Company's common
stock on a two-for-one basis subject to certain adjustments at the earlier to
occur of (i) at the election of each holder from and after the issuance date, or
(ii) the date at any time after the one-year anniversary of the issuance date
upon which both (x) the average of the market price for a share of common stock
for thirty consecutive trading days exceeds $10.00 per share, subject to certain
adjustments, and (y) the average of the trading volume for the Company's common
stock during such period exceeds 150,000, subject to certain adjustments.
Upon conversion, the holder of the preferred stock will be required to pay to
the Company, in cash, a conversion price equal to $1.50 per share of common
stock into which the shares of preferred stock are convertible.
The Company is required to accrue for and pay a dividend of 5%, subject to
certain adjustments, on its cumulative Series A Convertible Participating
Preferred Stock. In the event of a voluntary or involuntary liquidation or
dissolution of the Company, before any distribution of assets shall be made to
the holders of the Company's securities which are junior to the preferred stock
(such as the common stock), holders of the preferred stock shall be paid out of
the assets of the Company legally available for distribution to the Company's
stockholders an amount per share equal to the initial original issue price
($3.00) subject to certain adjustments plus all accrued but unpaid dividends on
such preferred stock.
-8-
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE H - EQUITY TRANSACTIONS
In April 2001, in accordance with the terms of the Company's stock option plan,
the Company issued the following options at an exercise price of $1.25 per
option share, which immediately vested:
o A total of 2,200,000 options to employees (Christopher B. Wood -
1,500,000 options; Stuart Smith - 500,000 options; and Thomas Scott
Nelson - 200,000 options);
o A total of 2,154,544 options to certain consultants to the Company; and
o A total of 500,000 options to Phoenix Ventures, which were issued in
connection with a credit facility made available to the Company by Glen
Investments Limited, a Jersey (Channel Islands) corporation wholly
owned by Kevin R. Leech, a U.K. citizen and one of the Company's
stockholders, which facility was terminated in August 2001.
Originally, the terms of the options were that each option could be exercised
after April 30, 2001 for a period of three years, whereby the options would no
longer be able to be exercised after April 30, 2004 unless otherwise agreed to
with the Company. In July 2002, the Company changed the three-year term to a
five-year term. The extension of the foregoing options to a five-year term
required the Company to record additional compensation, interest and finance
charges and consulting fees and expenses of $422,500 in the quarter ended
September 30, 2002.
In May 2002, the Company authorized the issuance of 200,000 shares of common
stock to a consultant for services to be provided to the Company through June
30, 2003. Compensation expense of $80,556 was recorded as consulting fees
related to this award for the year ended June 30, 2002. Through the nine months
ended March 31, 2003 an additional charge of $137,000 was recorded.
During the three months ended September 30, 2002, the Company granted options to
David Luci to purchase 380,000 shares of common stock at an exercise price of
$1.95 per share, which equaled the stock price on the date of grant. Of this
amount, 50,000 options vested on July 1, 2002 and the remaining 330,000 options
vest ratably over a three-year period on each anniversary date. On March 31,
2003, the Company entered into an Employment Agreement with Mr. Luci, pursuant
to which, among other things, the exercise price for all of the 380,000 options
were changed to $0.735 per share, which equaled the stock price on that date. In
addition, the Company issued an additional 120,000 options at an exercise price
of $.735 per share which vest immediately. As a result of the repricing of all
of the 380,000 options, the Company will remeasure the intrinsic value of these
options at the end of each reporting period and will record a change for
compensation expense to the extent the vested portion of the options are in the
money.
During the three months ended December 31, 2002, the Company granted 800,000
options to employees to purchase 800,000 shares of common stock at an exercise
price of $1.45 per share, which equaled the stock price on the date of grant.
The options vest equally over three years on their respective anniversary dates.
On December 31, 2002 the Company issued 200,000 options to purchase 200,000
shares of common stock to a consultant to the Company. The options have an
exercise price of $2.00 and vest ratably over a three-year period on each
anniversary date. Compensation expense of $14,000 was recorded as consulting
fees for the three months ended March 31, 2003.
During the three months ended March 31, 2003, the Company also issued 20,000
options to another employee to purchase 20,000 shares of common stock at an
exercise price of $1.42 per share. Of this amount, 10,000 options vested on
January 9, 2003 and the remaining 10,000 options will vest on January 9, 2004
NOTE I - RELATED PARTY TRANSACTIONS
On December 31, 2002, the Company entered into a one-year employment agreement
with its Chairman and Chief Executive Officer, Dr. Christopher Wood. The
agreement calls for Dr. Wood to be paid a base salary of $225,000, and an annual
incentive bonus to be determined by the Company's compensation committee and
approved by its Board of Directors. In
-9-
addition, Dr. Wood was issued 500,000 options to purchase 500,000 shares of
common stock at an exercise price equal to the average of the high and low bid
price on December 31, 2002. Options vest ratably over a three-year period on
each anniversary date.
On March 31, 2003, the Company entered into a one-year employment agreement with
its Director of Finance and General Counsel, David P. Luci. The agreement calls
for Mr. Luci to be paid a base salary of $205,200, and an annual incentive bonus
to be determined by the Company's compensation committee and approved by its
Board of Directors. In addition, Mr. Luci was issued 120,000 options to purchase
120,000 shares of common stock at an exercise price equal to the average of the
high and low bid price on March 31, 2003 and Mr. Luci's then-existing 380,000
options were repriced to an exercise price equal to the average of the high and
low bid price on March 31, 2003 (the date of the agreement). The 120,000 newly
issued options vest immediately on the effective date of the agreement and, of
the 380,000 options, 50,000 vest immediately and the remaining 330,000 options
vest ratably over a three-year period on each anniversary date.
NOTE J - NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement of Financial Accounting Standards 145
"Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections" ("SFAS 145"). This Statement rescinds FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and
an amendment of that Statement, FASB Statement No.64, "Extinguishment of Debt
Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds FASB
Statement No.44, "Accounting for Intangible Assets of Motor Carriers." This
Statement amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Effective July 1, 2002, the Company adopted the provisions of SFAS
145 which did not have an impact on the results of operations or financial
position of the Company for the three months ended March 31, 2003.
In July 2002, the FASB Issued Statement 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Cost
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
principal difference between this Statement and Issue 94-3 relates to its
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue
94-3 was recognized at the date of an entity's commitment to an exit plan. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. Effective January 1, 2003, the Company
adopted the provisions of SFAS 146 which did not have an impact on the results
of operations or financial position of the Company for the three months ended
March 31, 2003.
In November 2002, the FASB issued Interpretation No. 45, "Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires that certain guarantees be
initially recorded at fair value, which is different from the general current
practice of recording a liability only when a loss is probable and reasonably
estimable. FIN 45 also requires a guarantor to make significant new disclosures
for virtually all guarantees. The Company adopted the disclosure requirements
under FIN 45 for the quarter ended March 31, 2003 and will adopt the initial
recognition and initial measurement provisions for any guarantees issued or
modified after March 31, 2003. The adoption of FIN 45 is not expected to have a
material impact on the results of operations or financial position of the
Company.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation Transition and Disclosure" ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock Based Compensation," to provide
alternative methods of transition to SFAS 123's fair value method of accounting
for stock-based employee compensation. SFAS 148 also amends the disclosure
provisions of SFAS 123 and APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure on the summary of significant accounting policies of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. While SFAS 148 does not amend SFAS 123 to require
companies to account for employee stock options using the fair value method, the
disclosure provisions of SFAS 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for the
compensation using the fair value method of SFAS 123 or the intrinsic value
method of APB Opinion 25. The Company adopted the required disclosure provisions
of SFAS 148. See Note C.
-10-
In January 2003, the FASB issued interpretation No. 46, "Consolidation of
Variable Interest Entities--An Interpretation of ARB No. 51" ("FIN 46"), which
addresses consolidation of variable interest entities. FIN 46 expands the
criteria for consideration in determining whether a variable interest entity
should be consolidated by a business entity, and requires existing
unconsolidated variable interest entities (which include, but are not limited
to, Special Purpose Entities, or SPE's) to be consolidated by their primary
beneficiaries if the entities do not effectively disburse risks among parties
involved. This interpretation applies immediately to variable interest entities
created after January 31, 2003 and variable interest entities in which an
enterprise obtains and interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The adoption of FIN 46 is not expected to have a
material impact on the results of operation or financial position of the
Company.
NOTE K - COMMITMENTS
The Company has the following commitments as of March 31, 2003:
Payments Due in
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
Total 2003 2004 2005 2006
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
Employee Contracts 430,200 378,900 51,300 - -
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
Occupancy Lease 409,100 119,800 163,800 125,500 -
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
Total 839,300 498,700 215,100 125,500 -
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
In management's opinion, cash flows from operations and borrowing capacity
combined with cash on hand will provide adequate flexibility for funding the
Company's working capital obligations for the next twelve months. However, there
can be no assurance that suitable debt or equity financing will be available for
the Company. The Company has a commitment under its operating lease with the New
York office. The Company leases 3,299 square feet under a lease that expires on
September 30, 2005. The Company is a party to an additional month-to-month lease
agreement for its subsidiary, Bioenvision, Ltd.
NOTE L- SUBSEQUENT EVENTS
In January 2003, the Company entered into an agreement with RRD International
LLC ("RRD"), pursuant to which RRD serves as the global product development
consultant to the Company in connection with the development of clofarabine,
Modrenal (TM) and OLIGON and assists with designing and managing the Company's
clinical development program for the Company's products. On April 2, 2003, the
Company and RRD further memorialized their agreement pursuant to a formal Master
Services Agreement and Registration Rights Agreement and, in connection
therewith, the Company issued a Warrant to RRD pursuant to which RRD has the
right to acquire 175,000 shares of the Company's Common Stock at an exercise
price of $2.00 per share, which warrant includes registration rights under
certain circumstances.
On April 1, 2003, RLB Capital, Inc. filed a complaint against the Company in the
Supreme Court of the State of New York (Index No. 601058/03). The Complaint
alleges a breach of contract by the Company and demands judgment against the
Company for $112,500 and warrants to acquire 75,000 shares of the Company's
common stock. The Company believes that the grounds for the complaint are
meritless and intends to defend this matter vigorously. If the Company is not
able to successfully defend this complaint, management does not believe that any
resulting litigation or settlement would have a material adverse effect on the
Company, its financial position or results of operations.
-11-
BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION
The information set forth in this Quarterly Report on Form 10-QSB including,
without limitation, that contained in this Item 2, Management's Discussion and
Analysis or Plan of Operation, contains forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results may
differ materially from those projected in the forward-looking statements as a
result of certain risks and uncertainties set forth in this report. Although
management believes that the assumptions made and expectations reflected in the
forward-looking statements are reasonable, there is no assurance that the
underlying assumptions will, in fact, prove to be correct or that actual future
results will not be different from the expectations expressed in this report.
Summary of Significant Accounting Policies
Financial Reporting Release No. 60, which was released by the Securities and
Exchange Commission, requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of the consolidated
financial statements. In addition, Financial Reporting Release No. 61 was
released by the SEC, which requires all companies to include a discussion to
address, among other things, liquidity, off-balance sheet arrangements,
contractual obligations and commercial commitments. The following discussion is
intended to supplement the summary of significant accounting policies as
described in Note 1 of the Notes To Condensed Consolidated Financial Statements
for the year ended June 30, 2002 included in the Company's annual report on Form
10-KSB for the period then ended.
These policies were selected because they represent the more significant
accounting policies and methods that are broadly applied in the preparation of
the consolidated financial statements.
Revenue Recognition. Non-refundable up-front payments received in connection
with research and development collaboration agreements are deferred and
recognized on a straight-line basis over the relevant periods in the agreement,
generally the research or development period. Milestone and royalty payments, if
any, are recognized pursuant to collaborative agreements upon the achievement of
the specified milestones or sales transaction.
Stock Based Compensation. In accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, the Company applies Accounting Principles Board Opinion 25 and
related interpretations in accounting for its stock option plan and,
accordingly, does not recognize compensation expense for employee stock options
granted with exercise prices equal to or greater than fair market value.
Non-employee stock-based compensation arrangements are accounted for in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
Under EITF No. 96-18, as amended, where the fair value of the equity instrument.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles of the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates, and such differences may be material to the
financial statements.
Overview
We are an emerging biopharmaceutical company. Our primary business focus is the
acquisition, development and distribution of drugs to treat cancer. We have a
broad range of products and technologies under development, but our two lead
drugs are Clofarabine and Modrenal(TM).
Clofarabine
Based on third party studies conducted to date, we believe that Clofarabine may
be effective in the treatment of leukemia and lymphoma. To expedite the
commercialization Clofarabine in North America, we have entered into a
co-development agreement with ILEX Oncology, Inc. ("ILEX") under which Phase II
clinical trials of Clofarabine are currently being
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BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
conducted. In Europe, the European Medicines Evaluation Agency (the "EMEA")
granted a clinical trial exemption (a "CTX") and orphan drug designation for
acute lymphocytic leukemia ("ALL"), which is held by the Company, and the
Company has applied for orphan drug designation for acute myelogenous leukemia
("AML"). The Company plans to commence clinical trials in adult AML and
pediatric acute leukemias in the second quarter of calendar year 2003. Receipt
of orphan drug designation in Europe provides, for ALL, and would provide, for
AML, the Company with a ten-year exclusivity period to market clofarabine for
each such indication. Such marketing exclusivity would commence on the date of
receipt of marketing approval for each indication. The EMEA granted orphan drug
designation for ALL in January 2002 and the drug has also been granted orphan
drug designation in the United States. Receipt of orphan drug designation in
Europe for any indication includes a significant financial benefit to the
Company because the Company is eligible to receive a fee waiver from the EMEA
for each indication that receives the orphan drug designation. In addition, the
Company has been granted a clinical trials exemption certificate ("CTX") from
the Medicines Control Agency ("MCA") in the United Kingdom, which allows
clinical trials to be performed with clofarabine.
In January 2003, the Company had a pre-registration meeting with the EMEA
regarding its European development strategy, which is part of the global
development strategy which the Company has implemented with ILEX for the
development of clofarabine. In addition, the Company has retained RRD
International LLC as global product development consultants to the Company in
connection with the global development strategy for clofarabine and the
Company's platform of other products and to assist the Company with its clinical
development program for clofarabine and other products. In addition, the Company
entered into a Consulting Agreement, dated December 31, 2002, with Dr. Deidre
Tessman, pursuant to which Dr. Tessman serves as the Company's agent to
administer its CTX and orphan drug designation and is part of the Company's
management team which oversees the administration of clinical trials for
clofarabine.
Extensive pre-clinical and mechanistic studies have provided much of the
rationale for the rapidly advancing Clofarabine clinical development program.
Published data and information presented at recent scientific meetings suggest
that Clofarabine has broader anti-cancer activity, and may be more potent than
other currently marketed purine analogues such as Fludara(TM) (fludarabine) and
Leustatin(TM) (cladribine).
Preliminary results from ongoing clinical studies indicate that Clofarabine may
be an effective treatment for acute leukemias in adult and pediatric patients
that have become resistant, or refractory, to prior treatment. According to
researchers at the MD Anderson Cancer Center, interim Phase II study results
showed that 45% of adults with AML achieved a complete remission (CR) rate, and
ALL patients achieved a 20% CR rate when treated with Clofarabine as a single
agent. Data from a separate Phase I dose-escalation study demonstrated a 25% CR
rate, and an overall response rate of 40%, in children with acute leukemias who
were refractory to previous therapy. Trials in adult and pediatric acute
leukemias are currently ongoing in the U.S. and are planned to commence in
Europe later this year. Complete remission, in this context, means complete
clearance of all leukemic cells from the blood and normalization of the blood
count, sustained for a period of more than 4 weeks. In this context, a response,
or partial response, has largely the same meaning, except that the bone marrow
may still contain more than 5% but less than 25% blast cells (leukemic cells).
Modrenal(TM)
We are launching Modrenal (TM) in May 2003 in the United Kingdom, where we have
obtained regulatory approval for its use in the treatment of post-menopausal
breast cancer. As noted above, the Company has retained RRD International LLC as
global product development consultants to the Company to assist with the global
development strategy and clinical development program for its products,
including, without limitation, Modrenal (TM). Our management believes that
Modrenal(TM) works by a unique action as compared with other commercially
available drugs to treat post-menopausal breast cancer. We believe that
Modrenal(TM) alters the way in which the female hormone, estrogen, binds to the
hormone receptor on the cell in a previously unrecognized fashion. In
particular, it changes the manner in which the hormone acts on a newly
identified second estrogen receptor, ER beta (ER(beta)). Modrenal(TM) is the
first drug to be commercially available in a new class of agents that
specifically target ER(beta). We intend to seek regulatory approval for
Modrenal(TM) in the United States as salvage therapy for hormone-sensitive
breast cancer. This would target patients that have hormone-sensitive cancers
and have become resistant, or refractory, to prior hormone treatments, such as
-13-
BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
Tamoxifen(TM) or aromatase inhibitors. We believe that the potential market for
Modrenal(TM), based upon the sales of currently available drugs for hormonal
therapy for breast cancers, is in excess of $1.8 billion of sales per annum
worldwide. The results of extensive clinical trails to date with Modrenal(TM)
illustrate that it is at least as effective in second line or third line
treatment of advanced breast cancer as the currently available hormonal
treatments, such as the SERM's and aromatase inhibitors, and more effective than
these agents in certain specific patient types, such as those who have become
Tamoxifen(TM) refractory. Furthermore, our management currently intends to price
Modrenal(TM) in such a manner as to make treatment with Modrenal(TM) compare
very favorably, on a price basis, with the cost of treatment with the existing
drugs used for second line or third line therapy. We believe that this should
result in cost benefits for physicians, patients and health-care systems.
Company Status
We have made significant progress in developing our product portfolio over the
past twelve months, and have multiple products in clinical trials. We have
incurred losses during our development stage. Our management believes that we
have the opportunity to become a leading oncology-focused pharmaceutical company
in the next five years if we successfully bring our two lead drugs to market. We
anticipate that revenues derived from the two lead drugs will permit us to
further develop the twelve other products and potential products currently in
our development portfolio. We currently plan to have as many as twelve products
at market by the end of 2006. We intend to commence marketing on of one of our
lead products, Modrenal(TM), and to continue developing our existing platform
technologies with a primary business focus on drugs to treat cancer, and
commercializing products derived from such technologies. A key element of our
business strategy is to continue to acquire, obtain licenses for, and develop
new technologies and products that we believe offer unique market opportunities
and/or complement our existing product lines.
As a result of the acquisition of Pathagon, Inc. in February 2002, we have
several anti-infective technologies. These include the OLIGON(TM) technology, an
advanced biomaterial that has been approved for certain indications by the FDA
in the U.S., and is being sold by a product co-development partner, and the use
of thiazine dyes, such as methylene blue, which are used for in vitro and in
vivos inactivation of pathogens (viruses, bacteria and fungus) in biological
fluids. It is not the Company's strategy to sell devices or to expand into the
anit-infective market per se, but the technology obtained in the Pathagon
acquisition has specific application for support of the cancer patient and
oncology treatment. We have had discussions with potential product
co-development partners from time to time, and plan to continue to explore the
possibilities for co-development and sub-licensing in order to implement our
development plans. In addition, we believe that some of our products may have
applications in treating non-cancer conditions in humans and in animals. Those
conditions are outside our core business focus and we do not presently intend to
devote a substantial portion of our resources to addressing those conditions.
However, we have established an animal healthcare division to exploit some of
those opportunities.
You should consider the likelihood of our future success to be highly
speculative in light of our limited operating history, as well as the limited
resources, problems, expenses, risks and complications frequently encountered by
similarly situated companies. To address these risks, we must, among other
things:
o satisfy our future capital requirements for the implementation of our
business plan;
o commercialize our existing products;
o complete development of products presently in our pipeline and obtain
necessary regulatory approvals for use;
o implement and successfully execute our business and marketing strategy
to commercialize products;
o establish and maintain our client base;
-14-
BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
o continue to develop new products and upgrade our existing products;
o respond to industry and competitive developments; and
o attract, retain, and motivate qualified personnel.
We may not be successful in addressing these risks. If we were unable to do so,
our business prospects, financial condition and results of operations would be
materially adversely affected. The likelihood of our success must be considered
in light of the development cycles of new pharmaceutical products and
technologies and the competitive and regulatory environment in which we operate.
Results of Operations
We have acquired development and marketing rights to a portfolio of four
platform technologies developed over the past fifteen years, from which a range
of products have been derived and additional products may be developed in the
future. Although we intend to commence marketing our lead product, Modrenal(TM),
and to continue developing our existing platform technologies and
commercializing products derived from such technologies, a key element of our
business strategy is to continue to acquire, obtain licenses for, and develop
new technologies and products that we believe offer unique market opportunities
and/or complement our existing product lines. Once a product or technology has
been launched into the market for a particular disease indication, we plan to
work with numerous collaborators, both pharmaceutical and clinical, in the
oncology community to extend the permitted uses of the product to other
indications. In order to market our products effectively, we intend to develop
marketing alliances with strategic partners and may co-promote and/or co-market
in certain territories.
The Company reported revenues of $46,000 and $184,000 for the three-month period
ended March 31, 2003 and 2002, respectively. For the nine months ended March 31,
2003 and 2002, the company reported revenues of $464,000 and $552,000. Revenues
reflect our agreements with our co-development partners and/or licensees in
connection with our platform of drugs and technologies.
Research and development costs for the three-months ended March 31, 2003 and
2002 were $320,000 and $284,000, respectively, an increase of $36,000. The
increase is primarily attributable to the Company's retaining RRD International,
LLC to assist with its global development strategy, generally, and
implementation of clinical trials for clofarabine and modrenal.
Research and development costs for the nine-months ended March 31, 2003 and 2002
were $1,162,000 and $687,000, respectively, an increase of $475,000. The
increase reflects royalty payments under certain development contracts, the
retention of RRD International, LLC noted above, and the additional work
performed by Tessman Technologies in connection with execution of the Company's
operating strategy.
General and administrative expenses for the three-months ended March 31, 2003
and 2002 were $1,050,000 and $185,000 respectively, an increase of $865,000. The
increase is primarily attributable to the Company's re-constituting its
wholly-owned subsidiary, Bioenvision, Ltd. as a fully operational sales and
marketing subsidiary, salaries of newly-added employees, including the Company's
sales and marketing executives of $247,000, rent both at the Company's new
principle executive offices in New York, New York and new rental facility for
its sales and marketing subsidiary in Edinburgh, Scotland of $63,000, travel
($105,000), and other customary costs associated with our becoming an operating
company.
General and administrative expenses for the nine-months ended March 31, 2003 and
2002 were $2,743,000 and $489,000, respectively, an increase of $2,254,000. The
increase is primarily attributable to the matters set forth in the comparison of
the three-month period ended March 31, 2003 and 2002 noted in the preceding
paragraph. These increases, in general, reflect the Company's build out of its
management team and operating infrastructure, increased activity related to
patents and the launching of the Company's European sales and marketing office.
Depreciation and amortization expense for the three-month and nine month period
ended March 31, 2003 were $339,000 and $1,006,000 compared to the three-month
and nine-month period ended March 31, 2002 of $232,000 and $242,000. The
increase in amortization is related to the amortization of certain intangible
assets acquired by the Company in connection with its acquisition of Pathagon.
-15-
BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
Liquidity and Capital Resources
We are actively seeking strategic alliances in order to develop and market our
range of products. In August 2001, we obtained a $1 million unsecured line of
credit facility from Jano Holdings Limited, bearing interest at 8% per annum. In
November 2001, we entered into a senior, Secured Credit Facility with SCO
Capital Partners LLC. The credit facility was established for up to $1,000,000
in short term financing, in four tranches of $250,000, subject to satisfaction
of certain conditions, secured by the pledge of certain of our assets, and was
established to bear interest on drawings at a rate of 6% per annum. In addition,
our officers agreed to defer salaries, and our former outside counsel agreed to
defer certain fees, until we obtained sufficient long-term funding. Deferred
salaries and fees amounted to approximately $52,000 through June 30, 2002. In
May 2001, our officers agreed to accept 705,954 shares of our common stock in
settlement of $910,681 of the outstanding accrued salaries through June 30,
2001. The shares were issued during the quarter ended March 31, 2002. On October
17, 2001, our officers agreed to accept 134,035 shares in settlement of $154,140
of additional outstanding accrued salaries to September 30, 2001. On October 17,
2001, the board of directors approved a plan to repay certain trade debt with
shares of our common stock, and a total of 146,499 shares of common stock were
issued for the repayment of $168,473.
We received initial payment from ILEX of $1,350,000 which became non-refundable
in March 2001 upon execution of the agreement with ILEX to co develop
clofarabine. That sum was recognized as income for accounting purposes on a
straight line basis over the period from March 2001, when the payment was
received, through December 31, 2002, when ILEX was scheduled to complete pivotal
Phase II trials of clofarabine and make another payment to us. The Company is
currently in discussions with ILEX regarding the status and timing of this
scheduled payment. A total of $184,000 of that payment was recognized as
contract revenue for the three-month period ended December 31, 2002.
On May 7, 2002 the Company authorized the issuance and sale of up to 5,920,000
shares of Series A Convertible Participating Preferred Stock, par value $0.001
per share ("Series A Preferred Stock"). Series A Preferred Stock may be
converted into two shares of common stock at an initial conversion price of
$1.50 per share of common stock, subject to adjustment for stock splits, stock
dividends, mergers, issuance's of cheap stock and other similar transactions.
Holders of Series A Preferred Stock also received, in respect of each share of
Series A Preferred Stock purchased in the May 2002 Private Placement, one
warrant to purchase one share of the Company's common stock at an initial
exercise price of $2.00, per share subject to adjustment. The purchasers of
Series A Preferred Stock also received certain registration rights.
Through May 16, 2002, Bioenvision sold an aggregate of 5,916,666 shares of
Series A Preferred Stock in the May 2002 Private Placement for $3.00 per share
and warrants to purchase an aggregate of 5,916,666 shares of common stock,
resulting in aggregate gross proceeds of approximately $17,500,000. A portion of
the proceeds were used to repay in full the Jano Holdings and SCO Capital
obligations upon which such facilities were terminated, as well as to repay
$1,610,000 related to the transaction.
Our management believes that our net proceeds from the May 2002 private
placement will be sufficient to continue currently planned operations over the
next 12 months, and we will not intend to raise any additional funds during that
period in order to fund operations. However, a key element of our business
strategy is to continue to acquire, obtain licenses for, and develop new
technologies and products that we believe offer unique market opportunities
and/or complement our existing product lines. We are not presently considering
any such transactions, and we do not presently expect to acquire or sell any
significant assets over the coming 12 month period, but if any such opportunity
presents itself and we deem it to be in our interests to pursue such an
opportunity, it is possible that additional financing would be required for such
a purpose. We plan to utilize a portion of the proceeds of the May 2002 private
placement to conduct clinical trials of our receptor modulation drug,
trilostane, in the treatment of breast and prostate cancer. Further laboratory
studies will be conducted to examine the effect of the drug on the hormone
receptor.
The Company has the following commitments as of March 31, 2003:
Payments Due in
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
Total 2003 2004 2005 2006
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
Employee Contracts 430,200 378,900 51,300 - -
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
Occupancy Lease 409,100 119,800 163,800 125,500 -
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
Total 839,300 498,700 215,100 125,500 -
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
----------------------------------- ----------------- -------------------- ---------------- ------------------ ----------------
-16-
In management's opinion, cash flows from operations and borrowing capacity
combined with cash on hand will provide adequate flexibility for funding the
Company's working capital obligations for the next twelve months. However, there
can be no assurance that suitable debt or equity financing will be available for
the Company. The Company has a commitment under its operating lease with the New
York office. The Company leases 3,299 square feet under a lease that expires on
September 30, 2005. The Company is a party to an additional month-to-month lease
agreement for its subsidiary, Bioenvision, Ltd.
The Company anticipates that we may continue to incur significant operating
losses for the foreseeable future. There can be no assurance as to whether or
when we will generate material revenues or achieve profitable operations.
-17-
BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
The Company is required to accrue for and pay a dividend of 5%, subject to
certain adjustments, on its cumulative Series A Convertible Participating
Preferred Stock. In the event of a voluntary or involuntary liquidation or
dissolution of the Company, before any distribution of assets shall be made to
the holders of the Company's securities which are junior to the preferred stock
(such as the common stock), holders of the preferred stock shall be paid out of
the assets of the Company legally available for distribution to the Company's
stockholders an amount per share equal to the initial original issue price
($3.00) subject to certain adjustments plus all accrued but unpaid dividends on
such preferred stock.
Plan of Operation
We are an emerging biopharmaceutical company with a primary business focus on
the acquisition, development and distribution of drugs to treat cancer. We have
acquired development and marketing rights to a portfolio of six platform
technologies developed over the past 15 years, from which a range of products
have been derived and additional products may be developed in the future.
Although we intend to commence marketing one of our lead products, Modrenal(TM),
and to continue developing Clofarabine, and our existing platform technologies
and commercializing products derived from such technologies, a key element of
our business strategy is to continue to acquire, obtain licenses for, and
develop new technologies and products that we believe offer unique market
opportunities and/or complement our existing product lines. Once a product or
technology has been launched into the market for a particular disease
indication, we plan to work with numerous collaborators, both pharmaceutical and
clinical, in the oncology community to extend the permitted uses of the product
to other indications. In order to market our products effectively, we intend to
develop marketing alliances with strategic partners and may co-promote and/or
co-market in certain territories.
On December 1, 2002, the Company appointed Mr. Ian Abercrombie to serve as Sales
Manager (Europe). Mr. Abercrombie has joined Mr. Hugh Griffith, who serves as
the Company's Commercial Director (Europe) and, together, Messrs. Griffith and
Abercrombie are creating a worldwide marketing strategy for the Company's
products and commencing the marketing of Modrenal (TM) in the United Kingdom.
Further, Messrs. Griffith and Abercrombie are designing plans to expand the
Company's marketing strategy throughout the European Community and to commence
pre-registration marketing activities with clofarabine worldwide, except for
North America.
In addition, the Company entered into a Consulting Agreement, dated December 31,
2002, with Dr. Deidre Tessman, pursuant to which Dr. Tessman serves as the
Company's agent to administer its CTX and orphan drug designation, in each case,
for clofarabine, and is part of the Company's management team which oversees the
administration of clinical trials for clofarabine.
On March 31, 2003, the Company entered into a one-year employment agreement with
its Director of Finance and General Counsel, David P. Luci. The agreement calls
for Mr. Luci to be paid a base salary of $205,200, and an annual incentive bonus
to be determined by the Company's compensation committee and approved by its
Board of Directors. In addition, Mr. Luci was issued 120,000 options to purchase
120,000 shares of common stock at an exercise price equal to the average of the
high and low bid price on March 31, 2003 and Mr. Luci's then-existing 380,000
options were repriced to an exercise price equal to the average of the high and
low bid price on March 31, 2003 (the date of the agreement). The 120,000 newly
issued options vested immediately and, of the 380,000 options, 50,000 vested
immediately and the remaining 330,000 options vest ratably over a three-year
period on each anniversary date.
In December 2002, the Company's scientific advisory board convened at the
meeting of the American Society of Hematologists in Philadelphia, PA and
reviewed the clinical trial results to date and planned future clinical trials
for clofarabine.
In May 2003, the Company's scientific advisory board will meet to review and
discuss the forthcoming clinical trials, marketing strategy and clinical
indications for modrenal, globally, for patients with breast cancer.
The Company is launching the marketing of modrenal in the United Kingdom for
breast cancer on May 19, 2003 at the Royal College of Surgeons in London,
England.
In addition, a provisional product license has been granted in the United
Kingdom for the use of trilostane for the treatment of Cushing's disease in
dogs. In November 2001, we granted to Arnolds Ltd., a major distributor of
animal products in the United Kingdom, the right to market the drug for a six
month trial period, after which time, if the results were satisfactory to
-18-
Arnolds, we would enter into a licensing arrangement whereby Arnolds would pay
royalties to us on sales from April 2002 onward. During the trial period,
Arnolds has posted more than $400,000 of sales of the drug, which is marketed in
the United Kingdom as Veteryl(TM). Accordingly, since April 2002, we have
received royalty payments of $25,000 per calendar quarter from Arnold's pursuant
to this arrangement.
We also plan to utilize a major portion of the proceeds of the May 2002 private
placement to initiate clinical trials of Clofarabine in Europe. The emphasis
will be on the use of Clofarabine in the treatment of refractory acute leukemia
in children and adults. The drug has received orphan drug designation in Europe
for ALL and the Company has applied for orphan drug designation in Europe for
AML.
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BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
We plan to identify licensing partners for OLIGON(TM) and to continue developing
new aspects of the technology. We also plan to continue development of
methlylene blue and other products in our pipeline.
With respect to our gene therapy technology, we have completed laboratory
research that confirms proof of principal of our gene therapy technology and has
added to the pre-clinical data that will be important for any subsequent
regulatory submission. This laboratory research was required to allow the
Company and the research departments of the relevant universities assisting with
this technology to file patents for which the Company has licensing rights. We
now plan to perform additional clinical trials with the two lead products
related to this technology.
Subsequent Events
In January 2003, the Company entered into an agreement with RRD International
LLC ("RRD"), pursuant to which RRD serves as the global product development
consultant to the Company in connection with the development of clofarabine,
Modrenal (TM) and OLIGON and assists with designing and managing the Company's
clinical development program for the Company's products. On April 2, 2003, the
Company and RRD further memorialized their agreement pursuant to a formal Master
Services Agreement and Registration Rights Agreement and, in connection
therewith, the Company issued a Warrant to RRD pursuant to which RRD has the
right to acquire 175,000 shares of the Company's Common Stock at an exercise
price of $2.00 per share, which warrant includes registration rights under
certain circumstances.
On April 1, 2003, RLB Capital, Inc. filed a complaint against the Company in the
Supreme Court of the State of New York (Index No. 601058/03). The Complaint
alleges a breach of contract by the Company and demands judgment against the
Company for $112,500 and warrants to acquire 75,000 shares of the Company's
common stock. The Company believes that the grounds for the complaint are
meritless and intends to defend this matter vigorously. If the Company is not
able to successfully defend this complaint, management does not believe that any
resulting litigation or settlement would have a material adverse effect on the
Company, its financial position or results of operations.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of a date within 90 days of the filing of this
Form 10-QSB, the Company's Chief Executive Officer and Director of Finance have
concluded the Company's disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective.
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
-20-
BIOENVISION, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On April 1, 2003, RLB Capital, Inc. filed a complaint against the Company in the
Supreme Court of the State of New York (Index No. 601058/03). The Complaint
alleges a breach of contract by the Company and demands judgment against the
Company for $112,500 and warrants to acquire 75,000 shares of the Company's
common stock. The Company believes that the grounds for the complaint are
meritless and intends to defend this matter vigorously. If the Company is not
able to successfully defend this complaint, management does not believe that any
resulting litigation or settlement would have a material adverse effect on the
Company, its financial position or results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
No matter has been submitted to a vote of security holders during the period
covered by this report.
Item 5. Other information
There is no other information to report that is material to the Company's
financial condition not previously reported.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
4.1 Registration Rights Agreement, dated April 2, 2003, by and between the
Company and RRD International, LLC 4.2 Warrant, dated April 2, 2003, made by the
Company in favor of RRD International, LLC 10.1 Employment Agreement, dated as
of March 31, 2003, by and between the Company and David P. Luci 10.2 Master
Services Agreement, dated as of April 2, 2003, by and between the Company and
RRD International, LLC 99.1 Certificate of Chief Executive Officer 99.2
Certificate of Chief Accounting Officer
(B) Reports on Form 8-K: None.
-21-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 15, 2003 By: /s/ Christopher B. Wood M.D.
Christopher B. Wood M.D.
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2003 By: /s/ David P. Luci
David P. Luci
Director of Finance and General Counsel
(Principal Accounting Officer)
Certificate of Chief Executive Officer.
I, Christopher B. Wood, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Bioenvision, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14 for
the registrant and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/Christopher B. Wood
----------------------------
Christopher B. Wood
Chairman and Chief Executive Officer
(Principal Executive Officer)
2
Certificate of Chief Accounting Officer.
I, David P. Luci, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Bioenvision, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14 for
the registrant and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ David P. Luci
----------------------------
David P. Luci
Director of Finance, General Counsel and Corporate
Secretary
(Principal Accounting Officer)
3
EXHIBIT INDEX
Exhibit No.
4.1 Registration Rights Agreement, dated April 2, 2003, by and between the
Company and RRD International, LLC
4.2 Warrant, dated April 2, 2003, made by the Company in favor of RRD
International, LLC
10.1 Employment Agreement, dated as of March 31, 2003, by and between
Bioenvision, Inc. and David P. Luci
10.2 Master Services Agreement, dated as of April 2, 2003, by and between
the Company and RRD International, LLC
99.1 Certificate of Chief Executive Officer
99.2 Certificate of Chief Accounting Officer
4