UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission File # 0-24875
BIOENVISION, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4025857
-------- ----------
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
As of October 25, 2002, the following shares of the Registrant's common stock,
par value $.001 per share (the "Common Stock"), were issued and outstanding:
16,887,786 shares of Common Stock
Traditional small Business Disclosure Format (Check One): YES [ ] No [X]
INDEX
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Cash Flows 3
Note A. General 4
Note B. Interim Financial Statements 4
Note C. Net Loss Per Share 4
Note D. Acquisition of Pathagon 5
Note E. License and Co-Development Agreements 6
Note F. Stockholders' Transactions 7
Note G. Stock-Based Compensation 7
Item 2. Management's Discussion and Analysis or Plan of Operation 9
Item 4. Controls and Procedures 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES
Bioenvision, Inc. and Subsidiaries
CONDENSED CONSOLIDATD BALANCE SHEETS
September 30, June 30
2002 2002
--------------- ---------------
ASSETS (unaudited)
Current assets
Cash and cash equivalents $ 10,926,920 $ 12,882,521
Restricted cash 290,000
Deferred costs - current 92,046 184,091
Accounts receivable 25,000 50,000
Prepaid expenses 84,685
--------------- ---------------
Total current assets 11,418,651 13,116,612
Property and equipment, net 9,511 587
Intangible assets, net 16,589,880 16,921,792
Goodwill 4,704,100 4,704,100
Security deposits 168,177
--------------- ---------------
Total assets $ 32,890,319 $ 34,743,091
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 709,717 $ 434,316
Accrued expenses 1,156,480 1,429,508
Accrued dividends payable 352,066 131,328
Directors loans payable 3,728 32,261
Officers salaries 52,068 52,090
Deferred revenue 184,091 368,182
--------------- ---------------
Total current liabilities 2,458,150 2,447,685
Deferred tax liability - non current 7,503,900 7,656,000
--------------- ---------------
Total liabilities 9,962,050 10,103,685
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Stockholders' equity
Preferred stock- $0.001 par value; 5,920,000 authorized and 5,916,966
shares issued and outstanding 5,917 5,917
Common stock - par value $0.01; authorized 50,000,000 and
shares issued and outstanding 16,887,786 shares at September
30 and June 30, 2002, respectively 16,887 16,887
Additional paid-in-capital 45,914,054 45,491,555
Accumulated deficit (23,160,935) (21,027,299)
Accumulated other comprehensive income 152,346 152,346
--------------- ---------------
Stockholders' equity 22,928,269 24,639,406
--------------- ---------------
Total liabilities and stockholders' equity $ 32,890,319 $ 34,743,091
=============== ===============
The accompanying footnotes are an integral part of these financial statements
Bioenvision, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
September 30,
2002 2001
--------------- ---------------
(unaudited) (unaudited)
Contract revenue $ 209,091 $ 184,091
--------------- ---------------
Costs and expenses
Research and development 519,867 203,981
General and administrative 1,144,756 156,718
Interest and finance charges, net 325,000 219,996
Depreciation and amortization 332,338 4,859
--------------- ---------------
Total costs and expenses 2,321,961 585,554
Other income 48,411
Net loss before income tax benefit (2,064,459) (401,463)
Income tax benefit 152,100
--------------- ---------------
Net loss (1,912,359) (401,463)
Cumulative preferred stock dividend (221,278)
--------------- ---------------
Net loss available to common stockholders $ (2,133,637) $ (401,463)
=============== ===============
Basic and diluted net loss per share (0.12) (0.05)
=============== ===============
Weighted average shares used in computing
basic and diluted net loss per share 16,887,786 8,428,086
=============== ===============
The accompanying footnotes are an integral part of these financial statements
Bioenvision, Inc. and Subsidiaries
CONDENSED CONSOLIDATD STATEMENTS OF CASH FLOWS
Three months ended
September 30,
2002 2001
--------------- ---------------
(unaudited) (unaudited)
Cash flows from operating activities
Net loss $ (1,912,359) $ (401,463)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 332,338 4,859
Amortization of deferred tax liability (152,100)
Compensation costs - options issued to nonemployees 97,500
Noncash interest and finance charge - options issued 325,000
Changes in assets and liabilities
Accounts receivable 25,000
Deferred financing fees 207,500
Deferred costs 92,045 92,046
Deferred revenue (184,091) (184,091)
Accounts payable 275,401 27,493
Prepaid expenses (84,685)
Security deposits (168,177)
Officer's salary for equity conversion (28,555) 85,000
Accrued dividends payable 221,278
Other accrued expenses and liabilities (494,845) 11,822
--------------- ---------------
Net cash used in operating activities (1,656,250) (156,834)
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Cash flows from investing activities
Capital expenditures (9,350)
Restricted cash (290,000)
--------------- ---------------
Net cash used in investing activities (299,350) --
--------------- ---------------
Cash flows from financing activities
Loan payable 144,886
Bank overdraft 12,242
--------------- ---------------
Net cash provided by financing activities -- 157,128
--------------- ---------------
Net (decrease) increase in cash and equivalents (1,955,600) 294
Cash and cash equivalents, beginning of period 12,882,521 --
--------------- ---------------
Cash and cash equivalents, end of period $ 10,926,920 $ 294
=============== ===============
Supplemental disclosure of cash flow information
Interest paid $ -- $ 12,496
=============== ===============
The accompanying footnotes are an integral part of these financial statements
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(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 SFAS
141.
Prior to the acquisition of Pathagon and the May 2002 private placement in which
the Company raised gross proceeds of $17.7 million, 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 September 30, 2002 and the consolidated results of operations for
the three months ended September 30, 2002 and 2001, and cash flows for the three
months ended September 30, 2002 and 2001.
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.
Certain amounts in the 2002 and 2001 financial statements have been reclassified
to conform to the 2002 presentation.
The consolidated results of operations for the three months ended September 30,
2002 and 2001 are not necessarily indicative of the results to be expected for
any other interim period or for the full year.
NOTE C - 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 potentially dilutive
common shares outstanding during the periods. Options and warrants to purchase
5,234,544 and 4,854,444 shares of common stock have not been included in the
calculation of net loss per share for the three months ended September 30, 2002
and 2001, respectively, as their effect would have been antidilutive.
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BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE D - ACQUISITION OF PATHAGON
September 30, 2002 June 30, 2002
------------------ ---------------
(unaudited)
Patent and licensing rights $ 17,452,673 $ 17,487,548
Less: accumulated amortization 862,794 565,756
--------------- ---------------
$ 16,589,879 $ 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.
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.
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BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE E - LICENSE AND CO-DEVELOPMENT AGREEMENTS
Clofarabine
We have a license from Southern Research Institute, 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 plan to develop 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 have 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 have 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. 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.
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.
Deferred revenue
As of September 30, 2002, the Company reported deferred revenue of $184,091
related to the contract with ILEX. The Company is amortizing the deferred
revenue, and recognizing revenues ratably, on a straight-line basis concurrent
with certain development activities described in the contract, through December
2002.
Deferred costs
Deferred costs represent costs that are associated with the negotiation and
execution of the co-development agreement with ILEX. Since the revenue related
to the co-development agreement will be realized over the life of the agreement,
the Company has deferred the costs related to the ILEX agreement. The Company
will amortize such costs ratably, on a straight-line basis concurrent with
development activities through December 2002. As of September 30, 2002, the
Company has deferred costs of $92,046.
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BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE F - 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.
NOTE G - STOCK-BASED COMPENSATION
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 Wood - 1,500,000
options; Stuart Smith - 500,000 options; and Thomas Scott Nelson -
200,000 options);
o a total of 2,654,544 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.
- 7 -
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
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.
During the period ended September 30, 2002, the Company granted options to a new
employee to purchase 380,000 shares of common stock at an exercise price of
$2.00 per share, which equaled the stock price on the date of grant.
- 8 -
BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information set forth in this Report on Form 10-QSB including, without
limitation, that contained in this Item 2, Management's Discussion and Analysis
and 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 recently 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 recently 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 Consolidated Financial
Statements for the year ended June 30, 2002 included in the Company's annual
report on Form 10-KSB.
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
is more reliably measurable than the fair value of services received, such
services will be valued based on 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, we have entered into a co-development agreement
with ILEX Oncology, Inc. ("ILEX") under which Phase II clinical trials of
Clofarabine are currently being conducted. In January 2002, the European orphan
drug application for use of Clofarabine to treat acute leukemia in adults was
approved. The drug has also been granted orphan drug status in the United
States.
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BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
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 acute myelogenous leukemia (AML) achieved a
complete remission (CR) rate, and acute lymphocytic leukemia (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 plan to launch Modrenal(TM), by late 2002 in the United Kingdom, where we
have obtained regulatory approval for its use in the treatment of
post-menopausal breast cancer. 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 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 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
- 10 -
BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
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;
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.
- 11 -
BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
The Company reported revenues of $209,000 and $184,000 for the three-month
periods ended September 30, 2002 and 2001, respectively. 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-month period ended September 30,
2002 and 2001 were $520,000 and $204,000, respectively. The increase in research
and development costs is primarily attributable to the anticipated increase in
drug development activities resulting from the capital obtained in connection
with the May 2002 financing.
Administrative expenses for the three-month period ended September 30, 2002 and
2001 were $1,145,000 and $157,000, respectively. The increase in administrative
expenses of approximately $988,000 is primarily attributable to a $98,000
non-cash stock based compensation charge resulting from the extension of the
terms of certain options issued to consultants during the quarter ended
September 30, 2002. The extension of the terms of certain options also resulted
in a non-cash stock based interest charge of $325,000. The Company also incurred
legal and other professional fees of approximately $700,000 and salaries of
$141,000 during the three-months ended September 30, 2002.
Depreciation and amortization expense totaled $332,000 and $5,000 for the
three-month period ended September 30, 2002 and 2001, respectively. The increase
in amortization is related to the amortization of certain intangible assets
acquired by the Company in connection with its acquisition of Pathagon.
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 will be 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 is scheduled to complete Phase II
trials of clofarabine and make another payment to us. A total of $184,000 of
that payment was recognized as contract revenue for the three-month period ended
September 30, 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
- 12 -
BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
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 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.
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.
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
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).
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.
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.
- 13 -
BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
Subsequent Events
Mr. Hugh Griffith commenced employment with Bioenvision Ltd., a wholly owned
subsidiary of the Company, on October 6, 2002. Mr. Griffith will serve as
Commercial Director (Europe) and will be responsible for Bioenvision's marketing
campaign for modrenal, which is approved in the United Kingdom for the treatment
of advanced post-menopausal breast cancer, and for Bioenvision's sales and
marketing initiatives for all other approved products throughout Europe which,
initially, includes methylene blue and OLIGON.
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.
- 14 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are currently no pending legal proceedings against the Company.
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
99.1 Certificate of Chief Executive Officer
99.2 Certificate of Chief Accounting Officer
(B) Reports on Form 8-K: None.
- 15 -
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: November 14, 2002 By: /s/ Christopher B. Wood M.D.
Christopher B. Wood M.D.
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2002 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: November 14, 2002 Christopher B. Wood
----------------------------
Christopher B. Wood
Chairman and Chief Executive Officer
(Principal Executive Officer)
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: November 14, 2002 /s/ David P. Luci
----------------------------
David P. Luci
Director of Finance, General Counsel
and Corporate Secretary
(Principal Accounting Officer)
EXHIBIT INDEX
Exhibit No.
99.1 Certificate of Chief Executive Officer
99.2 Certificate of Chief Accounting Officer