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 December 31, 2004
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.
345 Park Avenue, 41st Floor, New York, NY 10154
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(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 twelve 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 _____ -
As of February 11, 2005, there were 40,432,173 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 (Unaudited) 1
Condensed Consolidated Statements of Operations (Unaudited) 2
Condensed Consolidated Statements of Stockholders Equity (Deficit) (Unaudited) 3
Condensed Consolidated Statements of Cash Flows (Unaudited) 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition or Plan of Operation 12
Item 4. Controls and Procedures 16
Part II - Other Information 18
Bioenvision, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2004 2004
----------- -----------
ASSETS (unaudited) (audited)
Current assets
Cash and cash equivalents $17,476,072 $18,875,675
Restricted cash 290,000 290,000
Deferred costs 241,824 241,824
Accounts receivable 1,285,983 2,627,773
Inventory-finished goods 62,890 -
Other current assets 503,346 253,311
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Total current assets 19,860,115 22,288,583
Property and equipment, net 71,308 47,857
Intangible assets, net 13,987,547 14,563,660
Goodwill 3,902,705 3,902,705
Security deposits 211,796 79,111
Deferred costs-long term 3,530,559 3,651,471
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Total assets $41,564,030 $44,533,387
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $414,449 $1,495,866
Accrued expenses 2,028,924 1,322,584
Accrued dividends payable 75,058 90,141
Deferred revenue 551,828 551,828
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Total current liabilities 3,070,259 3,460,419
Deferred revenue-long term 7,633,682 7,909,598
Deferred tax liability-non-current 5,505,486 5,780,799
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Total liabilities 16,209,427 17,150,816
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Stockholders' equity
Preferred stock - $0.001 par value; 20,000,000 shares 2,250 3,342
authorized; 2,250,000 and 3,341,666 shares issued and
outstanding at December 31, 2004 and June 30, 2004
(liquidation preference $6,750,000 and $10,024,998,
respectively)
Common stock - par value $0.001; 70,000,000 shares 32,491 28,316
authorized; 32,490,791 and 28,316,163 shares issued and
outstanding at December 31, 2004 and June 30, 2004,
respectively
Additional paid-in capital 73,494,899 68,517,702
Deferred compensation (179,865) (223,990)
Accumulated deficit (48,143,183) (41,082,397)
Accumulated other comprehensive income 148,011 139,598
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Stockholders' equity 25,354,603 27,382,571
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Total liabilities and stockholders' equity $41,564,030 $44,533,387
========== ==========
The accompanying notes are an integral part of these financial statements.
Bioenvision, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Six months ended
December 31, December 31,
-------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Licensing and royalty revenue $340,254 $82,495 $703,436 $136,536
Products sales 215,131 - 215,131 -
Research and development contract revenue 620,538 1,342,684 775,000
------- ------------- ----------- -------
Total revenue 1,175,923 82,495 2,261,251 911,536
Costs and expenses
Cost of products sold 130,356 - 130,356 -
Research and development 1,710,750 746,921 3,849,647 1,550,821
Selling, general and administrative 3,054,239 919,342 4,810,952 3,357,430
(includes stock based compensation
expense(income) of $1,009,308 and
$(186,054) for the three months ended
December 31, 2004 and 2003, respectively,
and $1,400,406 and $1,098,591 for the six
months ended December 31, 2004 and 2003,
respectively)
Depreciation and amortization 341,987 340,248 681,693 679,869
------- ------- ------- -------
Total costs and expenses 5,237,332 2,006,511 9,472,648 5,588,120
--------- --------- --------- ---------
Loss from operations (4,061,409) (1,924,016) (7,211,397) (4,676,584)
Interest income (expense)
Interest income 56,578 15,852 112,014 34,889
------ ------ ------- ------
Net loss before income tax benefit (4,004,831) (1,908,162) (7,099,383) (4,641,695)
Income tax benefit 141,087 134,351 275,313 268,577
------- ------- ------- -------
Net loss (3,863,744) (1,773,811) (6,824,070) (4,373,118)
Cumulative preferred stock dividend (110,375) (188,557) (236,716) (412,267)
--------- --------- --------- ---------
Net loss available to common stockholders $(3,974,119) $(1,962,368) $(7,060,786) $(4,785,385)
=========== =========== =========== ===========
Basic and diluted net loss per share of
common stock $(0.13) $(0.11) $(0.24) $(0.27)
====== ====== ====== ======
Weighted average shares used in computing 29,728,769 18,439,234 29,122,609 17,850,814
basic and diluted net loss per share ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
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Bioenvision, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Accumulated Total
Other Stock-
Additional Deferred Compre- holders'
Preferred Stock Common Stock Paid In Compen- Accumulated hensive Equity
Shares $ Shares $ Capital sation Deficit Income (Deficit)
------ - ------ - ------- -------- ------- ------ ---------
Balance at June 30, 2003 5,916,966 $5,917 17,122,739 $17,123 $47,304,449 $ - $(28,651,443)$152,346 $18,828,392
--------
Net loss for the period (11,574,178) (11,574,178)
Cumulative preferred stock
dividend for the period (856,776) (856,776)
Currency translation adjustment (12,748) (12,748)
Deferred compensation (223,990) (223,990)
Shares issued in connection
with private placement 2,602,898 2,603 16,265,495 16,268,098
Costs related to March private
placement financing (1,301,035) (1,301,035)
Preferred stock converted to
common stock (2,575,300) (2,575) 5,150,000 5,150 (2,575) -
Expense related to repricing of
options 2,381,066 2,381,066
Cashless exercise of options to
shares 2,122,682 2,122 (2,122) -
Warrants issued in connection
with services - 671,601 671,601
Shares issued to consultants for
services 14,510 15 305,972 305,987
Shares issued to employees 20,000 20 28,380 28,400
Options issued in connection
with services 93,987 93,987
Options issued to employees 262,601 262,601
Shares issued from warrant
conversions 1,283,334 1,283 2,509,882 2,511,165
Balance at June 30, 2004 3,341,666 3,342 28,316,163 28,316 68,517,702 (223,990) (41,082,397) 139,598 27,382,571
---------- ------- ----------- ------- ----------- --------- ------------ ------- ----------
Net loss for the period (6,824,070) (6,824,070)
Cumulative preferred stock
dividend for the period (236,716) (236,716)
Currency translation adjustment 8,413 8,413
Deferred compensation 44,125 44,125
Warrants issued in connection
with services 617,054 617,054
Options issued to consultants 23,610 23,610
Preferred stock converted to
common stock (1,091,666) (1,092) 2,183,332 2,183 (1,092) -
Shares issued from warrant
conversions 1,577,969 1,578 3,253,671 3,255,249
Cash exercise of options to
shares 308,946 309 368,441 368,750
Cashless exercise of options to
shares 41,881 42 (42) -
Shares issued in connection with
services 62,500 63 496,188 496,250
Expenses related to repricing of
options 219,367 219,367
---------- ------- ----------- ------- ------------ --------- ------------ -------- -----------
Balance at December 31, 2004 2,250,000 $2,250 32,490,791 $32,491 $73,494,899 $(179,865) $(48,143,183)$148,011 $25,354,603
========== ======= =========== ======= ============ ========== ============ ======== ===========
The accompanying notes are an integral part of these financial statements.
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Bioenvision, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
December 31,
---------------------------------
2004 2003
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities
Net loss $(6,824,070) $(4,373,118)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 681,693 679,869
Deferred tax benefit (275,313) (268,577)
Shares and warrants issued to non-employees 1,136,914 444,683
Stock based compensation expense 263,492 653,908
Changes in assets and liabilities
Deferred costs 120,912 (1,724,156)
Deferred revenue (275,916) 3,413,464
Accounts payable (1,081,417) (260,500)
Inventory-finished goods (62,890)
Other current assets (250,035) (136,627)
Other assets (132,685) 94,141
Accounts receivable 1,341,790 -
Accrued expenses 706,339 282,148
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Net cash used in operating activities (4,651,186) (1,194,765)
----------- -----------
Cash flows from investing activities
Purchase of intangible assets (93,992) (27,882)
Capital expenditures (35,039) -
------------ ------------
Net cash used in investing activities (129,031) (27,882)
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Cash flows from financing activities
Proceeds from issuance of common stock - 262,500
Proceeds from exercise of options, warrants and other
convertible securities 3,624,000 -
Dividends paid (251,799) -
------------ ------------
Net cash provided by financing activities 3,372,201 262,500
--------- -------
Effect of exchange rate on cash 8,413 -
Net decrease in cash and cash equivalents (1,399,603) (960,147)
Cash and cash equivalents, beginning of period 18,875,675 7,929,686
---------- ---------
Cash and cash equivalents, end of period $17,476,072 $6,969,539
========== =========
Supplemental cash flow information
Cash paid during the period for income taxes $32,975 $24,891
The accompanying notes are an integral part of these financial statements.
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BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
(Unaudited)
NOTE A - Description of Business and Significant Accounting Policies
Description of Business
Bioenvision, Inc. is a product-focused biopharmaceutical company with two
approved cancer therapeutics. The FDA recently approved its lead cancer product,
clofarabine, for the treatment of pediatric acute lymphoblastic leukemia, or ALL
in patients who have received two or more prior regimens. Clofarabine has
received Orphan Drug designation in the U.S. and the European Union. Genzyme
Corporation, the Company's co-development partner, currently holds marketing
rights in the U.S. and Canada for clofarabine for all cancer indications and
controls U.S. development of clofarabine in these indications. Genzyme is
selling clofarabine under the brand name Clolar in the U.S. In Europe, the
Company has filed for approval of clofarabine in pediatric ALL and acute
myelogenous leukemia, or AML, with the European Medicines Evaluation Agency, or
EMEA.
The Company is currently selling its second product, Modrenal, in the United
Kingdom. Modrenal is approved in the U.K. for the treatment of post-menopausal
advanced breast cancer following relapse to initial hormone therapy, and the
Company has initiated the filing process for mutual recognition in the E.U. on a
country-by-country basis.
In addition to clofarabine and Modrenal, the Company is developing Velostan,
initially for the treatment of bladder cancer and Virostat for the treatment of
Hepatitis C.
Significant Accounting Policies
In addition to the accounting policies reported in Note 1 to the consolidated
financial statements -- "Organization and significant accounting policies" in
the Company's annual report on Form 10-KSB for the year ended June 30, 2004, we
deem the following recent accounting policies important in understanding our
operating results and financial condition.
Revenue Recognition
The Company currently sells its products to wholesale distributors and directly
to hospitals, clinics, and retail pharmacies. Revenue from product sales is
recognized when the product is shipped from our distributor to the customer, the
sales price is fixed and determinable, and collectibility is reasonably assured.
We follow the guidance of EITF 99-19, "Reporting Revenue Gross as a Principal
versus Net as an Agent" in the presentation of revenues and direct costs of
revenues. This guidance requires us to assess whether we act as a principal in
the transaction or as an agent acting on behalf of others. We record revenue
transactions gross in our statements of operations if we are deemed the
principal in the transaction, which includes being the primary obligor and
having the risks and rewards of ownership.
Credit Risk
Our accounts receivable are primarily due from wholesale distributors and our
co-development partners. Based on our evaluation of the collectibility of these
accounts receivable, we believe the exposure to credit risk is minimal and, as
such, we feel that no allowance for doubtful accounts is necessary at December
31, 2004.
Inventory
Inventories consist of finished goods and are stated at the lower of cost or
market. The Company periodically reviews inventories and estimates reserves for
excess based on inventory levels on hand.
Accounting for Stock-Based Compensation
At December 31, 2004, the Company has stock based compensation plans which are
described more fully in the Company's annual report on Form 10-KSB for the year
ended June 30, 2004. As permitted by SFAS No. 123,
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"Accounting for Stock Based Compensation," and amended by SFAS 148, the Company
accounts for stock based compensation arrangements in accordance with provisions
of Accounting Principles Board ("APB") Opinion 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. Under APB 25, no
stock-based employee compensation cost is reflected in reported net loss, when
options granted to employees have an exercise price equal to the market value of
the underlying common stock at the date of grant.
The following table summarizes the pro forma effect of stock-based compensation
as if the fair value method of accounting for stock options had been applied in
measuring compensation cost. No tax benefits were attributed to the stock-based
employee compensation expense during the three and six months ended December 31,
2004 and 2003 because we maintained a valuation allowance on substantially all
of our net deferred tax assets.
Three months ended Six months ended
December 31, December 31,
------------ ------------
2004 2003 2004 2003
---- ---- ---- ----
Net loss available to common stockholders, $(3,974,119) $(1,962,368) $(7,060,786) $(4,785,385)
as reported
Add: Stock-based employee compensation expense
(income) included in reported net loss 439,337 (60,975) 263,492 653,908
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards (307,774) (108,421) (591,196) (213,378)
---------- ------------ ------------ ------------
Pro forma net loss $(3,842,556) $(2,131,764) $(7,388,490) $(4,344,855)
Loss per share
Basic and diluted - as reported $ (0.13) $ (0.11) $ (0.24) $ (0.27)
Basic and diluted - pro forma $ (0.13) $ (0.12) $ (0.25) $ (0.24)
The weighted-average assumptions used for the three and six months ended
December 31, 2004, and 2003 were: risk-free interest rate of 3.14% and 2.63%,
respectively; expected dividend yield of 0.0%, expected life of 3.5 years and
expected volatility of 80% for both periods.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling Goods or Services,"
as amended by EITF No. 00-27. Under EITF No. 96-18, 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.
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
4,196,555 and 7,207,809 shares of common stock have not been included in the
calculation of net loss per share for the three months and six months ended
December 31, 2004 and 2003, respectively, as their effect would have been
anti-dilutive.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123R, "Share-Based Payment," requiring all share-based payments to
employees, including grants of employee stock options, to be recognized as
compensation expense in the consolidated financial statements based on their
fair values. This standard is effective for periods beginning after June 15,
2005 and includes two transition methods. Upon adoption, we will be required to
use either the modified prospective or the modified retrospective transition
method. Under the modified prospective method, awards that are granted,
modified, or settled after the date of adoption should be measured and accounted
for in accordance with SFAS 123R. Unvested equity-classified awards that were
granted prior to the effective
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date should continue to be accounted for in accordance with SFAS 123 except that
amounts must be recognized in the income statement. Under the modified
retrospective approach, the previously-reported amounts are restated (either to
the beginning of the year of adoption or for all periods presented) to reflect
the SFAS 123 amounts in the income statement. We are currently evaluating the
impact of this standard and its transitional alternatives.
In December 2004, the FASB issued SFAS 153 "Exchange of Non-monetary assets".
This statement was a result of a joint effort by the FASB and the IASB to
improve financial reporting by eliminating certain narrow differences between
their existing accounting standards. One such difference was the exception from
fair value measurement in APB Opinion No. 29, Accounting for Non-Monetary
Transactions, for non-monetary exchanges of similar productive assets. SFAS 153
replaces this exception with a general exception from fair value measurement for
exchanges of non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. This
statement is effective for non-monetary assets exchanges occurring in fiscal
periods beginning after June 15, 2005. The adoption of SFAS 153 will not have a
material effect on the company's financial position or result of operations.
In November 2004, the FASB issued SFAS No. 151 (SFAS 151), "Inventory Costs".
SFAS 151 amends ARB No. 43, Chapter 4. This statement clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). SFAS 151 is the result of a broader effort by the
FASB and the IASB to improve financial reporting by eliminating certain narrow
differences between their existing accounting standards. This statement is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The adoption of SFAS 151 will not have a material impact on the
results of operations or financial position of the company.
In May 2003, the Emerging Issues Task Force ("EITF") reached a consensus on EITF
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF
00-21"). EITF 00-21 provides guidance on how to determine when an arrangement
that involves multiple revenue-generating activities or deliverables should be
divided into separate units of accounting for revenue recognition purposes, and
if this division is required, how the arrangement consideration should be
allocated among the separate units of accounting. The guidance in the consensus
is effective for revenue arrangements entered into in quarters beginning after
June 15, 2003. The adoption of EITF 00-21 did not impact the Company's
consolidated financial position or results of operations, but could affect the
timing or pattern of revenue recognition for future collaborative research
and/or license agreements.
NOTE B - Interim Financial Statements
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all the adjustments consisting of normal accrued
adjustments necessary to present fairly the consolidated financial position of
the Company as of December 31, 2004, the consolidated results of operations for
the three months and six months ended December 31, 2004 and 2003, the Condensed
Consolidated Statements of Stockholders Equity (Deficit) for the six months
ended December 31, 2004, and cash flows for the six months ended December 31,
2004 and 2003.
The condensed consolidated balance sheet at June 30, 2004 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 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,
2004.
The condensed consolidated results of operations for the three months and six
months ended December 31, 2004 and 2003 are not necessarily indicative of the
results to be expected for any other interim period or for the full year.
NOTE C - License and Co-Development Agreements
Clofarabine
The Company has a license from Southern Research Institute ("SRI"), 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, lymphoma and certain solid tumor cancers. The lead compound of these
purine-based nucleosides is known as clofarabine. Under the terms of the
agreement with SRI, the Company was 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 the
Company and by SRI from the technology. Initially, the Company is developing
clofarabine for the treatment of leukemia and lymphoma and studying its
potential role in treatment of solid tumors.
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In August 2003, SRI granted the Company an irrevocable, exclusive option to
make, use and sell products derived from the technology in Japan and Southeast
Asia. The Company intends to convert the option to a license upon sourcing an
appropriate co-marketing partner to develop these rights in such territory.
To facilitate the development of clofarabine, in March 2001, the Company entered
into a co-development agreement with ILEX Oncology, Inc. ("ILEX"), our
sub-licensor until it was acquired by Genzyme Corporation ("Genzyme") on
December 21, 2004, for the development of clofarabine in cancer indications.
Under the terms of the co-development agreement, Genzyme 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), in each case, for the development of clofarabine in cancer
indications. Genzyme is responsible for conducting all clinical trials and the
filing and prosecution of applications with applicable regulatory authorities in
the United States and Canada in cancer indications. The Company retains the
right to handle those matters in all territories outside the United States and
Canada (excluding Japan and Southeast Asia) and retains the right to handle
these matters in the U.S. and Canada in all non-cancer indications. 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, Genzyme will have certain rights if it
performs its development obligations in accordance with that agreement. The
Company would be required to pay Genzyme a royalty on sales outside the U.S.,
Canada, Japan and Southeast Asia. In turn, Genzyme, which would have U.S. and
Canadian distribution rights in cancer indications, would pay the Company a
royalty on sales in the U.S. and Canada. In addition, the Company received $7.5
million in milestone payments from ILEX throughout the U.S. drug development
program. Under the terms of the co-development agreement, Genzyme also pays
royalties to Southern Research Institute based on certain milestones. The
Company also is obligated to pay certain milestones and royalties to Southern
Research Institute with respect to clofarabine.
The Company received a nonrefundable upfront payment of $1.35 million when it
entered into the co-development agreement with ILEX and received an additional
$3.5 million in December 2003 when it converted ILEX's option to market
clofarabine in the U.S. into a sublicense. The Company received an additional
(i) $2 million in April 2004 upon ILEX's filing the New Drug Application for
clofarabine with FDA and (ii) $2 million from ILEX in September 2004 in
connection with the achievement of the NDA filing. The Company deferred the
upfront payment and recognized revenues ratably, on a straight-line basis over
the related service period, through December 2002. The Company has deferred the
milestone payments received to date and recognizes revenues ratably, on a
straight line basis over the related service period, through March 2021. For the
three months ended December 31, 2004 and 2003, the Company recognized revenues
of approximately $110,000, and $28,000, respectively, in connection with the
milestone payments received to date. For the six months ended December 31, 2004
and 2003, the Company recognized revenues of approximately $219,000, and
$28,000, respectively, in connection with the milestone payments received to
date.
Deferred costs include royalty payments that became due and payable to SRI upon
the Company's execution of the co-development agreement with ILEX. The Company
defers all royalty payments made to SRI and recognizes these costs ratably, on a
straight-line basis concurrent with revenue that is recognized in connection
with research and development costs including approximately (i) $55,000 and
$14,000 for the three months ended December 31, 2004 and 2003, respectively, and
(ii) $110,000 and $14,000 for the six months ended December 31, 2004 and 2003,
respectively related to such charges.
Modrenal(R)
The Company holds an exclusive license, until the expiration of existing and new
patents related to Modrenal(R), to market Modrenal(R) in major international
territories, and an agreement with a United Kingdom company to co-develop
Modrenal(R) for other therapeutic indications. Management believes that
Modrenal(R) currently is manufactured by third-party contractors in accordance
with good manufacturing practices. The Company has no plans to establish its own
manufacturing facility for Modrenal(R), but will continue to use third-party
contractors.
The Company received a nonrefundable upfront payment of $1.25 million when it
entered into the License and Sublicense Agreement with Dechra Pharmaceuticals in
May 2003. The Company deferred the upfront payment and recognizes revenues
ratably, on a straight-line basis over the related service period, through May
2014. The Company recognized revenues of approximately $28,000 and $29,000 in
connection with the upfront payment from Dechra for the three months ended
December 31, 2004 and 2003, respectively. The Company recognized revenues of
approximately $57,000 and $58,000 in connection with the upfront payment from
Dechra for the six months ended December 31, 2004 and 2003, respectively.
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Deferred costs include royalty payments that became due and payable to Stegram
Pharmaceuticals Ltd. upon the Company's execution of the License and Sub-License
Agreement with Dechra in May 2003. The Company defers all royalty payments made
to Stegram and recognizes these costs ratably, on a straight-line basis
concurrent with revenue that is recognized in connection with the Dechra
agreement. Research and Development costs related to this agreement include
approximately $6,000 and $6,000 for the three months ended December 31, 2004 and
2003, respectively. Research and Development costs related to this agreement
include approximately $11,000 and $12,000 for the six months ended December 31,
2004 and 2003, respectively.
Operational Developments
The Company submitted a Marketing Authorization Application, or MAA, the
European equivalent of a U.S. new drug application, or NDA, with the EMEA in
July 2004 for European approval of clofarabine in relapsed or refractory
pediatric acute leukemia. The company expects an opinion from the EMEA in
mid-2005.
In June 2003, the Company entered into a supply agreement with Ferro-Pfanstiehl
Laboratories ("Ferro"), pursuant to which Ferro has agreed to manufacture and
supply certain of Bioenvision's requirements for clofarabine-API. Subject to
certain circumstances, this agreement will expire on the fifth anniversary date
of the first regulatory approval of clofarabine drug product.
In June 2003, the Company entered into a development agreement with Ferro,
pursuant to which Ferro agreed to perform certain development activities to
scale up, develop, finalize, and supply CTM and GMP supplier qualifications of
the API-clofarabine. Subject to certain circumstances, this agreement expires
upon the completion of the development program. The development agreement is
milestone-based and payments are to be paid upon completion of each milestone.
If Ferro has not completed the development agreement by December 2007, the
development agreement will automatically terminate without further action by
either party.
In May 2003, we entered into a sub-license agreement with Dechra, pursuant to
which Dechra has been granted a sub-license for all of Bioenvision's rights and
entitlements to market and distribute Modrenal(R) in the United States and
Canada solely in connection with animal health applications. Subject to certain
circumstances, this agreement expires upon expiration of the last patent related
to Modrenal(R) or the completion of the last royalty set forth in the agreement.
Cumulatively, through December 31, 2004, we have recognized revenue and costs
related to this agreement of approximately $183,000 and $37,000 respectively.
The Company received an upfront non-refundable payment of $1.25 million upon
execution of this agreement and may receive up to an additional $3.75 million
upon the achievement by Dechra of certain milestones set forth in the agreement.
In May 2003, we entered into a master services agreement with
Penn-Pharmaceutical Services Limited ("Penn"), pursuant to which Penn has agreed
to label, package and distribute clofarabine on our behalf and at our request.
The services to be performed by Penn also include regulatory support and the
manufacture, quality control, packaging and distribution of proprietary
medicinal products including clinical trials supplies and samples. Subject to
certain circumstances, the term of this agreement is twelve months and renews
for subsequent twelve month periods unless either party tenders notice of
termination upon no less than three month prior written notice.
In April 2003, we entered into an exclusive license agreement with CLL-Pharma
("CLL"), pursuant to which CLL has agreed to perform certain development works
and studies to create a new formulation of Modrenal(R). CLL intends to use its
proprietary MIDDS.-patented technology to perform this service on behalf of the
Company. This new formulation, once in hand, will allow the Company to apply for
necessary authorization, as required by applicable European health authorities,
to sell Modrenal(R) throughout Europe. Through December 31, 2004, the Company
paid an advance of $175,000 related to development services provided by CLL over
an eighteen month period, which advance was initially recorded as a prepaid
development cost by the Company.
NOTE D - Equity Transactions
In June 2002, the Company granted options to an officer of the Company 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 June 28, 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 such officer of the Company,
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 vested 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
-9-
will record a charge for compensation expense to the extent the vested portion
of the options are in the money. For the three months ended December 31, 2004
and 2003 the Company recognized stock based employee compensation expense
(income) of $417,275 and $(60,975), respectively, as a result of the March 31,
2003 re-pricing. For the six months ended December 31, 2004 and 2003 the Company
recognized stock based employee compensation expense of $219,367 and $653,908,
respectively, as a result of the March 31, 2003 re-pricing.
For the three months ended December 31, 2004 and 2003, the Company recorded
compensation expense of $22,062 and $0, respectively, as a result of options
granted to certain employees. For the six months ended December 31, 2004 and
2003, the Company recorded compensation expense of $44,125 and $0, respectively,
as a result of options granted to certain employees.
On January 20, 2004, the Company granted 25,000 options to a board member for
serving as a member of the Board of Directors, at an exercise price of $4.55 per
share which vest ratably on the first and second anniversaries of the grant
date. The Company recognized $11,805 and $23,610 as a consulting expense for the
three months and six months ended December 31, 2004 relating to said options.
On June 22, 2004, the Company entered into a consulting agreement pursuant to
which the consultant will provide certain investor relations services on behalf
of the Company. In connection therewith, the Company issued a warrant to said
consultant pursuant to which he has the right to purchase 50,000 shares of the
Company's common stock at a price of $8.25 per share upon the completion of
certain milestones, as set forth in such agreement. The Company recorded $30,419
and $248,849 as consulting expense for the three months and six months ended
December 31, 2004 relating to said warrants.
On August 4, 2004, the Company issued a warrant to a consultant pursuant to
which said consultant has the right to purchase 40,000 shares of the Company's
common stock at a price of $7.22 per share upon satisfaction of certain
milestones included in the warrant. The Company recorded $13,706 and $169,101 as
consulting expense for the three months and six months ended December 31, 2004
relating to said warrants.
On August 9, 2004, the Company issued two warrants to a consultant pursuant to
which said consultant has the right to purchase 45,000 shares of the Company's
common stock at a price of $6.10 per share. The Company recorded $17,792 and
$199,105 as consulting expense for the three months and six months ended
December 31, 2004 relating to said warrants.
For the three and six months ended December 31, 2004, the Company granted
123,000 options to certain employees at exercise prices ranging from $7.87 to
$8.87 per share which vest ratably on the first, second and third anniversaries
of the grant date. No expense was recognized for the three and six months ended
December 31, 2004 in connection with said grants as each option was granted at
fair market value.
On December 3, 2004, we issued 62,500 shares of common stock to a consultant for
services rendered. In connection with such issuance we recognized $496,250 as
compensation expense for the three and six months ended December 31, 2004.
During the three months ended December 31, 2004, certain warrant holders of the
Company exercised their warrants to acquire 1,363,692 shares of the Company's
common stock. The Company received proceeds of approximately $3,137,749 during
the three months ended December 31, 2004 from the exercise of such warrants.
During the six months ended December 31, 2004, certain warrant holders of the
Company exercised their warrants to acquire 1,577,969 shares of the Company's
common stock. The Company received proceeds of approximately $3,255,249 during
the six months ended December 31, 2004 from the exercise of such warrants.
During the three month period ended December 31, 2004, certain holders of
options to purchase an aggregate of 284,095 shares of the Company's common stock
were exercised. The Company received proceeds of $306,750 during the three
months ended December 31, 2004 from the exercise of such options. During the six
month period ended December 31, 2004, certain holders of options to purchase an
aggregate of 350,827 shares of the Company's common stock were exercised. The
Company received proceeds of $368,750 during the six months ended December 31,
2004 from the exercise of such options.
NOTE E - Related Party Transactions
In May 2002, we completed a private placement pursuant to which we issued an
aggregate of 5,916,666 shares of Series
-10-
A convertible participating preferred stock for $3.00 per share and warrants to
purchase an aggregate of 5,916,666 shares of common stock and in March of 2004
we consummated a private placement pursuant to which we raised $12.8 million
with a second closing in May 2004 in which we raised an additional $3.5 million.
An affiliate of SCO Capital Partners LLC, one of our stockholders, served as
financial advisor to the Company in connection with these financings and earned
a placement fee of approximately $1.2 million in connection with May 2002
private placement and a placement fee of $1.1 million and warrants to purchase
260,291 shares of common stock for $6.25 per share for the March and May 2004
financings.
NOTE F - Litigation
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
alleged a breach of contract by the Company and demanded judgment against the
Company for $112,500 and warrants to acquire 75,000 shares of the Company's
common stock. The Company submitted its Verified Answer on June 25, 2003 and, in
pertinent part, denied RLB's allegations and asserted counterclaims based on
negligence. In September 2003, the Company filed a motion for summary judgment
and RLB filed its response on October 27, 2003. On November 12, 2003, the
Supreme Court granted the motion for summary judgment and the complaint was
dismissed. In March 2004, the complaint and two counterclaims asserted by the
Company were dismissed with prejudice.
On December 19, 2003, the Company filed a complaint against Dr. Deidre Tessman
and Tessman Technology Ltd. (the "Tessman Defendants") in the Supreme Court of
the State of New York, County of New York (Index No. 03-603984). An amended
complaint alleges, among other things, breach of contract and negligence by
Tessman and Tessman Technology and demands judgment against Tessman and Tessman
Technology in an amount to be determined by the Court. The Tessman Defendants
removed the case to federal court, then remanded it to state court and served an
answer with several purported counterclaims. The Company denies the allegations
in the counterclaims and intends to pursue its claims against the Tessman
Defendants vigorously.
Note G - Subsequent Events
On February 8, 2005, we completed a secondary public offering in which we sold
we sold 7,500,000 common shares at $8.00 per share, with net proceeds to the
Company of approximately $56.4 million, after deducting underwriting discounts
and commissions and estimated offering expenses. We intend to use the net
proceeds for further development of our lead products, for sales and marketing
expenses related to the commercial launch of our lead products, for working
capital and other general corporate purposes.
-11-
BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION
Except for historical information contained herein, this quarterly report on
Form 10-QSB contains forward-looking statements within the meaning of the
Section 21E of the Securities and Exchange Act of 1934, as amended, which
involve certain risks and uncertainties. Forward-looking statements are included
with respect to, among other things, the Company's current business plan an
"Management's Discussion and Analysis of Results of Operations." These
forward-looking statements are identified by their use of such terms and phrases
as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects,"
"expect," "expected," "project," "projected," "projections," "plans,"
"anticipates," "anticipated," "should," "designed to," "foreseeable future,"
"believe," "believes" and "scheduled" and similar expressions. The Company's
actual results or outcomes may differ materially from those anticipated. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date the statement was made. The Company undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
The following discussion and analysis of significant factors affecting the
Company's operating results, liquidity and capital resources and should be read
in conjunction with the accompanying financial statements and related notes.
Overview and Company Status
We are a product-focused biopharmaceutical company with two approved cancer
therapeutics. The FDA recently approved our lead cancer product, clofarabine,
for the treatment of pediatric acute lymphoblastic leukemia, or ALL in patients
who have received two or more prior regimens. We believe clofarabine is the
first new medicine initially approved in the United States for children with
leukemia in more than a decade. Clofarabine has received Orphan Drug designation
in the U.S. and the European Union. Genzyme Corporation, our co-development
partner, currently holds marketing rights in the U.S. and Canada for clofarabine
for all cancer indications and controls U.S. development of clofarabine in these
indications. Genzyme is selling clofarabine under the brand name Clolar in the
U.S. In Europe, we have filed for approval of clofarabine in pediatric ALL and
acute myelogenous leukemia, or AML, with the European Medicines Evaluation
Agency, or EMEA. If approved, we anticipate commencing sales in Europe during
the second half of calendar 2005 through a dedicated European sales force.
We are selling our second product, Modrenal, in the United Kingdom, through our
sales force of eight sales specialists. Modrenal is approved in the U.K. for the
treatment of post-menopausal advanced breast cancer following relapse to initial
hormone therapy, and we have initiated the filing process for mutual recognition
in the E.U. on a country-by-country basis.
If we receive additional European approvals for our products, we intend to
expand our sales force by adding up to six to 10 sales specialists in each of
five other key regions within the E.U. which include the countries of France,
Germany, Italy, Spain, Portugal, Netherlands, Austria, Belgium, Denmark and
Sweden. In addition to clofarabine and Modrenal, we are developing Velostan,
initially for the treatment of bladder cancer, and Virostat for the treatment of
Hepatitis C.
Over the next 12 months, we intend to continue our internal growth strategy to
provide the necessary regulatory, sales and marketing capabilities which will be
required to pursue the expanded development programs for clofarabine and
Modrenal described above.
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 this emerging stage. Our management believes that we have
the opportunity to become a leading oncology-focused pharmaceutical company in
the next four years if we successfully bring clofarabine to market and if mutual
recognition is granted for Modrenal in the largest European commercial markets.
We anticipate that revenues derived from our two lead drugs, clofarabine and
Modrenal will permit us to further develop the other products currently in our
product pipeline.
-12-
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. In May 2003, we entered into a
License and Sub-License Agreement with Dechra Pharmaceuticals, plc ("Dechra"),
pursuant to which we sub-licensed the marketing and development rights to
vetoryl(R) trilostane, solely with respect to animal health applications, in the
United States and Canada, to Dechra. We received $1.25 million in cash, together
with future milestone and royalty payments which are contingent upon the
occurrence of certain events. We intend to continue to try and capitalize on
these types of opportunities as they arise.
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
The Company recorded revenues for the three months ended December 31, 2004 and
2003 of approximately $1,176,000 and $82,000, respectively, representing an
increase of $1,094,000. For the six months ended December 31, 2004 and 2003, the
Company recorded revenues of $2,261,000 and $912,000, representing an increase
of $1,349,000. Of the revenues recorded for the three months ended December 31,
2004, approximately $621,000 was recognized from Genzyme, pursuant to the
Co-Development Agreement, approximately $215,000 was recognized from sales of
Modrenal and approximately $112,000 was recognized from Name Patient Sales of
clofarabine. Of the revenues recorded for the six months ended December 31,
2004, approximately $1,343,000 was recognized from Genzyme, pursuant to the
Co-Development Agreement, approximately $344,000 was recognized from sales of
Modrenal and approximately $122,000 was recognized from Name Patient Sales of
clofarabine.
The cost of products sold for the three and six months ended December 31, 2004
and 2003 were approximately $130,000 and $0, respectively. The cost of products
sold reflects the direct costs associated with our sales of Modrenal.
Research and development costs for the three months ended December 31, 2004 and
2003 were approximately $1,711,000 and $747,000, respectively, representing an
increase of $964,000. Research and development costs for the six months ended
December 31, 2004 and 2003 were approximately $3,850,000 and $1,551,000,
respectively, representing an increase of $2,299,000.
Our research and development costs include costs associated with six projects,
five of which the Company currently devotes time and resource. Clofarabine
research and development costs for the three months ended December 31, 2004
-13-
and 2003 were approximately $1,113,000 and $213,000, respectively, representing
an increase of approximately $900,000. Clofarabine research and development
costs for the six months ended December 31, 2004 and 2003 were approximately
$2,993,000 and $649,000, respectively, representing an increase of approximately
$2,344,000. The increase primarily reflects costs which are associated with our
increased development activities and clinical trials of clofarabine being
conducted in Europe.
Modrenal research and development costs for the three months ended December 31,
2004 and 2003 were approximately $569,000 and $474,000, respectively,
representing an increase of $95,000. Modrenal(R) research and development costs
for the six months ended December 31, 2004 and 2003 were approximately $820,000
and $758,000, respectively, representing an increase of $62,000. The increase
primarily reflects costs associated with ongoing clinical trials.
Velostan research and development costs for the three months ended December 31,
2004 and 2003 were approximately $9,000 and $49,000, respectively, representing
a decrease of $40,000. Velostan research and development costs for the six
months ended December 31, 2004 and 2003 were approximately $17,000 and $113,000,
respectively, representing a decrease of $96,000. The decrease primarily
reflects the Company's primary focus on clofarabine and Modrenal during these
periods.
Virostat research and development costs for the three months ended December 31,
2004 and 2003 were approximately $6,000 and $11,000, respectively, representing
a decrease of $5,000. Virostat research and development costs for the six months
ended December 31, 2004 and 2003 were approximately $6,000 and $31,000,
respectively, representing a decrease of $25,000. The decrease primarily
reflects the Company's primary focus on clofarabine and Modrenal during these
periods.
OLIGON research and development costs for the three months ended December 31,
2004 and 2003 were approximately $13,000 and $0, respectively, representing an
increase of $13,000. OLIGON research and development costs for the six months
ended December 31, 2004 and 2003 were approximately $13,000 and $0,
respectively, representing an increase of $13,000. The increase primarily
reflects pre-development costs incurred in connection with continuing
co-partnering discussions.
There were no research and development costs associated with Gene Therapy for
the three and six months ended December 31, 2004 and 2003 due to the Company's
focus on clofarabine and Modrenal during these periods.
The clinical trials and development strategy for the clofarabine and Modrenal
projects, in each case, is anticipated to cost several million dollars and will
continue for several years based on the number of clinical indications within
which we plan to develop these drugs. Currently, management cannot estimate the
timing or costs associated with these projects because many of the variables,
such as interaction with regulatory authorities and response rates in various
clinical trials, are not predictable. Total costs to date for each of our
projects is as follows: (i) clofarabine research and development costs have been
approximately $10,491,000; (ii) Modrenal(R) research and development costs have
been approximately $5,467,000; (iii) Velostan research and development costs
have been approximately $327,000; (iv) Virostat research and development costs
have been approximately $64,000; (v) OLIGON research and development costs have
been approximately $23,000; and (vi) Gene Therapy research and development costs
have been approximately $451,000.
Selling, general and administrative expenses for the three months ended December
31, 2004 and 2003 were approximately $3,054,000 and $919,000, respectively,
representing an increase of $2,135,000. Selling, general and administrative
expenses for the six months ended December 31, 2004 and 2003 were approximately
$4,811,000 and $3,357,000, respectively, representing an increase of $1,454,000.
This increase primarily reflects an increase in costs associated with the
expanded sales and marketing and administrative infrastructure and costs
associated with the internal build out of the Company.
Depreciation and amortization expense for the three months ended December 31,
2004 and 2003 were $341,987 and $340,248, respectively, representing an increase
of $1,739. Depreciation and amortization expense for the six months ended
December 31, 2004 and 2003 were $681,693 and $679,869, respectively,
representing an increase of $1,824. This increase primarily reflects the
increase in our net asset base.
Liquidity and Capital Resources
We anticipate 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.
-14-
The Company received a nonrefundable upfront payment of $1.35 million when it
entered into the co-development agreement with ILEX and received an additional
$3.5 million in December 2003 when it converted ILEX's option to market
clofarabine in the U.S. into a sublicense. The Company received an additional
(i) $2 million in April 2004 upon ILEX's filing the New Drug Application for
clofarabine with FDA and (ii) $2 million from ILEX in September 2004 in
connection with ILEX having completed such NDA filing. The Company deferred the
upfront payment and recognized revenues ratably, on a straight-line basis over
the related service period, through December 2002. The Company has deferred the
milestone payments received to date and recognizes revenues ratably, on a
straight line basis over the related royalty period, through March 2021. For the
three months ended December 31, 2004 and 2003, the Company recognized revenues
of approximately $110,000 and $28,000, respectively, in connection with the
milestone payments received to date. For the six months ended December 31, 2004
and 2003, the Company recognized revenues of approximately $219,000, and
$28,000, respectively, in connection with the milestone payments received to
date.
Deferred costs include royalty payments that became due and payable to SRI upon
the Company's execution of the co-development agreement with ILEX. The Company
defers all royalty payments made to SRI and recognizes these costs ratably, on a
straight-line basis concurrent with revenue that is recognized in connection
with research and development costs including approximately (i) $55,000 and
$14,000 for the three months ended December 31, 2004 and 2003, respectively, and
(ii) $110,000 and $14,000 for the six months ended December 31, 2004 and 2003,
respectively related to such charges.
The Company received a nonrefundable upfront payment of $1.25 million when it
entered into the License and Sublicense Agreement with Dechra Pharmaceuticals in
May 2003. The Company deferred the upfront payment and recognizes revenues
ratably, on a straight-line basis over the related royalty period, through May
2014. The Company recognized revenues of approximately $28,000 and $29,000 in
connection with the upfront payment from Dechra for the three months ended
December 31, 2004 and 2003, respectively. The Company recognized revenues of
approximately $57,000 and $58,000 in connection with the upfront payment from
Dechra for the six months ended December 31, 2004 and 2003, respectively.
Deferred costs include royalty payments that became due and payable to Stegram
Pharmaceuticals Ltd. upon the Company's execution of the License and Sub-License
Agreement with Dechra in May 2003. The Company defers all royalty payments made
to Stegram and recognizes these costs ratably, on a straight-line basis
concurrent with revenue that is recognized in connection with the Dechra
agreement. Research and Development costs related to this agreement include
approximately $6,000 and $6,000 for the three months ended December 31, 2004 and
2003, respectively. Research and Development costs related to this agreement
include approximately $11,000 and $12,000 for the six months ended December 31,
2004 and 2003, respectively.
On May 7, 2002 we authorized the issuance and sale of up to 5,920,000 shares of
Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock
may be converted into 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 Convertible Preferred Stock also received, in respect of
each share of Series A Convertible Preferred Stock purchased in a private
placement which took place in May 2002, one warrant to purchase one share of our
common stock at an initial exercise price of $2.00 subject to adjustment.
Through May 16, 2002 we have sold an aggregate of 5,916,666 shares of Series A
Convertible 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 $17,750,000. 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 fees
amounting to $1,610,000 related to the transaction.
On March 22, 2004, we consummated a private placement transaction, pursuant to
which we raised $12.8 million and issued 2,044,514 shares of our common stock
and warrants to purchase an additional 408,903 shares of our common stock at a
conversion price of $7.50 per share. We recorded proceeds of $11,792,801 net of
all legal, professional and financing fees incurred in connection with the
offering. We consummated a second closing for this financing on May 13, 2004 in
order to comply with certain contractual obligations to our holders of Series A
Convertible Preferred Stock which hold preemptive rights for equity offerings.
We raised an additional $3.2 million (net of all legal, professional and
financial services incurred) from the second closing and issued an additional
558,384 shares of our common stock and warrants to purchase 111,677 shares of
our common stock at a conversion price of $7.50 per share.
On February 8, 2005, we completed a secondary public offering in which we sold
we sold 7,500,000 common shares at $8.00 per share, with net proceeds to the
Company of approximately $56.4 million, after deducting underwriting discounts
and commissions and estimated offering expenses. We intend to use the net
proceeds for further development
-15-
of our lead products, for sales and marketing expenses related to the commercial
launch of our lead products, for working capital and other general corporate
purposes. Prior to the offering, on December 31, 2004, we had cash and cash
equivalents of approximately $17,476,000 and working capital of $16,790,000.
Management believes the Company has sufficient cash and cash equivalents and
working capital to continue currently planned operations over the next 12
months. Although we do not currently plan to acquire or obtain licenses for new
technologies, if any such opportunity arises 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.
The Company has the following commitments as of December 31, 2004:
Payments Due in
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Total 2005 2006 2007 Thereafter
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Employee Contracts $ 549,770 $ 387,270 $ 162,500 $ - $ -
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Occupancy Lease and Automobiles 2,018,059 303,091 598,027 326,401 790,540
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Total $2,567,829 $ 690,361 $ 760,527 $ 326,401 $ 790,540
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In October, 2004, the Company executed a Sublease Agreement pursuant to which we
sublease 5,549 square feet of commercial space at 345 Park Avenue, 41st Floor,
New York, NY 10154, which is the new location of the Company's principal
executive offices. Subject to the terms and conditions of the Sublease
Agreement, the lease expires on December 31, 2009.
Subsequent Events
On February 8, 2005, we completed a secondary public offering in which we sold
we sold 7,500,000 common shares at $8.00 per share, with net proceeds to the
Company of approximately $56.4 million, after deducting underwriting discounts
and commissions and estimated offering expenses. We intend to use the net
proceeds for further development of our lead products, for sales and marketing
expenses related to the commercial launch of our lead products, for working
capital and other general corporate purposes.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by this
quarterly report on Form 10-QSB. Based on this evaluation, our principal
executive officer and principal financial officer concluded that these
disclosure controls and procedures are effective and designed to ensure that the
information required to be disclosed in our reports filed or submitted under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the requisite time periods.
In connection with its review of the Company's consolidated financial statements
for and as of the three month period ended March 31, 2004, Grant Thornton LLP
("Grant Thornton"), the Company's independent accountants, advised the Audit
Committee and management of certain significant internal control deficiencies
that they considered to be, in the aggregate, a material weakness, including,
inadequate staffing and supervision leading to the untimely identification and
resolution of certain accounting matters; failure to perform timely reviews,
substantiation and evaluation of certain general ledger account balances; lack
of procedures or expertise needed to prepare all required disclosures; and
evidence that employees lack the qualifications and training to fulfill their
assigned functions. Grant Thornton indicated that they considered these
deficiencies to be a material weakness as that term is defined under standards
established by the American Institute of Certified Public Accountants. A
material weakness is a significant deficiency in one or more of the internal
control components that alone or in the aggregate precludes our internal control
from reducing to an appropriately low level the risk that material misstatements
in our financial statements will not be prevented or detected on a timely basis.
The Company considered these matters in connection with the quarter end closing
of accounts and preparation of related quarterly financial statements at and as
of March 31, 2004 and determined that no prior period financial statements were
materially affected by such matters.
In response to the observations made by Grant Thornton, the Company will proceed
more expeditiously with its existing plan to enhance the Company's internal
controls and procedures, which it believes addresses each of the matters raised
by Grant Thornton.
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Changes in Internal Controls
In November 2004, the Company appointed a Controller who is involved with the
administration of all accounting functions including Sarbanes-Oxley compliance,
preparation of all monthly, quarterly and annual financial statements and
further enhancements of the Company's internal controls. Our Controller most
recently served as a Manager in the audit department of KPMG (New York office),
an internationally recognized public accounting firm.
-17-
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
alleged a breach of contract by the Company and demanded judgment against the
Company for $112,500 and warrants to acquire 75,000 shares of the Company's
common stock. The Company submitted its Verified Answer on June 25, 2003 and, in
pertinent part, denied RLB's allegations and asserted counterclaims based on
negligence. In September 2003, the Company filed a motion for summary judgment
and RLB filed its response on October 27, 2003. In December 2003, the Supreme
Court granted the motion for summary judgment and the complaint was dismissed.
In March 2004, the complaint and two counterclaims asserted by the Company were
dismissed with prejudice.
On December 19, 2003, the Company filed a complaint against Dr. Deidre Tessman
and Tessman Technology Ltd. (the "Tessman Defendants") in the Supreme Court of
the State of New York, County of New York (Index No. 03-603984). An amended
complaint alleges, among other things, breach of contract and negligence by
Tessman and Tessman Technology and demands judgment against Tessman and Tessman
Technology in an amount to be determined by the Court. The Tessman Defendants
removed the case to federal court, then remanded it to state court and served an
answer with several purported counterclaims. The Company denies the allegations
in the counterclaims and intends to pursue its claims against the Tessman
Defendants vigorously.
ITEM 2. Changes in securities and Use of Proceeds
None
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting of stockholders on December 17, 2004.
(b) and (c) At the annual meeting of stockholders on December 17, 2004, our
stockholders considered and approved:
1. A proposal to approve and adopt an amendment to our 2003 Stock
Incentive Plan to increase the number of shares that may be granted under the
plan from 3,000,000 to 4,500,000 ("Proposal 1"); and
2. A proposal to elect five directors (identified in the table below)
to serve until the next annual meeting of stockholders or until such directors'
successors are elected and shall have been duly qualified ("Proposal 2").
The following table sets forth the number of votes in favor, the number of votes
opposed, and the number of abstentions (or votes withheld in the case of the
election of directors) with respect to each of the foregoing proposals.
Proposal Votes in Favor Votes Opposed Abstentions(withheld)
---------- -------------- ------------- --------------
Proposal 1 19,735,996 1,161,592 98,230
Proposal 2
Christopher B. Wood 28,854,073 2,142,165
Thomas Scott Nelson 28,869,234 2,128,379
Michael Kauffman 30,515,894 481,719
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Steven A. Elms 30,475,659 521,954
Andrew N. Schiff 30,474,459 523,154
ITEM 5. Other information
None.
ITEM 6. Exhibits and Reports on Form 8-K
A) Exhibits
31.1 Certification of Christopher B. Wood, Chief Executive Officer, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of David P. Luci, Chief Financial Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Christopher B. Wood , Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of David P. Luci, Chief Financial Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant Section 906 of the
Sarbanes-Oxley Act of 2002.
B) Reports on Form 8-K:
During the fiscal quarter ended December 31, 2004, the Company filed the
following Current Report on Form 8-K:
Current Report on Form 8-K, dated November 17, 2004, as filed with the
Commission on November 18, 2004, reporting under Item 1.01 Entry into a Material
Definitive Agreement in connection with the adoption of the Company's Preferred
Share Purchase Rights Plan.
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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: February 14, 2005 By: /s/ Christopher B. Wood M.D.
----------------------------
Christopher B. Wood M.D.
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 2005 By: /s/ David P. Luci
-----------------
David P. Luci
Chief Financial Officer and General Counsel
(Principal Financial and Accounting Officer)
EXHIBIT INDEX
Exhibit No.
31.1 Certification of Christopher B. Wood, Chief Executive Officer, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of David P. Luci, Chief Financial Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Christopher B. Wood , Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of David P. Luci, Chief Financial Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant Section 906 of the
Sarbanes-Oxley Act of 2002.